The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

56 4 Insider Knowledge and Insider Trading
not productive speculation. The corporation supplying the information already has
the knowledge at its disposal on which the insider trading is based. It has the option
to disseminate this knowledge or, if dissemination would harm its own business,
to withhold it and act on the information itself by purchasing the shares itself over
time. 8
The example of the insider deal in which an insider acquires shares on his
private account on behalf of a third party shows that insider trading cannot be
described as unethical solely because it violates a fiduciary relationship. 9 In many
instances, this is indeed the case, and insider trading is then unethical based on
the fact that it constitutes a breach of fiduciary duties. In a few cases, however,
what happens is that the person who established the fiduciary relationship passes
on the insider information to another person who is asked to act in the first person’s
private interest. Some arguments in favor of insider trading claim that insider
trading improves the allocative function of the market by virtue of the fact that
trading in the shares does disseminate information about the insider facts. Such
arguments rest on the assumption that insider trading is not only in the interests
of the insider trader or broker, but can also be in the interests of the client or
principal. 10
To recapitulate this point: neither the advantage of the inside trader, nor the
advantage of the client, nor the minor allocative effect of insider trading upon price
formation in the securities market can offer any justification for insider trading, if
its unethical character is due to the fact that the insider dealing violates the nature of
the matter at issue, i.e. the nature of speculation in the stock market; in other words,
if the insider speculation serves some other purpose than reducing real uncertainty.
Insider trading does not really reduce uncertainty because the insider information
is already in existence. Since all shareholders have the same right to information
about the corporation, the management is not allowed to pass on information about
a pending takeover just to enrich a select few third parties. 11 Even individual shareholders
may not pass on insider knowledge to selected other individuals because, if
they did, they would be violating the right of other shareholders to this knowledge.
The principle of parity of rights for all shareholders demands that either all shareholders
should know the insider information and be able to pass it on, or none of
8 The Second Financial Market Promotion Act of 26 July 1994, Section 21, obliges all corporations
listed on the German stock exchange to report acquisitions or sales of shares in other corporations
which exceed 5, 10, 25, 50 or 75% of the other corporation’s total equity. The Federal Supervisory
Authority can, however, exempt a corporation from this duty if compliance with the duty could
cause the corporation substantial damage (Section 25, no. 4).
9 J. MOORE: “What is Really Unethical About Insider Trading”, Journal of Business Ethics, 9
(1990), pp. 171–182, claims that insider trading is unethical because it breaches the fiduciary
relationship. Certainly this is often true, but not in every case of insider trading.
10 The main proponent of this thesis is H. G. MANNE: Insider Trading and the Stock Market, New
York (The Free Press) 1966.
11 The aspect of the parity of rights of all shareholders is particularly emphasized by HOPT (1991).