Law Professor an Unexpected Foil to Insider Trading

Law Professor an Unexpected Foil to Insider Trading

Michael Guttentag 2021
Professor Michael Guttentag

Michael Guttentag is not your typical academic critic of insider trading law. At one time he was the ultimate corporate insider. Until he wasn’t. 

Given that Guttentag’s resume is replete with experience working at the highest levels of corporate America, you might not expect him to be the one leading the charge to tighten regulations around insider trading. But Guttentag’s career has defied expectations in many ways.  

In his most recent law review article, Avoiding Wasteful Competition: Why Trading on Inside Information Should Be Illegal,” Guttentag argues: “The time has come for the United States to replace the current insider trading regime, which conditions the insider trading prohibition on whether the information is wrongfully acquired, with an insider trading prohibition that bans all trading when in possession of insider information regardless of how the information was acquired.” In other words, he wants to replace an ambiguous prohibition that is difficult to enforce in many situations with an ironclad prohibition: If you possess information that you know is material and nonpublic you cannot trade no matter how you happened to get access to that information. 


The problem of insiders taking advantage of their proximity to information and power is a problem Guttentag came to know well in his career before the classroom. Prior to his move to academia, Guttentag spent a combined 20 years in private equity, investment banking and related fields. His fingerprints are on some of the biggest deals of the dot-com boom. He quarterbacked for tech behemoth IAC the acquisition of, now a household name in the online dating category. As part of his work at the startup accelerator eCompanies he helped to launch the pioneering early mobile game innovator JAMDAT Mobile. 

“People were saying, ‘Mobile gaming? It will never work,’” said Guttentag of his early dreams to revolutionize gaming on cell phones long before it was ubiquitous. “So I got in there and argued for it, and we started the company. The rest is history, in a number of different ways.” 

History indeed. Guttentag and his team made JAMDAT so successful that EA acquired it for $680 million in 2005, or about $1 billion in today’s dollars. At the time, the deal was the largest consolidation move ever in the mobile gaming sector. And the Match-IAC marriage that Guttentag facilitated? In 2020, IAC spun off Match Group with a market capitalization of $30 billion, making it the largest such transaction in IAC’s history. 

No doubt, Guttentag saw a lot of money change hands during his time as a deal-maker. But he was beginning to question the ramifications. “I saw a lot of greed, a lot of well-rewarded greed, and I just had questions about whether this was the right way for things to be done,” he said.  


No stranger to pushing boundaries, Guttentag eventually realized he had done about as much as he could in the startup sector and was looking for new ways to make a difference.  

“I felt like it was my time to give back and figure out how the legal system was monitoring what was happening, what I had been part of. I think it was my calling to understand to what extent greed and greed alone is enough to make the world go round,” he said. “When is greed bad? When does greed lead to the wrong outcome? And that's what my insider trading scholarship confronts. Turns out that everyone being greedy does not always lead to the world being a great place. And that's what I write about and study.” 

Enter Guttentag’s new venture: using his expertise to study ways in which corporate governance was at odds with regulations – and sometimes, the good of the people. The John T. Gurash Fellow in Corporate Law & Business at LMU Loyola Law School, Guttentag began his scholarly career looking at corporate disclosures. His early law review articles included Agency Enhancement, Agency Costs, and Disclosure Regulation in The Review of Law and Economics, followed later by articles such as Requiring Public Companies to Disclose Political Spending in the Columbia Business Law Review.  

“That was really the starting point of my academic scholarship: trying to understand the disconnect between what we knew about our businesses and what we were telling the public in our public disclosure documents. I had known from law school that we were supposed to be disclosing all material information, but it seemed pretty obvious that what we were disclosing to the public was not what we knew ourselves about our businesses. And I was just trying to understand that disconnect.” 

Connecting the dots, Guttentag saw a correlation between issues of disclosure and insider trading. “It's clear that what people within a company know about what's going on is a lot richer than what they're telling the public on an ongoing basis,” he said. That set the stage for his current passion: insider trading. When Guttentag began exploring existing scholarship, he found it one-dimensional.  

“The academics who study insider trading are stuck back in the 1950s, literally. Someone named Henry Manne came along and wrote a book that was very influential. He basically argued, ‘Insider trading's great, and no one is harmed by insider trading.’ And that was the law and economics approach to insider trading,” he said. “In this school of thought, people who were complaining about insider trading were just jealous and wanted to be insiders too. No one was being harmed. Well, that argument stood for about 30 years.” 

It stood, that is, until people like Guttentag began finding fissures. “The reality is insider trading is a disaster. It wastes resources. It benefits insiders at the expense of outsiders. It's a game that we should end, and we have not,” he said. 

What is Insider Trading? 

When it comes to laws around insider trading, Congress has thus far been painfully absent. And, without legislative clarity, the judicial branch has been left to offer what little guidance it can. “The Supreme Court is interpreting vague statutes from the 1930s. And we've tried to tie insider trading law to: Are you a fiduciary? Have you been deceptive? And it's a morass,” he said. “Today what we have is this stitched-together insider trading law created by the Supreme Court and supported by these academics who think insider trading isn't really that bad after all.” 

Just when it looked like things could not get any worse for scholars like Guttentag who are pushing for more regulation, congressional interest started to heat up about two years ago – and not in a good way. Congress began toiling over a bill that essentially codified a string of judicial opinions that clumsily interpreted antiquated statutes. “To enact that legislation would be a step in the wrong direction. That's just going to lock us in to this awful system that we have now. What we need is a fresh start,” said Guttentag. “The only way to end insider trading is by legislating. And the way to legislate is not to copy what the confused doctrine of the Supreme Court. The way to end it is by just saying that trading with inside information is illegal.  

Similarly, while Guttentag applauds recent calls for a prohibition on any stock trading by federal legislators, he does not think these proposals go nearly far enough. “A prohibition on trading when in possession of material nonpublic information should be imposed on everyone in the marketplace,” he explains. 

For a fresh start, Guttentag suggests looking to European regulations for inspiration. “I hate to say it: We actually need to follow Europe because Europe is doing it right. Europe said: ‘If you have inside information, you cannot trade. It's a simple, clear, obvious rule. It should be the rule in the United States.” 

So why hasn’t this simple solution found traction? Strong headwinds in the form of corporate influence and academics wedded to an economic analysis grounded on work not significantly updated since the 1950s. “Who do you think is benefiting from the law the way it is now? The hedge funds, the insiders. And they can say, ‘Oh, insider trading is already illegal – there is no need to change the system.’ Well, it's kind of illegal, but it's awfully hard to prove. It's not where the system should be,” he said. “We've got to tell the legislature, we've got to tell Congress: Wake up. Protect the individuals, protect the ordinary Americans. Stop letting insiders get away with what they've gotten away with, whether in Congress or in the Executive Suite.’” 

Other scholarship by Guttentag on the topic has included Selective Disclosure and Insider Trading in the Florida Law Review, Shorting Crypto Assets and Insider Trading, in the Iowa Law Review Online, and "Huh?" Insider Trading: The Chris Collins Story in the Tennessee Journal of Law and Policy.