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16 Fordham Urb. L.J. 573 (1987-1988)
Closing a Loophole: Insider Trading in Standardized Options

handle is hein.journals/frdurb16 and id is 583 raw text is: CLOSING A LOOPHOLE: INSIDER TRADING
Steve Thel*
A recent Note in the Journal took the position that section
10(b) of the Securities Exchange Act of 1934' and rule 10b-
52 should be interpreted broadly-to close a loophole that may
allow corporate insiders to trade standardized options on the
corporation's stock when they cannot trade the stock itself.3
While it is generally agreed that insiders violate rule lOb-5 if
they trade stock on the basis of material nonpublic corporate
information, the Note suggested that the rule may not forbid
them to trade options on the stock under the same circum-
stances.4 There are several theories why insider trading violates
rule lOb-5,5 but the Note argued that by the simple expedient
of trading options on common stock rather than the common
stock itself, an insider can escape liability under the only theory
that the Supreme Court has expressly endorsed.6
The key to insider trading law under rule lOb-5 is Chiarella
v. United    States,7 in   which   the Supreme Court held         that a
trader who does not make any misrepresentation does not violate
section 10(b) or rule 10b-5 unless his silent trading is deceptive
because he violates some duty when he trades.' Broadly speak-
ing, there are two      reasons that an      insider in   possession   of
* Associate Professor, Fordham University School of Law; B.A., University of
North Texas; J.D., Harvard University.
1. 15 U.S.C. § 78j (1982).
2. 17 C.F.R. § 240.10b-5 (1988).
3. Note, Insiders, Options and the Fiduciary Principle: A Rule 1Ob-5 Loophole,
16 FoRDHA URB. L.J. 295 (1988) [hereinafter Note, Rule lOb-5 Loophole].
4. Id. at 322.
5. See generally D. LANGEVOORT, INSIDER TRADnIG REGULAMTION (1988) [hereinafter
6. Note, Rule lOb-5 Loophole, supra note 3, at 324 & n.223 (no criminal liability,
no civil penalties, and no private liability).
7. 445 U.S. 222 (1980).
8. Id. at 227-28. The holding follows from the language of § 10(b), which provides
for the regulation of manipulative or deceptive devices and contrivances. See 15 U.S.C.
§ 78j (1982).

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