Negligent Insider Trading: A viable theory of civil liability?

Steven Brody, Stanford University Law School

Abstract

A flurry of civil suits by the SEC and private parties has followed on the heels of the collapse of the subprime mortgage market. Many of these actions raise theories of liability that are still developing in the area of white collar crime and securities fraud. As the SEC and private parties seek to explore new theories under which to bring suit, this article briefly addresses one as-yet unexplored avenue that many academic authorities have alluded to as possible under Section 17 of the Securities Act of 1933: that of “negligent insider trading.” While such a theory has yet to be charged, the recent SEC action against Angelo Mozilo, former CEO of Countrywide Financial Corp. incorporates language that suggests such an approach and presents a timely opportunity to assess the viability of such a charge. We ask whether this theory should be permitted in light of conflicting case law and statutory authority, and conclude that indeed it should not.