Illegal insider trading volume and profitability have increased while the regulatory environment has become more restrictive. This paper explains this puzzling evidence by evaluating the effectiveness of legal theories of insider trading liability and government enforcement. Registered insiders are forbidden from trading on material non-public information based on the disclose-or-abstain theory or the misappropriation theory. Temporary insiders have liabilities similar to registered insiders. In takeover cases, this status is accorded to those connected to both the target and bidding firms. This paper concludes that insider trading regulation has been reasonably effective in deterring illegal trading by registered and temporary insiders. It has, however, failed to deter illegal outside-insider trading.