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Abstract

The Texas Gulf Sulphur decision began what has become a fifty-year project of developing U.S. insider trading regulation through judicial law- making. During the course of that project, the courts developed a complex, fraud-based approach to determining the scope of liability. The approach has led, in many cases, to doctrinal uncertainty, a result that is reflected in the recent decisions in Newman, Salman, and Martoma.

In the face of this uncertainty, many commentators have called for a legislative solution. This article argues, however, that the true challenge of insider trading regulation is a lack of consensus about the appropriate scope of the prohibition. On the one hand, insider trading regulation seeks to address the potential unfairness resulting from wealth and privileged access. On the other hand, it seeks to preserve sufficient incentives for re- search to promote market efficiency.

In the face of these competing policy concerns, a legislative definition is likely to be both under- and over-inclusive. Judicial lawmaking may offer a superior alternative because it, unlike legislation, can employ constructive ambiguity—deliberately vague standards that require contextual analysis. By enabling policymakers to maintain ambiguity about the permissible limits on the acquisition and use of market-sensitive information, judicial lawmaking helps to balance the competing concerns that animate the de- bate over insider trading.

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