Overview

Wouldn't it be great to have access to inside information the real skinny about what's going on in a company you might like to invest in? In fact, you may already have had such an opportunity. Of course, the problem is that if you act on the information, you may have to pay a fine or even go to prison. That's what happened to a variety of Wall Streeters such as Ivan Boesky in the 1980s. It was also good material for the classic Hollywood film Wall Street.

During the 1920s, a tremendous amount of investor activity was based on insider information. It was almost normal operating procedure. Then again, it was not illegal either that is, until the 1930s and passage of the landmark securities laws.

A big problem with the attempt to regulate insider trading was defining it. Basically, you are not allowed to buy or sell stock if your decision is based on any material, nonpublic information that will affect the stock price. If you find out that Fast Co. is about to buy XYZ Corp. at a big price and you snap up some XYZ shares before the information becomes public knowledge, then this would qualify as insider trading.

However, Congress had a problem: What about the executives and directors of the firm? Aren't they constantly exposed to inside information? One idea was to prevent them from buying or selling any shares in their own company. But this seemed too extreme. If anything,...