NCJ Number
116744
Journal
University of Cincinnati Law Review Volume: 57 Issue: 2 Dated: (1988) Pages: 679-698
Date Published
1988
Length
20 pages
Annotation
This article considers the three civil remedies available to the Securities Exchange Commission (SEC) for insider trading to assess their interrelated objectives and evaluate the various measures of disgorgement.
Abstract
Under the Securities Exchange Act of 1934 and the promulgation of rule 10b-5 in 1942, the courts have been attempting to find appropriate remedies for insider trading. Congress has also taken action by passing the Insider Trading Sanctions Act of 1984 (ITSA). Under these measures, the SEC may seek a temporary or permanent injunction to prohibit the defendant from further violations of section 10(b) of the Exchange Act and rule 10b-5; disgorgement of ill-gotten gains, which may be paid into an escrow fund for compensation to those damaged; and a civil money penalty, not to exceed three times the profits gained or losses avoided. The injunction prevents future violations; disgorgement deprives the defendant of unjust enrichment; and the money penalty acts as a deterrent. Recently, the U.S. Court of Appeals for the Second Circuit upheld a measure of full disgorgement that takes from an inside trader all profits gained from the purchase of securities based on inside information. Under this measure, the defendant must disgorge even those profits that accrued after the public dissemination of the inside information. This has more of the penal effect than the alternative measure of partial disgorgement, which extracts from the defendant only those profits measured by a reasonable period after dissemination of the inside information. This broader measure, along with an injunction and the ordering of the ITSA penalty, will have a maximal deterrent effect on insider trading. 137 footnotes.