A Huge Loophole In U.S. Insider Trading Law

Columbia Law School professor John C. Coffee Jr. makes a case that U.S. insider trading laws are toothless and badly need a rewrite. The major problem, he says, goes back to a 1983 decision, Dirks v. S.E.C., that vindicated a whistleblower who deserved it but had the perverse effect of legalizing a kind of insider trading that has since become rampant. The result has been millions of dollars of ill-gotten gains, essentially at the expense of the mass of traders and stock holders who didn’t have the information. Under current ground rules, Coffee explains, with Dirks as the operative precedent, it’s legal to trade on insider information as long as the tipper didn’t personally benefit from providing the tip – or more accurately, as long as authorities can’t prove that the tippee knew that the tipper received a benefit. Coffee says that some time ago he worked on writing a law that addressed this issue, and although it had sponsors from both parties, it didn’t pass. It’s time to revisit the issue, he says.