Risk Arbtitrage and Insider Trading: A Functional Analysis of the Fiduciary Concept under Rule 10b-5
![handle is hein.journals/touro5 and id is 127 raw text is: RISK ARBITRAGE AND INSIDER TRADING: A
FUNCTIONAL ANALYSIS OF THE FIDUCIARY
CONCEPT UNDER RULE 10b-5
INTRODUCTION
On November 14, 1986, the Securities and Exchange Commission
(SEC) announced that a leading risk arbitrageur,' Ivan F. Boesky,
had consented to an injunction2 entered in Federal District Court,
barring him from trading securities. The announcement stunned
both professional traders and the investing public.' At the same time
the announcement was made, subpoenas were served on several other
prominent Wall Street figures by the United States Attorney for the
Southern District of New York, causing widespread concern in the
capital markets. Within two days of the announcement of Boesky's
1. See Boesky, The Risk Arbitrageur Growing Presence Abroad. 20 MERG. & AcQ. 82
(1986). Risk arbitrage was born of corporate reorganization or merger activity. Id. Risk
arbitrage is commonly associated with the trading of stock after a takeover bid has been made
public. Arbitrageurs, however, also trade prior to announcements (anticipatory arbitrage), and
participate in a wide spectrum of non-takeover situations including liquidations and reorgani-
zations; see also Phalon, Tipping the Takeover Balance of Power, 16 MERG, & AcQ. 52-56
(1982).
2. Securities and Exchange Comm'n v. Boesky, Fed. Sec. L. Rep. (C.C.H.) t 92,991 (Nov.
14, 1986). Without admitting or denying the allegations of the SEC complaint, Boesky con-
sented to the entry of a final judgment of permanent injunction and other equitable relief
permanently enjoining him from future violations of Sections 10(b) and 14(e) of the Exchange
Act. Boesky also payed the equivalent of S100 million in cash and assets, S50 million of which
represented a civil penalty to be paid to the Treasury of the United States under the Insider
Trading Sanctions Act, 15 U.S.C. § 78(d)(2)(A). The Boesky complaint alleged that Boesky
had obtained material nonpublic information about future transactions from investment
banker Dennis B. Levine. Boesky knew or had reason to know that the information was confi-
dential and had been obtained through misappropriation or a breach of a fiduciary duty or
other relationship of trust and confidence. Boesky allegedly made a number of deals on the
basis of this information and allegedly agreed to pay Levine five percent of the profits accruing
to the entities under his [Boesky's] control in those instances where the material nonpublic
information provided to Boesky by Levine was the basis for the purchase of securities by the
entities under Boesky's control. Levine allegedly disclosed information to Boesky concerning
material nonpublic information concerning a possible merger of Nabisco Brands, Inc. and R.
J. Reynolds, a possible tender offer for Houston Natural Gas Corp. by lnterNorth, Inc. and a
contemplated recapitalization of FMC Corporation. Boesky. utilizing this information, alleg-
edly netted approximately $4 million, S4.1 million, and S975 thousand.
3. See Kilborn, Big Trader to Pay US. S100 million for Insider Trading Abuses, N.Y.
Times, Nov. 15, 1986, at Al, col. 6.
4. See Stewart & Hertzberg, Fall of Ivan Boesky Leads to Broader Probe of Insider Infor-
mation, Wall St. J., Nov. 17, 1986, at Al, col. 6.](ViewImageLocal?handle=hein.journals/touro5&div=10&collection=&method=preview&ext=.png&size=3)
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Risk Arbtitrage and Insider Trading: A Functional Analysis of the Fiduciary Concept under Rule 10b-5
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