Document Type

Article

Publication Date

2014

Abstract

In October 2011, a U.S. district court sentenced Raj Rajaratnam to eleven years in federal prison for insider trading. This is the longest sentence for insider trading in U.S. history, but it is significantly less than the nineteen to twenty-four-year term requested by the government. Such harsh prison terms (equal in some cases to those meted out for murder or rape) require sound justification in a liberal society. Yet jurists, politicians, and scholars have failed to offer a clear articulation of either the economic harm or the moral wrong committed by the insider trader. This Article looks to fill this gap by offering a rigorous analysis of insider trading, its criminalization, and its punishment from multiple economic and moral perspectives. This analysis reveals that of the three forms of insider trading currently proscribed under section 10(b) of the Securities Exchange Act of 1934, two are economically harmful and morally impermissible, but, surprisingly, one is not-nonpromissory insider trading, where the insider trades on material nonpublic information while having made no promise or other commitment not to trade. Having reached this conclusion, this Article explores alternative justifications or explanations for criminalizing nonpromissory insider trading. Virtue theory offers an alternative justification for the criminalization of nonpromissory insider trading, particularly the vice of greed. But while insider trading often reflects the vice of greed, a moralistic contempt for this character flaw cannot justify the criminalization of otherwise morally innocent conduct, as this would violate the firmly held, liberal harm principle famously articulated by John Stuart Mill. If the criminalization of nonpromissory insider trading cannot be justified, it must be explained. The sociopsychological theory of cognitive dissonance (as articulated by Dan Kahan and Eric Posner) is entertained as an explanation for how morally innocent conduct such as nonpromissory insider trading might first become criminalized and then later perceived to be immoral by a population. Under this theory, actors generally regarded as moral innocents may initially be targeted for punishment as scapegoats in the wake of a disastrous social event. Over time, to avoid cognitive dissonance between the belief that conduct is morally permissible and the act of punishing it, society simply drops its shared belief in the moral permissibility of the conduct. This theory of cognitive dissonance fails to explain, however, why nonpromissory insider traders would be targeted as scapegoats to begin with. The moralistic contempt for the vice of greed in some insider traders offers one motivation, but the public's own vice of envy concerning the easy money made by insiders may offer another. Since neither motivation supplies a justification for criminalization in a liberal democracy, and since envy in particular has its own harmful effects on society, this Article concludes with the cautionary note that we should rethink our laws and reconsider our attitudes concerning nonpromissory insider trading.

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