It is in the definition of insider that the discussion regarding the ability of regulation to maintain market efficiency becomes difficult.
There is no overriding definition of "insider." Instead, the courts have relied on precedence to make their decisions. In a seminal case, the Second Circuit court, in reversing a conviction of a lower court, took strides toward determining what an insider is not.
In this case, Chestman was a stockbroker who bought shares of stock in the Waldenbaum grocery chain on inside information. His source was a nephew-in-law of Mr. Waldenbaum who tipped Chestman that the company was about to be taken over in a tender offer by the larger A&P chain. The nephew (Keith Loeb) learned of the pending offer from his wife, who learned of it from her mother (Mrs. Waldenbaum). Loeb's wife instructed him not to tell anyone because it could put the offer in jeopardy. Despite this warning, Loeb told Chestman the day after learning about the offer and himself placed an order for additional shares of Waldenbaum stock. Chestman placed orders for customers of the securities firm where he worked based on Loeb's information, and was convicted of insider trading.
In overturning the conviction, the Second Circuit court held that trading on nonpublic information, even though that information is considered material, does not, "without more," violate the rules of insider trading unless the trader has expressly and explicitly agreed to keep the information confidential, has received the information through misrepresentation or subterfuge, or has a fiduciary or other obligation to maintain the confidentiality of the information. In this case, the court ruled that kinship alone does not constitute such an obligation, although there are instances, according to the court when kinship would create such an obligation. Such instances would occur when the trader was more closely related to the controlling interests of the comp...
What is Insider Trading?. (1969, December 31). In LotsofEssays.com. Retrieved 16:12, July 06, 2015, from http://www.collegetermpapers.com/viewpaper/1303507248.html