As promised, I am reporting back from Tulane’s Corporate Law Institute qua “Who’s Who in the M&A World” gathering.  Leo Strine did indeed query today: “can you have angst without a soul?”  (He asked in response to the statement that initial bidders fear deal-jumpers when waiting out a go shop period.)  Though the WSJ was the first to give you the Strine quote, allow me to give you a few more substantive details from Strine’s panel, which was a super one.  The panel was titled “The Challenges of Representing a Private Equity Target,” and the panel included moderators Jim Morphy and Eileen Nugent, and speakers Vice Chancellor Leo Strine, Creighton Condon, Jesse Finkelstein, Robert Kindler, Ted Mirvis, and David Sorkin.  (Morphy sat next to Kindler, who sat next to Mirvis, who sat next to Strine – it is unclear to me how *that* seating chart got put together….)

One of the hot sub-topics on the panel was the question of whether or not a target BOD has to shop the target if it is considering a private equity offer.  As a general matter, the Revlon rule requires that, any time a sale or change of control is inevitable, the BOD of the target corporation has the obligation to “maximize shareholder value.”  When dealing with a “strategic” transaction, this obligation basically requires the BOD of the target to conduct an auction to try to get the highest possible bid for the target.  But when dealing with a going-private transaction, the BOD of the target has historically been held to an “entire fairness” standard.  That is to say, when a private equity bidder makes an offer for a target, and the target’s BOD moves forward on the bid, the courts will later review the BOD’s actions for the purpose of assessing whether the transaction was entirely fair: Was the transaction fair both in ultimate price paid and procedure used to review the offer and get to the price?  There is no obligation to basically conduct a public auction for the target. Yet a going-private transaction is clearly a change-of-control transaction (ala Revlon), such that one would *think* the Revlon rule of maximizing shareholder value should apply (instead of the entire fairness review).  The question came up on the panel, then, as to whether a target who was moving toward a private equity offer or who was retaining an investment bank to gauge interest from other private equity groups needed to publicly announce itself up for sale.  Kindler raised the very good point that often private equity groups come after the weak and sick targets.  So announcing that the target is weak and sick and considering bids really does not do a lot for the target in terms of market strength.  Moreover, if the private equity transaction falls through, the target will be left having admitted it was an injured animal.  Kindler then made the very good point – with which the entire panel seemed to concur – that sometimes conducting a true Revlon auction does not actually work to the s/h benefit.

Vice Chancellor Strine chimed in to say something like “Revlon is a reasonableness test.”  (I think that those were his exact words, actually.)  What I am hoping he meant was that the *way* a target BOD decides to maximize s/h value (with conducting a public auction, making focused inquiries to private equity groups, doing a market test, etc.) was up for business judgment rule protection.  If the way the BOD of the target chose to get the best value did NOT involve a public auction (to keep secret their compromised status or some such), as long as the process used – whatever it was - was designed to ensure maximization of s/h value,  assuring itself the price taken maximized s/h value, the BOD would be fulfilling their fiduciary duties.

Good to know, because, quite frankly, it has never been clear why Revlon comes up in strategic transactions and not going private transactions.  Hopefully, however, this does not lead to the Revlon rule losing its rigidity in the context of plain vanilla public strategic transactions.  It was nice to have a Delaware rule that was clear:  If up for sale, conduct an auction.

While we have been going on and on and on about Leegin here at TOTM, Manfred Gabriel offers a detailed analysis and a prediction on Twombly, the pending SCOTUS case which may provide some important guidance on 12(b)(6) standards.  Gabriel predicts that the Court will neither embrace the District Court’s ruling that plus-factors must be pleaded in a complaint to survive a motion to dismiss nor adopt the Second Circuit’s holding.  Instead, Gabriel predicts that the Court will:

at least reformulate the rule that naked allegations are insufficient, and that under Rule 8(a) the standard is that there must be “no set of facts” under which a claim is stated.

Gabriel expands a bit on how he expects the Court to articulate the pleading standards:

I expect to see three categories of pleadings emerge. The first is one where parallel conduct is in itself so suspicious that it states the claim, as in Scalia’s example. The second category is the allegation of facts relating to the formation or maintenance of the conspiracy: who participated in the conspiracy, where were conspiratorial meetings held, and when (the plaintiffs in Twombly only pleaded that the alleged conspirators had ample opportunity to meet and conspire). In such an instance, the courts will not be required to ask about the plausibility of a conspiracy. In the third category of cases, the Supreme Court will require more than a naked allegation of conspiracy, but less than plus factors, which are meant to show that the alleged parallel conduct “tends to exclude the possibility of normal competitive behavior.” If such a pleading were required to survive 12(b)(6), the district courts would find themselves embroiled in economic theories before the facts of the case had been sufficiently developed, a result the Supreme Court will shy away from. What is left then, is that complaints must allege how the conspiracy was not normal competitive behavior and what normal competition would have looked like but for the conspiracy.

Very interesting.  Definitely worth reading the whole thing.

See also Randy Picker’s view of the Twombly tea leaves here.

A few more thoughts to supplement Josh’s fine posting on the transcript of oral argument in Leegin.

I don’t understand Justice Breyer. He recognizes that there are at least some circumstances in which RPM helps consumers. Why isn’t that enough for Dr. Miles to be overruled?

Justice Breyer regards this as a “close case” (presumably for reasons of stare decisis rather than on the merits) and asks “what has changed?”

What has changed is our state of economic understanding. When Dr. Miles was decided in 1911, the proconsumer aspects of RPM were not yet recognized. And that was largely true even in 1966, a year that Justice Breyer has focused upon, given the publication that year of an academic book criticizing RPM, which seems (so far as Justice Breyer can tell) to have made all of the same arguments against RPM that are now being made today. But it was not and could not have been argued back in 1966 that it would be inconsistent to exempt some vertical restraints from the per se rule but not others. Only once the late 1970s came, when Continental overruled Schwinn, did it become clear how foolish Dr. Miles is. Now that we allow (subject to the rule of reason) non-price vertical restraints, it seems entirely crazy not to allow RPM as well. As then-Professor Posner argued back in the 1970s, RPM is likely in many cases to be a more efficient vertical restraint than the now permissible non-price ones. So banning RPM across the board on a per se basis does not seem to make any sense. And while many of the same arguments against RPM could have been made in 1966, there are some new ones now that didn’t exist then. Anyway, Dr. Miles was decided in 1911, not 1966. It’s not as though the Court considered overruling Dr. Miles in 1966 and decided not to. The Court is now squarely addressing whether Dr. Miles should be overruled for the first time. So any post-1911 developments in economic science are fair game; there’s no basis for excluding from debate what happens to have been known in 1966!

Justice Breyer is impressed by Professor Scherer’s examples of cases where RPM has been harmful to consumers. But how can these examples justify a per se rule? If Professor Scherer can persuasively demonstrate the benefits of banning RPM in the market, say, for blue jeans, then RPM should be banned in that context under the rule of reason. But this does not come close to showing that RPM is”always or almost always” harmful to consumers such that a per se rule is justified.

But enough about Justice Breyer. I also don’t understand Justice Stevens. What on earth does a horizontal conspiracy among New York distributors have to do with this case? As Justice Scalia said, what possible procompetitive benefit could be associated with a horizontal agreement on price? It’s very hard to think of one. But if Justice Stevens can think of one, then sure: apply the rule of reason in that context too!

Predictions are hard to make. But I don’t think Shubha Ghosh is right about Dr. Miles definitely have four votes in the bag. I say it’s one, not four. Justice Breyer says it’s a close case and may well come around. Justice Souter seems altogether uncertain. Justice Ginsberg if anything seems to be leaning the other way–given her interest about what arguments would be available to the plaintiff on remand assuming (as she appears to think likely) a loss in the Supreme Court. As I read the transcript, Dr. Miles can be confident only about Justice Stevens’ vote.

I leave tomorrow for Tulane’s Annual Corporate Law Institute.  This conference is viewed by many as the top annual deal conference, so I am expecting great things (this will be my first time attending the conference).  Indeed, the speaker line-up is incredible.  Chief of OMA at the SEC, Chief Justice of the Del. Supreme Court, Vice Chancellor Strine, Richard Breeden, Justice Jack Jacobs, a medley of deal lawyers from super firms, Patrick McGurn from ISS… the list goes on.

While the topics are hot (exec. comp., SOX, shareholder activism), what will be most interesting to me is the interplay between the practicioners, the jurists, and the regulators.  I have worked for all three at different times, and the differences in perspective I noted were. . . vast.  This should be a fun conference.

(I participated in a recent Going-Private conference where the organizers - Frank Aquila and Nancy Wojitas - similarly did an incredible job with respect to representation.  For example, there was a hugely successful s/h-plaintiffs’ attorney sitting on a panel with corporate counsel.  And both parties were candid about where they stood on going-private transactions.  It was fascinating.)

 I will try to take bloggable notes.  And I hope those of you reading who are also going to the conference will introduce yourselves to me (either at the conference or via an advance e-mail at nowickie[insert “@” sign]wlu.edu)!

Transcripts in Leegin are available here (HT: Antitrust Review where David Fischer points out some of the highlights of the oral argument).  I may add some additional thoughts later after I read the whole thing again, but for now here are some first impressions:

1. Breyer and Souter both had some interest comments on what to make of economists views on RPM (”we’re supposed to count economists?”) — with Breyer relying heavily on the fact that Professor Scherer Yamey’s 1966 book on RPM.  To the extent that Souter and Breyer expressed interest in the empirical evidence  regarding the impact of RPM, I hope his clerks have read the Economists’ Brief which surveys some of the more recent and impressive evidence on the subject of RPM.   It would be a shame if they voted in favor of per se rules based on the state of empirical evidence.
2. Scalia was fairly impressive in his understanding of the economics.  He had the right response to the classic “how does increasing the retailer’s margin guarantee you that the retailer provides the *right* services?” question that the per se crowd is fond of asking.  In a few spots, Scalia demonstrates that he understands that some of the services we are talking about in many of these markets are non-contractible or not conducive to third party enforcement.  Contracts are incomplete.  Parties rely on self-enforcement mechanisms and court enforcement to induce services like these.  The manufacturer gives the retailer a larger margin coupled with the threat of termination to induce performance.  The answer: “well you can just contract for the services directly” denies the incompleteness of contracts.
3. Scalia, pretty early in the oral argument, re-directed the discussion from prices to consumer welfare by suggesting that the higher retail margin is only bad for consumers if it reflects higher retail prices than otherwise (not always true in theory) and is not offset by increased services.  The question is about the services and whether we get a total increase in output — or rather, the burden is really whether the empirical evidence shows that we do not always or almost always get a total decrease in output.  On that point, it really isn’t a close question.
4. Given Breyer and Souter’s interest in the empirics, I would have liked to see a bit more direct response to the reliance on these older studies suggesting higher prices from the lawyers with reference to current work and a level of detail greater than “there is now a consensus …”  I know, I know, we don’t want to bore the Justices with our talks of empirical studies — but they asked for it.

Shubha Ghosh at Antitrust& Competition Policy Blog thinks that at least four Justices (Breyer, Ginsburg, Stevens, Souter) are in the bag for upholding Dr. Miles.  I doubt it.  I’m not much of a vote counter, but I don’t think it will be that close.  7-2 or 6-3.  Something like that.

What do you think after reading the transcripts Thom?  Any surprises?

I have a Word-a-Day calendar - each day of the calendar has its own page and its own vocabulary word.  But I am visiting away from Richmond this semester, I am packing my Richmond house and moving to Tulane, I am buying a house, and I am selling my house.  I am therefore very far behind on my Word-a-Day calendar.  I do not have time to work each word into a sentence.  If you devoted readers could work the following words (from the past two weeks of March) into conversation, I would appreciate it.  I would hate to waste the calendar by not using the words.  Thanks.

Edulcorate:  To free from harshness (as of attitude)

Adventitious:  coming from another source and not inherent or innate

Corvee:  Unpaid labor due from a feudal vassal to his lord

Occident:  regions or countries lying to the west of a specified or implied point of orientation

Zibeline:  a soft lustrous wool fabric with mohair, alpaca, or camel’s hair

Panjandrum:  a powerful personage or pretentious official

Hydromancy:  divination by the appearance or motion of liquids (as water)

Vanward:  located in the vanguard

Favonian:  of or relating to the west wind

Realia:  objects or activities used to relate classroom teaching to the real life especially of peoples studied

Comestible:  edible

As readers of TOTM know, I am interested in law school rankings. So recently I’ve been reading about the Vault “underrated” law school rankings (see my colleague Ilya Somin’s take here). Of course, I agree that GMU is underrated (and also with the praise the recruiter comments section gives to our evening students). But that is besides the point.

What does this have to do with Bill? No sooner do I start thinking about what the implications for the Vault rankings might be for an improved law school ranking procedure than does Bill post the following: “Vault Top 25 Underrated Schools: What Does It Mean?” Bill has done some very interesting empirical work on rankings and the legal profession more generally and so ran a few preliminary tests and explores the the quantitative and qualitative evidence in support of two explanations of the low rankings of various schools relative to Vault’s recruiter scores: (1) better students than the USNews measures tell us; and (2) more educational value-added than other schools of comparable rank. Obviously the analysis is preliminary, and only suggestive.  But it is real analysis. And it is in a blog. And you should go read it.

Time to go scout the Bruins’ Final Four opponent!

Ronald Cass, dean emeritus of Boston University Law School, argues in today’s WSJ that the Supreme Court should overrule Dr. Miles:

The decision was a mistake that has plagued antitrust law and American business ever since. Manufacturers have no interest in suppressing price competition to help increase profits for retailers. A manufacturer with a meaningful monopoly can extract all of his potential profit from controlling the prices (and quantities) at which he sells, and would have no concern for the prices charged downstream. Prices for products that don’t have market power are constrained by forces outside the manufacturer’s control. In either case, the Supreme Court in Miles misunderstood how markets work.

The context for RPM agreements also doesn’t fit the Supreme Court’s assumption — that manufacturers were enforcing conspiracies among retailers. RPMs are common in markets where there is almost no possibility of effective cartels and typically concern products that aren’t likely vehicles for suppressing retail competition. As in Leegin, the products protected from price-cutting generally don’t dominate markets. RPMs serve a different end: they promote brand loyalty — and thus brand value — in highly competitive markets for differentiated, but still largely substitutable, products. While manufacturers can do much to establish brand value, not all of the factors influencing brand value are easily within a manufacturer’s control.

Retailers can help or hurt by tilting sales toward or away from a brand through their choices on how to display it, promote it, service it, or provide information about it — all actions that affect consumers’ perceptions of product quality. By reducing price competition among a brand’s retailers, the RPM provides a profit margin that can make such brand-enhancing behavior affordable and prevent competitors from free-riding on a retailer’s investment in such behavior.

The makers of some brands succeed in the market by reducing price aggressively; others by providing higher quality products. The ability to choose from more products marketed in more varied ways provides options to serve a broad spectrum of consumer tastes and values, including the values of economizing on their time, of making products easier to understand and to use, or of generating straightforward financial savings.

Well said.

Marginal Revolution’s Alex Tabarrok has a good post responding to recent attacks on the extension of credit to poor borrowers (and in particular, this rant from Nouriel Roubini).  Here is a taste:

Roubini and others generating hysteria about defaults in the mortgage market are credit snobs - they think credit is something that only the rich can handle.  Just look at the language that Roubini uses to analogize borrowers - they are “reckless patients” who “spent the last few years on a diet of booze, drugs and artery clogging junk food.”  Similarly, the Washington Post tells us that it’s the end of the “borrowing binge.”

Yeah, we get it.  Credit is ok for us, the “sober” borrowers but poor people can’t handle credit.  Too much credit among the poor generates decay and social pathology.  Credit must be regulated.  We can’t, for example, have credit stores in poor neighborhoods.  Don’t you know that credit is bad for people without self-discipline?   Let the poor buy on installment credit?  That’s unconscionable.  Today’s furor over sub-prime mortgages is the same old story.

Basic economics says that people should borrow so that they can consume based upon their permanent income.  Modern day financial markets are finally making this possibility a reality.  Combine financial innovation, strong US economic performance and a global savings glut and it makes sense that credit should become easier to obtain.  We see the benefits of financial innovation in bringing credit to the poor not just in the United States but around the world.  Will Roubini next be calling for the retraction of Muhammad Yunus’s Nobel Prize?

Check out the comment thread too.  It’s pretty good.

The insider trading trial of former Qwest CEO Joseph Naccio began yesterday. I’ve posted a couple of times (here and here) on Nacchio’s innovative defense, which the WSJ labeled a “black box” defense. (Basically, Nacchio is arguing that his sales of Qwest stock could not have been based on material non-public information that Qwest was doing poorly because he also had non-public information that Qwest was likely to procure some lucrative government contracts.)

TheRacetotheBottom.org, which describes itself as “a pro-SOX blog,” is covering the trial. Based on the blog’s name and description, I’m guessing its authors’ views on insider trading are somewhat different than my own. In any event, the bloggers are providing an interesting play-by-play.

DealBook reports that Goldman Sachs has included the following shareholder proposal from Evelyn Davis in its 2007 proxy statement:

RESOLVED: “That the Board of Directors take the necessary steps so that NO future NEW stock options are awarded to ANYONE, nor that any current stock options are repriced or renewed (unless there was a contract to do so on some).”

REASONS: “Stock option awards have gone out of hand in recent years, and some analysts MIGHT inflate earnings estimates, because earnings affect stock prices and stock options.”

There are other ways to “reward” executives and other employees, including giving them actual STOCK instead of options.

Recent scandals involving CERTAIN financial institutions have pointed out how analysts CAN manipulate earnings estimates and stock prices.

I did a Westlaw search to see whether Goldman filed a no-action request with the SEC to exclude the proposal. It appears that it did not. However, Ms. Davis submitted the same proposal to Pfizer. Pfizer did file a no-action request arguing that the proposal is excludable under Rule 14a-8(i)(7) because it “pertains to matters of Pfizer’s ordinary business operations, namely general compensation matters.” The SEC concurred.

Adam Liptak, in the NYT, penned an interesting article on the declining level of usefulness that law review articles appear to have in judicial opinions.  (Orrin Kerr has a nice post on the article.)

Various quotes in the article make clear that some members of the judiciary do not find law review articles particularly helpful in deciding cases.  I would like to think that that is more reflective of the substance of many of the well-placed law review articles than it is of the value of law review articles as a genre.

I say this as an academic who favors doctrinal work and who has gone so far as to say somewhere in one of my articles on securities fraud that the whole point of writing the article was to help the court and the bar make their way through securities fraud claims.  I have taken a bit of flack from a few scholars who look down on doctrinal work, yet my sense has always been, and the quotes from the judiciary in the NYT article seem to confirm, that doctrinal work has the potential to be incredibly valuable in the courts. 

For example, my writing on telecomm and on securities fraud - all of which is doctrinal - has been cited by courts.  I would like to flatter myself by thinking that the recent Mass. district court judge who cited my securities fraud work in passing (see In re Credit Suisse-AOL Secs. Litig., 465 F. Supp.2d 34 (D.Ct. Ma. 2006)) actually read my work for its substance (which led to the analyst liability claims *not* being dismissed).  I would like to believe that I am achieving my goal of explaining a more sensible way to examine securities fraud claims in the context of one-off actors (e.g. investment banks, auditors, lawyers), and I would like to think that, if academics produce articles that are helpful (as opposed to purely descriptive, etc.), they will be relied upon as such.

The ball, then, seems to partially rest with the second- and third-year law students who select the articles that their law journals will publish.  What is the chance that the student editors of the “top” law reviews are going to read the NYT article and start looking for good academic work that has practical value to the bench, bar, and/or legislature?  When choosing between articles titled “Going Private Transactions and Fiduciary Duties” and “A Countermajoritarian Analysis of the Ellsworth Court, Federalism and the Eleventh Amendment,” perhaps law review editors might consider the potential practical value of the articles in molding the evolution of the law.  (I am not suggesting that an article providing a countermajoritarian analysis of the Ellsworth court and the 11th Amendment would not help mold the law, by the way.)

Thanks to my colleague Mark Drumbl for bringing this NYT article to my attention.

Friday’s WSJ documented an effect of ethanol mandates:

Rising costs for agricultural commodities are making their way up the food chain into the food you eat. Thanks to rising demand for corn-based ethanol, corn prices have nearly doubled during the past year. That’s raised costs for corn products, like the ubiquitous high-fructose corn syrup that’s used to flavor everything from Apple Jacks to Yoplait Yogurt. It’s also raised costs for livestock and poultry, which are fed corn, and for crops like soybeans, which farmers are replacing so they can grow more corn.

Yesterday, the Labor Department reported February prices for “crude foodstuffs and feedstuffs” were 18.8% above year-ago levels. Food companies are starting to pass those higher costs on — wholesale consumer food prices were 6.8% above year-ago levels. Today’s report on consumer inflation will probably show higher prices at the checkout line, too.

These higher prices might not be a bad thing if we were getting some environmental benefit from increase ethanol use. But as Jerry Taylor and Peter Van Doren have shown, we’re not.

Farmers, of course, are benefitting. And we Americans like farmers — so much so that we throw subsidies their way despite the fact that U.S. farm households earn about 11 percent more on average than non-farm households. Unfortunately, the subsidy inherent in ethanol mandates disproportionately impacts the poor, who spend a larger percentage of their incomes on food. Doesn’t that seem like a perverse sort of redistribution?

Unfortunately, the situation is likely to persist. Midwestern farmers constitute the sort of discrete and insular group that organizes well to curry legislative favors. Food consumers, by contrast, are pretty widely dispersed and difficult to organize. And since the costs of ethanol mandates (increased food prices) are diffuse while the benefits (increased profits for farmers) are concentrated, farmers will be much more likely to lobby for their preferred outcome.

I say we require ethanol to stand on its own two feet, and if it can’t, let it fail.

R. Foster Winans knows insider trading.

A former author of the Wall Street Journal’s Heard on the Street column, Winans was a key figure in an insider trading case that went all the way to the U.S. Supreme Court. In that case, Carpenter v. United States, the Court affirmed securities fraud and mail/wire fraud convictions against Winans, who tipped investors about the contents of forthcoming Heard on the Street columns.

In an interesting NYT op-ed, Winans argues for a rethinking of insider trading policy. He contends that the SEC’s current policy improperly aims at “maintain[ing] fairness” in securities markets. Trading on an informational advantage may be a sin, Winans says, but it really isn’t a crime. Indeed, everyone who trades stock does so because she believes she knows something others don’t — something that causes the stock she’s trading to be undervalued (if she’s purchasing) or overvalued (if she’s selling). Moreover, the only way the SEC can police unfair trading on the basis of an informational advantage is to prosecute selectively, “much as a patrolman tickets only the red sports car when everyone on the road is speeding.” That sort of selective prosecution is troubling, Winans maintains, for “stopping the sports car slows traffic only for a mile or two” and “gives the false impression that the policeman is on the beat, making the financial markets safe for the rest of us.”

Winans thus concludes that the SEC ought to stop fighting sin — i.e., trading on an informational advantage — and redirect its efforts to combatting crime — i.e., insider trading that involves the theft of non-public information. (”The solution is sinfully simple. Throw out the current insider trading laws and bus the Securities and Exchange Commission’s lawyers over to the Justice Department, where they can concentrate on the real crime: stealing.”)

While I’m generally sympathetic, I think Winans glosses over a couple of things.

First, current insider trading policy is not — at least, isn’t officially — based on the achievement of fairness (or a level playing field) in securities trading. It couldn’t be. As Winans notes, practically all trades involve some sort of information asymmetry. Moreover, making it illegal to trade on the basis of an informational advantage would wreak havoc on the securities industry, in which analysts make their livings — and enhance market efficiency — by discovering hidden information and recommending trades on the basis of it. Efficient capital markets are ultimately the best investor protection there is, so any development that impaired securities analysts would ultimately harm investors.

Fortunately, the Supreme Court grasps this point. The Second Circuit flirted with a level playing field-based insider trading regime in the 1969 Texas Gulf Sulphur case (“The core of Rule 10b-5 is the implementation of the Congressional purpose that all investors should have equal access to the rewards of participation in securities transactions. … The insiders here were not trading on an equal footing with the outside investors.”). The Supreme Court, however, squarely rejected the notion that insider trading liability can arise solely because of the unfairness of trading on an informational advantage:

Imposing a duty to disclose or abstain solely because a person knowingly receives material nonpublic information from an insider and trades on it could have an inhibiting influence on the role of market analysts, which the SEC itself recognizes is necessary to the preservation of a healthy market. (Dirks v. SEC, 1983)

Now, Winans may be right that the SEC’s real goal in prosecuting insider trading is to create some sort of level playing field. As a matter of legal doctrine, though, the insider trading ban is not based on ensuring informational parity. In other words, “sinful” trading on an informational advantage is not, without more, illegal.

Second, Winans’ sin versus crime dichotomy is a false one, for it leaves out the actual theory on which the ban is based: fraud. As a matter of official doctrine, insider trading is illegal not because it’s unfair (the sin theory) or because it’s stealing (the crime theory) but because it involves a misrepresentation. Under the classical theory, fraud arises because the trader is a fiduciary of her trading partner, owes that partner a duty to disclose the inside information before trading on it, and fails to do so. Under the misappropriation theory, fraud arises because the trader is in a relationship of trust or confidence with the source of her information and “feigns fidelity to the source of the information” by failing to disclose her trading plans before doing so. (See United States v. O’Hagan, 1997). While the misappropriation theory does seem to involve some sort of stealing (using information owned by a fiduciary), liability is based not on the using of the information but on the failure to disclose one’s intention to do so. As Justice Ginsburg explained in O’Hagan, “[F]ull disclosure forecloses liability under the misappropriation theory … [I]f the fiduciary discloses to the source that he plans to trade on the nonpublic information, there is no [insider trading liability].”

***

All that said, I’m sympathetic to Winans’ basic point that we should reconceive of insider trading as an offense based on theft, not fraud. The gravamen of an insider trading offense is trading on information that doesn’t belong to you, and the only reason the courts have concocted this crazy fraud-based liability scheme (which Saikrishna Prakash has aptly described as dysfunctional) is because the securities laws ban fraud and not theft of information. Congress could easily fix that and would likely do so if the courts would ever own up to the fact that they just can’t force this square peg of theft into the round hole of fraud.

Of course, if insider trading were treated as a property rights violation rather than as fraud, the door would be open for firms to opt out of the insider trading ban. A corporation might say to its insiders (or to some class of them), “We transfer our right to this information to you. You may use this information in making trades.” Would firms really do that? Who knows. We could let the market decide. Firms might find, as Henry Manne famously argued, that the right to trade on inside information is a desirable form of compensation — that their shareholders are better off if executives are compensated with the right to use information rather than with money that could otherwise go to the shareholders. Or they might find, as I’ve argued, that the right to trade on inside information enhances the efficiency of the firm’s stock price, preventing mispricing that can increase agency costs. Or they might find, as Henry more recently argued, that insider trading provides informational benefits that lead to better management.

It’s impossible to say ex ante what firms would do if we allowed them to allocate the right to trade on inside information. It’s likely, though, that some firms would figure out ways to reallocate property rights to enhance shareholder value. I say we take Winans’ advice, reconceive of insider trading as a property rights issue, and see what the market produces.