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CALIFORNIA CORPORATE & SECURITIES LAW

Did Joseph P. Kennedy Make Insider Trading Illegal?

The Patriarch: The Remarkable Life and Turbulent Times of Joseph P. Kennedy. (Penguin Press, 2012) by Professor David Nasaw is one of several books that I am currently reading.  As a securities lawyer, the following sentence gave me pause:

“Trading on insider information was not illegal – and would not become illegal until [Joseph P.] Kennedy, as the first chair of the Securities and Exchange Commission (SEC), made it so in 1935 . . .”.

Mr. Kennedy was, of course, the first chairman of the Securities and Exchange Commission.  During his brief tenure, only 431 days, did he make insider trading illegal?

Some might take the position that insider trading was already illegal several decades before President Franklin D. Roosevelt appointed Mr. Kennedy to the SEC.  In 1909, the U.S. Supreme Court found that a director and controlling stockholder was liable for failure to disclose material information in connection with the purchase of a stockholder’s shares.  Strong v. Repide, 213 U.S. 419 (1909).

Others may take the view that insider did not become illegal until several (or even many) years after Mr. Kennedy left the SEC.  Modern insider trading cases, whether criminal or civil, are based on Rule 10b-5 under the Securities and Exchange Act of 1934.  The SEC, however, did not adopt Rule 10b-5 until 1942, seven years after Mr. Kennedy had left the building.  See Why Bassam Salman Should Not Have Been Convicted (quoting Milton Freeman’s account of the origin of Rule 10b-5).  Even then, the SEC didn’t make a case that insider trading violated Rule 10b-5 for another quarter century.  Cady, Roberts & Co., 40 S.E.C. 907 (1961).

“Vanity of Vanities”

In yesterday’s post, I noted that Yahoo was a word invented by Jonathan Swift to describe loutish human-like creatures in Gulliver’s Travels. It occurred to me that Vanity Fair also may have roots in English literature.  This may be a nod to William Makepeace Thackeray’s novel by the same name, but Vanity Fair has deeper literary roots.  John Bunyan in The Pilgrim’s Progress explains the meaning of a place named Vanity Fair:

Then I saw in my dream, that when they were got out of the wilderness, they presently saw a town before them, and the name of that town is Vanity; and at the town there is a fair kept, called Vanity Fair: it is kept all the year long. It beareth the name of Vanity Fair because the town where it is kept is lighter than vanity; and, also because all that is there sold, or that cometh thither, is vanity. As is the saying of the wise, “all that cometh is vanity.” [Eccl. 1; 2:11,17; 11:8; Isa. 11:17]

I am not the only person connecting company names with literature.  In a front page article appearing in yesterday’s The Wall Street Journal, Seoul Bureau Chief Jonathan Cheng explained how the founder of the Lotte Group named his company after the femme fatale in Johann Goethe’s The Sorrows of Young Werther (Die Leiden des jungen Werther).  It is surprising that each of these companies chose names burdened with negative overtones.

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