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Martha Stewart and Insider Trading According to Section 10b of the Securities Exchange Act of 1934 insider trading 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 confused by this vague definition So judicial members were forced to interpret this idea 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 theory The classical theory is the type of illegal activity one usually thinks of when the words insider trading are mentioned The theory 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 the basis of information not available to the public The Supreme Court officially recognized the classical theory in the 1980 case US v Chiarella US v Chiarella was the first criminal case of insider trading Vincent Chiarella was a printer who put together the coded packets used by companies preparing to launch a large money offer for other firms Chiarella broke the code and bought shares of the target companies based on his knowledge of the takeover bid He was eventually caught and his case clarified the terms of what has come to be known as the classical theory of insider trading However the Supreme Court reversed his conviction on the grounds that the existing insider trading law only applied to people who owed a
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