This Article discusses corporate criminal liability for insider trading violations under Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b–5 of the United States Securities and Exchange Commission. The Author begins by reviewing the basis for insider trading liability and tracking its development since the early 1930s. The Author discusses the required level of mens rea for insider trading—observing that while recklessness is presumed to be sufficient, there is no clear legal standard in this unsettled area of law. Further complicating matters is Congress’ adoption of a “willfulness” element for the criminal enforcement of insider trading. The Author analyzes the effects of this adoption on the existing mens rea requirement, noting the apparent conflict between “recklessness” required at common law and the new “willfulness” requirement for criminal liability. This analysis leads the Author to question whether reckless insider trading, which is likely sufficient for civil liability, might be construed as willful and therefore punished as criminal conduct.
Given the potential for corporate criminal liability of reckless insider trading, the Author argues that it should be eliminated entirely. In other words, corporate criminal liability for insider trading should be limited to knowing violations of the law. The Author offers a number of means to affect such a change, such as the clarification that reckless conduct is not willful conduct, the issuance of prosecutorial guidelines, or a change of penalties through sentencing guidelines. To assuage potential criticisms that the elimination of corporate criminal liability for reckless insider trading disincentivizes corporations from monitoring and guiding employee compliance, the Author argues that existing tort and statutory civil liability is a sufficient basis to deter potential wrongdoing.