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Journal of Business Ethics (2008) 77:205217 Springer 2007 DOI 10.1007/s10551-006-9344-6
Applying Ethics to Insider Trading Robert W. McGee
ABSTRACT. Insider trading has received a bad name in recent decades. The popular press makes it sound like an evil practice where those who engage in it are totally devoid of ethical principles. Yet not all insider trading is unethical and some studies have concluded that certain kinds of insider trading are actually beneficial to the greater investment community. Some scholars in philosophy, law and economics have disputed whether insider trading should be punished at all while others assert that it should be illegal in all cases. This paper explores the nature of insider trading and analyzes the issues to determine the positive and negative aspects of insider trading, and how policy should be changed. The best hope would be for studies to be made that isolate the individuals or groups who are fraudulently harmed by insider trading. If any such groups exist, then clearly worded legislation could be passed to prevent any fraud from being committed against these individuals and groups, while allowing non-fraudulent transactions to be completed without fear of prosecution. Until it can be clearly determined that someone is fraudulently harmed by insider trading, there should be no law or regulation restricting the practice, since such restrictions violate individual rights and will likely have a negative market reaction.
KEY WORDS: ethics, insider trading, level playing eld, property rights, utilitarian ethics
Introduction
Practically all the articles that have been written on insider trading in recent years have treated it as
something evil. The notable exception is the work of Manne (1966a, b, 1985). Two particularly hostile and vociferous attacks on Mannes position were made by Hetherington (1967) and Schotland (1967). But theirs were not the only attacks. In fact, it would not be incorrect to say that most articles that have been written about insider trading have taken the position, either implicit or explicit, that insider trading constitutes unethical conduct (Boatright, 1997; Brudney, 1979; Moore, 1990; Salbu, 1992; Strudler and Orts, 1999; Werhane, 1989). Unfortunately, many of those articles do not probe the ethical issues involved. They merely begin with the premise that trading on insider information is inherently unethical. But such a conclusion...