However, as we saw in the case of OMRs, a prohibition on a firm trading in its own shares on material inside information cannot, by itself, prevent the firm from exploiting valuable inside information when trading in its own stock.
This makes it difficult to determine whether a particular trade was illegal--that is, whether the firm was in possession of material inside information at the time of the trade.
116) This opacity makes it easier for the corporation to generate profits for insiders by trading illegally on material inside information and legally on valuable but sub-material inside information.
As Parts II and III explain, a firm is not permitted to trade in its own shares on the open market when it possesses material inside information.
Of course, one might believe that firms currently do not trade in their own shares when in possession of material inside information.
222, 227-29 (1980) (stating that a corporation's officers and directors must disclose material inside information or abstain from trading in the firm's shares under Rule 10b-5 because they are in a relationship of trust and confidence with the firm's shareholders).
This Section concludes by explaining how the SEC's safe harbor could easily be modified to prevent insiders with prearranged trading plans from using material inside information to increase their trading profits.
C, suppose that CEO, lacking material inside information bearing on the value of ABC's shares, either gives irrevocable trading instructions to a third party or enters into a binding contract to sell ABC shares.
Thus, whether CEO receives material inside information indicating that ABC will outperform the market or material inside information indicating that ABC will underperform the market, CEO's shares are sold pursuant to the irrevocable instructions or binding contract.
Because the expected cost associated with required trade cancellations offsets the expected benefit associated with self-interested trade cancellations, insiders under such a regime cannot expect to outperform public shareholders using material inside information.
C's analytical framework, suppose that CEO, lacking material inside information bearing on the value of ABC's shares, commits to selling shares according to a prearranged plan.
7 (suggesting that "the answer [to the `possession versus use' debate] is best viewed as a function of a number of specific factors, including: whether the case is brought under the misappropriation theory or the classical theory of insider trading liability"); Horwich, supra note 5, at 1237-38 ("In order to focus the analysis of whether there is a distinction between (i) affirmatively using
material inside information to trade, and (ii) trading while in possession of
material inside information but without making deliberate use of the information, the analysis [in] this Article is limited to the classical theory.
