Some may say that insider trading by now is a pretty cut-and-dried topic. Most investors agree that for a marketplace to be fair, those with nonpublic information should not be allowed to trade on it.

But a recent ruling by the United States Court of Appeals for the Second Circuit made it harder to prosecute insider-trading cases, and weeks ago the U.S. Supreme Court agreed to hear a separate insider-trading case, the decision of which could provide a roadmap for future regulation – or upend the shallow foundation of rules that already exists.


As we await the court’s decision, it’s worth reflecting on how we reached this point in the history of investing. If so many of us accept that insider trading is outright wrong, why are we still debating it? And when will we demand that our elected officials create simpler and stronger rules against it?

There is surprisingly little consensus over the proper regulatory or societal response to insider trading – or what constitutes it. In fact, among the courts, there is little agreement on where the lines should be drawn around insider trading or even what constitutes “value” for tippers in exchange for the intelligence they provide.

A number of parties claim that the SEC and other regulators have overstepped their bounds in prosecuting traders. Still others say that it’s useless to argue, since the unscrupulous among us will always toe or cross the line, no matter where we draw it.

It was only in the second half of the 20th century that we came to broadly label insider trading as an economic malfeasance. As recently as 1933, a court case called Goodwin v. Agassiz upheld the legality of an investor to purchase shares based on nonpublic information. In this case, insiders in a public mining company, after learning that the discovery of significant amounts of copper in land owned by the company was probable, was told they did not have to make that information public before trading company shares on the open market.

These legal outcomes were commonplace until the 1960s, when President John F. Kennedy appointed William Cary chairman of the SEC. Cary was a Columbia Law professor and a scholar, and on his agenda of reform was a mission to overturn the 1933 Goodwin v. Agassiz decision.

Cary’s big blow to legal insider trading came in a case called In re Cady, Roberts & Co. (or simply Cady, Roberts), which involved the Curtiss-Wright Corporation. A board member had mentioned to a business partner that the company would curtail its dividend payment. That business partner then sold shares based on this information. The SEC brought administrative action, and Cary used SEC Rule 10b-5 – a provision created in 1942 to prevent outright fraud in the purchase or sale of securities – to declare this kind of insider trading illegal.

The Cady, Roberts decision introduced critical changes in the treatment of insider trading, by making it clear that the passing along of inside information to others for trading was illegal. While it did not have precedential value itself, it marked the beginning of Cary’s SEC finally pursuing enforcement against this behavior.

Cary’s novel interpretation of SEC provision 10b-5 laid the cornerstone for modern regulation of trading on insider information. Fortunately, his actions as SEC Chairman were followed by a string of victories that solidified his reading of the SEC’s rules.

In 1968, the SEC v. Texas Gulf Sulphur case agreed that the law should ensure that “all investors trading on impersonal exchanges have relatively equal access to material information.” Later, in 1984, the Insider Trading Sanctions Act allowed the SEC to pursue treble damages – or three times the amount of money gained by trades based on inside information.

For thousands of years, it was accepted that it was the prerogative of investors to trade on whatever information they had at their disposal. Until only a few hundred years ago, the only “investors” in the world were politically well-connected members of the elite. “Insider trading” was not an issue of impropriety; it was  quite typical.

The changes we have seen over the last several decades are part of the democratization of investing, by which a larger and larger segment of the world has enjoyed access to the opportunities and responsibilities of investment. Since Goodwin v. Agassiz, the United States has made remarkable progress in democratizing access to a fair market by continuing to ensure that insider trading is illegal.

At the same time, it is astonishing to note that the vast majority of regulation against insider trading has been the result of judicial actions and precedent – not explicit statute. It is up to us to decide, as a society, where the line should be drawn when it comes to trading on insider information, lest a combination of historical circumstance and judicial action decide it for us. It we let that happen, we may not like the result.

Reamer and Downing are the authors of Investment: A History (Columbia Business School Publishing, February 2016). Reamer is the former CEO of Putnam Investments, one of the oldest mutual fund complexes in the US, and Downing is an investment professional in Boston.