Book Review: Research Handbook on Insider Trading

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Bainbridge, Stephen M., ed., Research Handbook on Insider Trading (Northampton, MA: Edward Elgar Publishing, Inc., 2013), ISBN 9780857931849 (hardcover), xi + 485 pp, GBP 150.

Of all the topics covered in a typical law school securities regulation course or corporations course, insider trading probably excites the average law student the most going in. At least that was true among me and my friends when we took Securities Regulation and Business Associations. Part of that appeal likely stems from a general familiarity with insider trading. We at least had heard of insider trading and had a rudimentary understanding of what it entails before taking the classes, unlike Section 4(2) private offering exemptions or Revlon duties, which were completely unknown to us beforehand. And compared to other topics in securities regulation and corporations law, insider trading lends itself to livelier discussions. It seemed more interesting to talk about the pros and cons of insider trading laws than the requirements for being a qualified institutional buyer (QIB) or the indemnification of directors and officers. So it shouldn’t be surprising that Research Handbook on Insider Trading, which is part of Edward Elgar’s Research Handbooks series, is actually quite enjoyable as far as legal books go.

Almost two dozen legal academics wrote chapters for Research Handbook on Insider Trading, with each author contributing one or two chapters. Despite the many voices, the book maintains a consistently high level of quality throughout in terms of style and content. The writing style is law review-esque—good structure and logical consistency within each chapter. Nobody will mistake this for Hemingway, but it’s very readable in its own way. The book is organized fluidly so you could read it from beginning to end, which is what I did. I imagine some readers will read only individual chapters that interest them, and that works well too. Because the chapters focus on discrete topics, prior chapters aren’t necessary to understand the one you’re reading. If you come to the book with little to no prior knowledge of insider trading, then Professor Stephen Bainbridge’s opening overview will be extremely helpful. But if you have even a basic familiarity with the law of insider trading (or securities law in general), you should be able to absorb any chapter in isolation without a problem.

The content is also well done. The book is broken into four parts; the first part explores and analyzes the history of and policies and philosophy underpinning U.S. insider trading law, the second part examines various types of insiders and certain peculiarities unique to them, the third part discusses findings from empirical research into insider trading and the fourth part describes the state of insider trading in certain foreign jurisdictions. The book discusses most of the seminal U.S. cases on insider trading, including SEC v. Texas Gulf Sulphur (on the disclose or abstain rule), Chiarella v. United States (on the duty to disclose), Dirks v. SEC (on tipper/tippee liability) and United States v. O’Hagan (on misappropriation). The authors do a good job of addressing some of the central tensions and questions in insider trading law, such as whether the fraud-based Rule 10b-5 is an appropriate mechanism for dealing with insider trading (and whether insider trading can even be properly characterized as “fraud”) or whether insider trading regulation even protects markets and investors in the first place. The one area I wished the book addressed more is Section 16(b) and disgorgement of short-swing profits. The book mentioned it briefly in a few places, but I think an entire chapter devoted to the topic would have made the book more complete.

It would be impossible for me to go into detail on each chapter in such a short book review, but I want to highlight two chapters that I found particularly interesting. The first is Henry Manne’s chapter on entrepreneurship and compensation. Originally published in a scholarly journal, Professor Manne’s chapter discusses where insider trading rights fit into the compensation structure for corporate entrepreneurs to incentivize innovation. I hadn’t looked at insider trading from this perspective before, and it’s intriguing to think about. The second is Laura Nyantung Beny and H. Nejat Seyhun’s chapter on the prevalence of insider trading. Beny and Seyhun note an increase in the government’s enforcement of insider trading and look at whether that increase correlates to an actual rise in insider trading activity. By analyzing stock and option price fluctuations before tender offer announcements, they conclude that there indeed has been an increase in insider trading activity over this period of increased enforcement.

Students, scholars and other researchers are the best audience for this book. The book would fit nicely in law school or business school libraries, or even undergraduate libraries. It’s a good source to consult for writing papers or articles about insider trading. The book treats its topics thoroughly, but without overwhelming a researcher unfamiliar with the subject. There are plenty of footnotes that direct the reader to relevant cases, statutes, administrative materials and law review and other articles. Also, if insider trading just fascinates you as a topic, you should read the book to pick up different perspectives. 

This book likely won’t be as useful for public law libraries or law firm libraries. The book is not designed to make you a better insider trading attorney. It doesn’t give strategies on how to handle insider trading probes or defend against suits. It doesn’t offer much guidance on how to counsel clients to avoid insider trading violations. Certainly, it’s helpful to practitioners in the sense that a deeper understanding of insider trading will make you a better attorney, but don’t expect a practice guide.

Ultimately, this book serves as a good introduction to the issues and debates surrounding insider trading, and it will supplement the securities section of any academic library that has one.

Lei Zhang is a Reference Librarian at Western State College of Law in Fullerton, California. His email is lzhang@wsulaw.edu.

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