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Word Count: 2,204
Imagine a boardroom of corporate executives along with their lawyers accountants and investment bankers plotting to take over a public company The date is set an announcement is due within weeks Meeting adjourned many of them phone their brokers and load up on the stock of the target company When the takeover is announced the share price zooms up and the lucky investors dump their holdings for millions in profitsFirst things first - insider trading is perfectly legal Officers and directors who owe a fiduciary duty to stockholders have just as much right to trade a security as the next investor But the crucial distinction between legal and illegal insider trading lies in intent What this paper plans to investigate is the illegal aspects of insider trading What is insider trading According to Section 10b of the Securities Exchange Act of 1934 it is any manipulative or deceptive device in connection with the purchase or sale of any security This ruling served as a deterrent for the early part of this century before the stock market became such a vital part of our lives But as the 1960s arrived and illegal insider activity began to pick up courts were handcuffed by this vague definition So judicial members were forced to interpret on the fly since Congress never gave a concrete definition As a result two theories of insider trading liability have evolved over the past three decades through judicial and administrative interpretation the classical theory and the misappropriation theoryThe classical theory is the type of illegal activity one usually thinks of when the words insider trading are mentioned The theorys framework emerged from the 1961 SEC administrative case of Cady Roberts This was the SECs first attempt to regulate securities trading by corporate insiders The ruling paved the way for the traditional way we define insider trading - trading of a firms stock or derivatives assets by its officers directors and other key employees on
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