A [Dis]semblance of Privity: Criticizing the Contemporaneous Trader Requirement in Insider Trading
Delaware Journal of Corporate Law
insider trading, privity
The contemporaneous trader requirement should be replaced with a more appropriate designation of who is allowed to bring a private action for insider trading. This article will discuss the concerns that gave rise to the contemporaneous trader requirement and various alternatives for addressing them. It argues that the alternative chosen by the courts and Congress, the contemporaneous trader requirement, does not satisfactorily address those concerns. Those concerns are better addressed by a different alternative, which expands the availability of the private action, but provides a cap for damages. Part II begins with a background section on the concerns that gave rise to the contemporaneous trader requirement and other alternatives the courts could have chosen for dealing with those concerns. Part II also reviews the adoption of the contemporaneous trader requirement by the courts and the legislature. One section reviews the cases in which the requirement was initially developed and summarizes subsequent judicial development of the principle. It points out that the requirement was flawed from its creation, poorly addressing the concerns it was created to alleviate. The next section reviews a different alternative for addressing those concerns, that adopted in the American Law Institute's proposed Federal Securities Code. The final section of Part II discusses Congress's adoption of the contemporaneous trader requirement as part of the express private right of action in the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA). Part III discusses in greater detail what happens when an insider trades and the practical problems of causation and harm. It points out that the alternative the courts and Congress chose to address those issues fails to do so appropriately. Part IV goes on to explore a range of possible alternatives to the contemporaneous trader requirement. It recommends that the requirement, which currently restricts the private right of action to those trading on the same day as, or within a few days of, the defendant insider, be replaced by a doctrine opening the private action to all those who traded after the insider and prior to public disclosure of the information.
Veronica Dougherty, A [Dis]semblance of Privity: Criticizing the Contemporaneous Trader Requirement in Insider Trading, 24 Delaware Journal of Corporate Law 83 (1999)