1 The Illusion of Equality Within the Securities Market with a Focus on Insider Trading I. Introduction The market has historically been a male dominated field. Women toiled in the kitchen while men went to trade in the market. Recently, family issues have received much attention from politicians and social commentators. The debate has centered, for the most part, on the decline of “family values” and the commensurate decline of “work ethic” among participants in the labor market. Although economists have no way of measuring values or work ethic directly, they may nonetheless be able to find evidence of changes in values and work ethic to the extent that these changes affect different markets. When it comes to showing the impact of these family interactions on labor and financial markets, however, economists for the most part have remained on the sidelines. In this paper, I bring the family and its influence on the market to the heart of the discussion by using insider trading as a benchmark to highlight the integral link between the family and the market. In the Nineteenth century there had been an ideology of two separate spheres that existed; one sphere being the family and the other sphere being the marketplace. The marketplace was thought of as a place to be dominated by men while women tended to the needs of the family. This dichotomy tended to exclude women from the market while promising them a central role in the apparently equal domestic sphere. This may no longer be considered to be true but we do continue to view the family and the market as two distinct spheres. Also, court decisions seem to inherently adhere to the idea that This watermark does not appear in the registered version - http://www.clicktoconvert.com
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1
The Illusion of Equality Within the Securities Market with a Focus on Insider Trading
I. Introduction
The market has historically been a male dominated field. Women toiled in the
kitchen while men went to trade in the market. Recently, family issues have received
much attention from politicians and social commentators. The debate has centered, for
the most part, on the decline of “family values” and the commensurate decline of “work
ethic” among participants in the labor market. Although economists have no way of
measuring values or work ethic directly, they may nonetheless be able to find evidence of
changes in values and work ethic to the extent that these changes affect different markets.
When it comes to showing the impact of these family interactions on labor and financial
markets, however, economists for the most part have remained on the sidelines. In this
paper, I bring the family and its influence on the market to the heart of the discussion by
using insider trading as a benchmark to highlight the integral link between the family and
the market.
In the Nineteenth century there had been an ideology of two separate spheres that
existed; one sphere being the family and the other sphere being the marketplace. The
marketplace was thought of as a place to be dominated by men while women tended to
the needs of the family. This dichotomy tended to exclude women from the market while
promising them a central role in the apparently equal domestic sphere. This may no
longer be considered to be true but we do continue to view the family and the market as
two distinct spheres. Also, court decisions seem to inherently adhere to the idea that
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interest and turning it into a mechanism for the joint production of goods and services.10
Through bargaining with others, wants on both sides of a transaction are satisfied thus
increasing the public welfare without any need for altruistic feelings towards others.
According to classical economists, the market is also non-hierarchical.11 All men,
regardless of who they are, have wants that they try to satisfy, and all are potential
bargaining partners. Men in the market are not only equal vis-à-vis their potential ability
to satisfy others’ wants, they are also equal in relation to the state.12 As a result, classical
economics says there should not be any state intervention in the market. Indeed, by
assuming a highly competitive marketplace, even bargaining power among individuals
could be seen as equal.13
Under the separate spheres ideology, the home, the family, and women provided a
direct contrast to the autonomous, self- interested nature of men and the market. In fact, a
home was often defined in direct opposition to the market. If the market intruded on the
home in any way, it was not a true home. Thus, John Ruskin wrote,
[Home] is the place of peace….In so far…as the anxieties of the outer life
penetrate into it, and …the outer world is allowed by either husband or wife to cross the
threshold it ceases to be a home; it is then only a part of the outer world which you have
roofed over and lighted fire in.14
The home was identified with women and families just like the market was
identified with men. “The true woman’s place was unquestionably by her own fireside…
10
See Atiyah, supra note 7, at 299. 11
Historians describe the changes experienced in the late eighteenth century and early nineteenth centuries as a move from the patriarchal relations of master and servant to the more formally equal relations of employer and employee in the modern market. See Cott, supra note 2, at 66. 12
See Olsen, supra note 4, at 1502. 13
See Atiyah, supra note 7, at 340. 14
Kate Millet, The Debate over Women: Ruskin vs. Mill, in Suffer and Be Still 121, 130-31 (Martha Vicinus ed., 1972).
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between the market and the home, however, is to think of them together as allowing men
to express their whole range of emotions. While men in the market were expected to be
calculating and self- interested, once they returned to their homes their warmer, more
altruistic feelings could be expressed. Even Adam Smith admitted that men experienced
great sympathy for members of their immediate families: “It approaches…. To what he
feels for himself.”21 Within the home, men were allowed to cry, and being “tender-
hearted” at home was by no means considered inappropriate.
The existence of a home different and separate from the market allowed men to
act one way in the market and somewhat different at home. In short, it created more
possibilities for a range of emotions, allowing men to be fuller people than if they were
limited to the emotions and styles of action permitted in the market.
Thus, the existence of a home and women, and their strong associations with
emotion and care for others, allowed the market to continue to exist with only a limited
range of permissible behaviors. Both spheres made it possible for men to be competitive
and self-serving within the market and loving outside of it.22 It also made it possible for
society to accept a market that was self- interested. Without the separate, recognizable
sphere of family, the market would appear reprehensible and indefensible. It is the
existence of the separate sphere along side the market that allows the market to continue
to exist.
21
See Davidoff & Hall, supra note 5, at 534. 22
The market was also associated with the positive value of progress, self-reliance, and modernization. Olsen, supra note 5, at 1500. These positive values had the effect of making the market ideologically viable. See Cott, supra note 2, at 69.
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In contrast to the market, in which universal selfish behavior is supposed to result
in the betterment of society, the family has generally been expected to be based less on
individualism.23 The good of all is not achieved by each family member’s pursuit of
individual goals, but rather by sharing sacrifices among family members. At one time the
husband was thought to control his wife; and children were, and to an extent still are,
expected to obey their parents for the sake of a better society, parents have often been
expected to sacrifice their immediate individual interests for the sake of their children.24
Altruism was supposed to be the central tenet of the family much like individualism was
supposed to be the tenet of the marketplace. At one time, for example, the father’s social
role entitled him to control the children. If the mother were to leave him and take the
children with her, the courts would ordinarily be expected to force her to return them to
him; for courts to refuse to do so would be considered state interference with the family.25
Neither husband nor wife were expected to pursue self- interests over interests of the
others. Sharing and self-sacrifice were considered “appropriate behavior.”26
The theory of the private family, like free market theory, includes the assertion
that particularized adjustments of seemingly unfair or inhumane results will not actually
serve anybody’s long-run interests.27 One attack made upon ad hoc adjustments by the
23
See J. Locke, An Essay Concerning the True Origin, Extent and End of Civil Government, in Social Contact 33 (E. Barker ed. 1960) (parents’ duty to care for children). 24
Id. 25
See People ex rel. Olmstead v Olmstead, 27 Barb 9, 31 (N.Y. Sup. Ct. 1857) (granting father habeas corpus remedy against mother and mother-in-law to obtain custody of child on ground that “the paramount legal right of the father to the custody and education of his child can be interfered wit by a court of equity only where he has been at fault in bringing about the separation.”) 26
See L. Alcott, Little Women (Boston 1968). 27
See Emily Martin, The Egg and the Sperm: How Science has Constructed a Romance Based on Stereotypical Male -Female Roles, in Feminism and Science 103 (Evelyn Fox Keller & Hellen E. Longino eds., 1996).
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state is based on the delicate quality of family relations.28 Adherents of this position
argue that what might seem to be a minor change in the law could have disastrous
unforeseen consequences. Thus, a member of England’s House of Lords argued in 1838
that a bill allowing mothers to visit children living with their legally separated fathers
could “ruin half the families in the kingdom.”29 It was said to be “dangerous…to tamper”
with the “delicate” principles of family law.30
IV. The Securities Market as the Ideal Market
The idea of the ideal market has influenced the interpretation of the securities
markets so that it is understood as having the characteristics of the ideal market. This is
especially true within insider trading laws. As in the market of separate spheres,
securities traders owe each other no duties. They act autonomously, motivated by their
own self- interest. As with the ideal market, this pursuit of self- interest is seen as
ultimately beneficial to everyone. Additionally, like the ideal market of the separate
spheres ideology, the securities market is also seen as populated by males.31 Finally,
when court cases raise issues about conduct within the market they are decided in a
manner that is consistent with the ideal market. When market participants could be
understood to act out of any of a number of motives, courts tend to see them as acting
from personal self- interest, much like an ideal market.
28
Id.at 106. 29
44 Parl. Deb. (3d ser.) 772, 789 (1838) (statement of Lord Wynford). 30
Id.at 788 (statement of Lord Brougham). 31
Women do play a role in the securities market. Thirty-nine percent of securities industry professionals and 28% of managers and officers are women. See Jon Birger, Hiring Women: Ladies Who Power Lunch Make Gains in Securities , Crain’s N.Y. Bus., Juen 16, 1997, at 25.
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Within insider trading, United States v. O’Hagan32 is the most recent court
decision on Rule 10b-5 of the Securities and Exchange Act of 1934.33 However,
O’Hagan did not address the issue of how broadly the statute could be applied within
insider trading. As with the market in general, traders in the securities market act
autonomously from one another. As a general rule, there are no duties owed to the other
traders under Rule 10b-5. The Supreme Court made this rule very clear in Chiarella v.
U.S.34 Chiarella, a “mark-up man” for a financial printer, had figured out how to
decipher crucial information purposely left temporarily blank in documents for corporate
takeover bids.35 This is the central case that tries to confine the doctrine of insider
trading to the market. The SEC argued that, because he had information that other
traders did not possess, he was trading on inside information in violation of Rule 10b-5.
The court rejected this argument. The court held that Chiarella owed no duties to the
target company or to its shareholders. As to both, he was a complete stranger. It said:
“No duty could arise from petitioner’s relationship with the sellers of the target company’s securities, for petitioner had no prior dealings with them. He was not their agent, he was not a fiduciary, and he was not a person in whom the sellers had placed their trust and confidence. He was, in fact, a complete stranger who dealt with the sellers only through impersonal market transactions.”36
Participants in the securities market are considered strangers to one another in the same
way as participants in the ideal market.
The same theme emerges in the cases dealing with insiders’ liability to option
traders under Rule 10b-5. Many courts have held that insiders who trade in corporate
32
117 S. Ct. 2199 (1997). 33
15 U.S.C. 78j(b) (1994). 34
445 U.S. 222 (1980). 35
See Id.at 224. 36
Id.at 232-33
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shares do not owe a duty to those who trade in options.37 Like the printer in Chiarella,
option traders are seen as “strangers” to those insiders who have traded in corporate
stock. Since they trade in different markets, there is no real connection between a
defendant’s trading and any losses that the plaintiff may have suffered.38 As strangers,
there is no duty owed to option traders by the insiders.
Securities traders who are “strangers” to others are free to pursue their own self-
interest. In Dirks v. SEC, the Supreme Court emphasized both the inevitability and the
desirability of self- interested behavior.39 As part of its decision, the court rejected the
position put forth by the SEC that the mere possession of nonpublic information was
enough to impose an obligation to disclose or abstain from trading.40
Despite this, the Dirks court understood market efficiency as dependent on the
analysts’ work in ferreting out information that might emerge more slowly. It noted,
“The analysts’ work redounds to the benefit of all investors.”41 The court recognized that
people in the market do not work to obtain exclusive information purely out of the
goodness of their hearts. They work because to do so produces personal profit; they can
sell via market letters any new information for which clients are willing to pay.42 If they
could not profit from the information, they would, according to the court, be less willing
to search for it. Finding liability under Rule 10b-5 for anyone who had traded on
material, non-public information would mean that the analysts would be unable to profit
37
See H.T.Mill, Enfranchisement of Women , in J.S. Mill & H.T. Mill Essays on Sec Equality 89, 99-100 (A. Rossi ed. 1970). 38
See C. Lasch, Haven in a Heartless World 36 (1977). 39
See, e.g ., Easton, Feminism and the Contemporary Family , in a 8 Socialist Rev., May-June 1978, at 11. 40
See Id. 41
See Pound, The End of Law as Developed in Juristic Thought (pt. 2), 30 Harv. L. Rev. 201, 203, 210 (1917) (discussing theory that law gradually progresses toward a system of individual liberty in which “rights, duties and liabilities flow from voluntary action”). 42
See H. Clark, The Law of Domestic Relations in the United States § 7.1 at 220 (1968).
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family businesses, there were clearly not the settings in which he expected the
entrepreneur to be located. A feature of the entrepreneur is that he is male.
If we think of the stereotypes of men and women that are part of the separate
spheres ideology, the entrepreneur, as described by Manne, is a man. Men work alone
while women work within networks and to preserve relationships.51 Men are
traditionally thought of as rough and self-confident, while women are shy and insecure.
Manne sees the entrepreneur inhabiting the work world of men: corporate managers,
lawyers, investment bankers, scientists. Even today, men dominate the securities
industry. The final proof that Manne’s entrepreneur is male comes from Manne’s
understanding of his motivation. Entrepreneurs, Manne asserted, are attracted to those
positions offering them the “greatest opportunity… to make large, indefinite gains.”52
Unlike women, who are traditionally believed to be motivated by love or beauty,
Manne’s male entrepreneur is motivated by the stereotypical male objective: money. It is
this that makes insider trading, with its potential for large gains, the appropriate form of
compensation. Manne’s entrepreneur is the classic profit-maximizing male.53
Thus, Manne’s work clears up the picture of the securities market as an idealized
market in line with the separate spheres ideology. The securities market, like the
idealized market of classical economics, is seen as a place where people do not owe
duties to others, where people act in pursuit of their own self- interest (to the ultimate
good of all), and where stereotypical male traits can be expected. Furthermore, Manne’s
51
See discussion of the ideal woman. 52
Manne, supra note 35, at 155. 53
See, e.g., SEC v. Materia, 745 F.2d 197, 200 n.3 (2d Cir. 1984) (concluding that the wife neither knew nor should have known that the information conveyed to her was confidential).
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One of the few cases that, like Chestman, involve a discussion of family is SEC v.
Switzer.57 In Switzer, a corporate executive was overheard at a track meet talking to his
wife about an out of town meeting to discuss what to do with a corporate subsidiary. The
eavesdropper, Switzer, then traded on the information that he had heard, and spread the
word to some of his friends. The court held that the defendants had not engaged in
insider trading. Rule 10b-5 would be violated only if a corporate insider had passed on
the information in breach of a fiduciary duty, including benefiting pecuniarily from the
tip. According to the court, the executive, George Platt, had not breached a duty in
relaying to his wife the information that he was considering liquidating the company.58
Instead, the court saw the discussion as a family matter. His wife would be
leaving town for a week the day after their discussion and they needed to discuss their
family’s plans for that week. Since they had children, it was their practice to try to
arrange for one parent to be in town while the other was away.59 In this way, passing the
information on to his wife takes on a family tone instead of business. Similarly, the court
describes the conversation between husband and wife as one in which she is performing
as a good wife:
“When G. Platt appears distracted, it is not uncommon for his wife to inquire of him what is on his mind. On these occasions, he will talk to her about his problems, even though she does not have an understanding of or interest in business matters. On the day of the track meet, Phoenix [the corporation in questions] was weighing upon the mind of G. Platt …prompting G. Platt to talk to his wife about it.”60 It is her job to provide solace and comfort to her husband as he deals with the
troubles of the world. The interaction between husband and wife is seen as a family
57
590 F. Supp. 756 (W.D. Okla. 1984). 58
See Id.at 766. The case could have gone either way. 59
See Switzer, 590 F. Supp. at 762. 60
Id. The court referred to Mrs. Platt either by “wife” or “Linda.” She was not called either “Mrs. Platt” or “L. Platt.”
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market is the subject of continuing political and legal battles.72 The market, despite its
egalitarian theoretical premises, reproduces the inequality of the family.73 The above
cases are a small sample of the inequality of the court’s view of men and women. This
reproduction takes place for a number of reasons and through a number of mechanisms.
Efforts to combat it are thus also varied in their intentions and their effects.
One reason women are disadvantaged in the market is that some market actors
intentionally discriminate against them. Before such discrimination was outlawed, there
were many efforts to justify it. The justifications ranged from protecting the family74 and
women from the corruption of the market,75 to protecting men and the market itself from
the ill-effects said to result from women’s participation in the market.76 These four
justifications are not generally accepted anymore for excluding women from working in
the market, but they do continue to operate to rationalize differential treatment of men
and women.
While these justifications may not explain the discrimination present in insider
trading it does help to explain the patterns of inequality and sexual segregation that
continue in the market. Thus, it could be said that the market reproduces the inequality of
the family but denies this unequal discrimination against women. Rather, unequal results
in the market are explained as the effect that growing up and living in families has upon
behavior of men and women in the market.
72
See generally, Women and Philosophy: Toward a Theory of Liberatio n (C. Gould & M. Wartofsky eds. 1980). 73
See C. MacKinnon, Sexual Harassment of Working Women 18-21 (1979). 74
Proponents of “Separate Spheres”: thought that the family would suffer if they would have participated in the market. The opportunities would tempt the women into other roles besides being a mother and a wife. See W. Wandersee, Women’s Work and Family Values: 1920 -1940 , at 67, 70 (1981). 75
Women were thought to be less physically fit and healthy as men. See, e.g., Muller v Oregon, 208 U.S. 412, 421 (1908). 76
Women were thought of as worse workers than men because they were too weak for many jobs and were not educated. See C. MacKinnon, supra note 73, at 10-12.
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There are two general mechanisms by which discrimination operates. First,
differing family obligations and expectations about men and women prejudice women.77
Second, the particular upbringings girls receive in families and the roles women have
played in the past do in fact leave women ill prepared to succeed in the market, as it is
now organized.78
An important aspect of both mechanisms is that the market was constructed
primarily of men, and the roles available in the market as well as the rewards associated
with the market were a result of society. It is the interaction between women’s behavior
and the particular demands of the market that results in discrimination against women.79
The way the courts focus on relationships within insider trading is strange
considering that such focus is usually reserved for the family context. In Chiarella and
Dirks the court says that there must be a relationship between the insider trader and the
firm in which he is trading on. But, the court does not set out the requirements for the
establishment of this relationship.
Many anti-discrimination provisions can be explained or justified as efforts to
allow women to be assimilated into the free market. Within the securities market insider
trading regulations must try to protect women from discrimination, there must also be a
concerted effort to make the market more like the free market ideal. Three of the four
classic reasons for intentional discrimination against women – protecting women from
the corruption of the market, insulating the family from market pressures, and protecting
77
See Frug, Securing Job Equality for Women: Labor Market Hostility to Working Mot hers , 59 B.U.L. Rev. 55, 56-58 (1979) (observing that, because women have been expected to assume most parental responsibilities, they must often work on a part-time basis, take jobs with little responsibility, and compromise employment opportunities). 78
See Baker, Women in Blue -Collar and Service Occupations, in Women Working , at 339, 357-359 (A. Stromberg & S. Harkness eds. 1978). (saying that many forms of training are unavailable to women). 79
See Frug, supra note 77, at 55, 56-58.
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men’s position in the marketplace – are factors that the ideal free market actors would not
take into account in purely profit-motivated activity. Only the fourth factor – that women
are, in general, less valuable or less productive in the market – provides a market
justification for intentional discrimination. However, all these concerns seem to be weak
arguments for discriminating against all women. So, requiring market players and the
court to lose their biases may be a way to make the actors and the court rational players.
So how would we get rid of this bias? My solution would be to have an
affirmative action plan for women in the court system and the market to eliminate
discrimination against women. First, a target or quota may be set to the number of
women who would be in violation of insider trading laws when brought up on charges by
the Securities and Exchange Commission. This type of a quota system may serve as an
avenue for gender-neutral decisions since judges would be more inclined to treat women
as players within the market and not merely as housewives. Furthermore, even when
affirmative action is intended to help individual women for prior discrimination or to
create a sexually integrated marketplace by rewarding women beyond what they deserve,
it is conceived of as a temporary relief measure.80 It may be seen as a brief departure
from the free market system, a departure designed to correct a malfunction caused by
irrational, intentional discrimination and to restore free-market, profit-maximizing
rationality.81
Systems that promote facially neutral policies that serve to handicap women are
sometimes supported as efforts to purify the free market. For example, under the
80
If male-dominated professions are sexually integrated then women will have a fairer chance in market competition. 81
Before there are changes in the market against discrimination it might be done it must be achieved within the family. See Frug, supra note 77, at 55-61.
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continued oppression of most women: the reforms maintain the status quo by
particularizing and privatizing inequality and encouraging women to blame themselves
for their failures in the market.84
A quota system promotes market individualism and promises each individual
woman that she can succeed in the market if only she chooses to apply herself. It
obscures for women the actual cause of the oppression and treats discrimination against
women as an irrational and capricious departure from the normal objective operation of
the market, instead of recognizing such discrimination as a pervasive aspect of the two-
sphered system. The reforms reinforce free market ideology and encourage women to
see individualistic, inward looking solutions to social problems.
A second common way to understand anti-discrimination law is that it moderates
the effects of the free market in order to promote women’s equality.85 If intentional
discrimination is considered rational but socially irresponsible, laws against such
discrimination can be seen as an effort to counteract the individualism of the market and
to force market actors to behave more responsibly.86 Similarly, affirmative action can be
considered more than just an effort to get rid of irrational discrimination by the court; it
can be viewed as a method of combating discrimination or even as an attempt to
restructure the workplace.87
These reforms share the advantage of the welfare state. Like other welfare state
provisions, anti-discrimination laws can promote more than mere formal equality. By
84
See, Freeman, Legitimizing Racial Discrimination Through Anti discrimination Law: A Critical Review of Supreme Court Doctrine , 62 Minn. L. Rev. 1049 (1978) (arguing that racism and antidiscrimination law work to legitimate the inferior position of racial minorities). 85
See, Fried, In Defense of Preferential Hiring, in Women and Philosophy at 309-319. 86
See, Connecticut v. Teal, 102 S. Ct. 2525, 2534-35 (1982) (rejecting evidence of substantial minority employees as defense against employment discrimination charge). 87
See, Ginger, Who Needs Affirmative Action , 14 Harv. C.R.-C.L. L. Rev. 265, 27075 (1979).
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