Justices Will Know Insider Trading When They See It

A loose but useful way to think about U.S. insider-trading law is that it is supposed to encourage research, but discourage cheating.1453221987825 So if you read a company's financial statements, examine its stock chart, inspect its products, survey its customers, compare its competitors and otherwise do the work of obtaining information that could affect its stock price, you can go ahead and trade on that information, and we all hope that you are rewarded for your efforts with an above-market return. But if you just play golf with the chief executive officer, and he tells you that the company is being acquired next week, we don't want you trading on that information, and if you do we want you to be rewarded with prison.

That is the intuition. It is not quite the law. It is not quite the law because, in the real world, it is not always easy to distinguish research from cheating. In practice, a lot of the stuff that investors do to research a company involves talking to the company.1453220479505 Sometimes this occurs out in the open, like on a public earnings call. Sometimes it occurs out in the semi-open, like at an industry conference. Sometimes it occurs in private conversations with the company's investor-relations employees, whose job is, as the title implies, to have conversations with investors. Sometimes it occurs in private conversations with the company's executive management. Sometimes, I suspect, it even occurs in private conversations with the chief executive officer on the golf course.