FRAUD LIABILITY FOR OUTSIDER TRADING: SEC RULE 14e-3 IN LIMBO

For more than a decade, the Securities and Exchange Commission (SEC) has focused its attention on insider trading because it is perceived to pose a serious threat to the integrity of the securities markets and investors' confidence in the markets. Insider trading is pursued under broad anti-fraud provisions with the courts determining, on a case-by-case basis, whether the conduct is illegal. The validity of Rule 14e-3, which creates a "parity-of-information" rule, was recently raised in the case of US versus Chestman (1991). A recent study examines the issue of whether the SEC has gone too far in defining insider trading. The findings conclude that Rule 14e-3 is invalid based upon the Supreme Court's decisions in Schreiber versus Burlington Northern Inc. (1985) and Chiarella versus US (1980). The rule changes the definitions of fraud, deception, and manipulation under common law and under securities law, a dramatic change that should only be the result of clear legislative intent.