Criminalization of Insider Trading: To Be Or Not To Be?


The illegalization of insider trading in most jurisdictions of the world has not received full acceptance. Whilst some legal and economic scholars are in support of the prohibition of insider trading for amounting to fraud and breach of fiduciary duties, others advocate for decriminalization of the practice arguing that criminalization serves no economic purpose. Much of the scholarly debate about insider trading among economists and lawyers has focused on whether insider trading is economically harmful and whether its prohibition is therefore socially beneficial. Distinguished scholars in law and economics disagree fervently about the economic costs and benefits of insider trading rules. Some argue in favour of the legalization of insider trading because they believe such trading would provide an appropriate form of corporate executive compensation and improve allocative efficiency by transferring important information quickly to the securities markets. In relatively recent times, the scope of persons classified as insider traders or beneficiaries of insider trading for penalty purposes, has been unsettled by the 1997 decision of the US Supreme Court in United States v. O’Hagan. The court unprecedentedly held that an outsider who takes advantage of non-public information to transact could be held liable for insider trading even when he is not an insider in the entity in question. This paper found that both the traditional and economic theories of insider trading concede the reprehensible nature of the practice. The paper recommends the retention of the prohibition of insider trading as it is justified for ethical, corporate and economic reasons.