Article
Selective Disclosure by Federal Officials and the Case for an FGD (Fairer Government Disclosure) Regime
By Donna M. Nagy & Richard W. Painter
This Article addresses a problem at the intersection of securities regulation and government ethics: the selective disclosure of market-moving information, by federal officials in the executive and legislative branches, to securities investors outside the government who use that information for trading. These privileged investors, often aided by political intelligence consultants, can profit substantially from their access to knowledgeable sources inside the government. In most instances, however, neither the disclosure nor the trading violates the antifraud provisions of the federal securities laws (under which the insider trading prohibitions arise). This legally protected favoritism undermines investor confidence in the fairness and integrity of securities markets—and in government itself. Congress considered these harms in the debates leading up to the Stop Trading on Congressional Knowledge (STOCK) Act of 2012. But it wisely opted to study the role of political intelligence in financial markets before legislating further.
To address securities trading on the basis of selectively disclosed government information, this Article examines an analogous situation in the private sector that plagued individual investors until relatively recently. Selective disclosure of issuer information by corporate executives to securities analysts and professional investors had been regarded as blatantly unfair yet, in most instances, not illegal. Regulation FD, which the Securities and Exchange Commission (SEC) adopted in 2000, addressed this unfairness by looking beyond the construct of fraudulent tipping and trading under Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The solution involved regulating the timing and manner of disclosures by corporate insiders, rather than the conduct of outsiders who gather and trade on the basis of those disclosures. Regulation FD embraced this approach for publicly traded companies and corporate executives have been adhering to it for more than a decade.
This Article proposes an analogous FGD regime—standing for Fairer Government Disclosure—that would prompt federal agencies, as well as members of Congress and their staffs, to deploy a variety of strategies that could substantially reduce the amount of selective disclosure of nonpublic government information to persons who are likely to use it in securities trading. The Article first gathers together press reports, agency and congressional correspondence, and other materials that demonstrate the ubiquity of selective disclosure in the federal government. It then analyzes insider trading law to show that most of these instances of selective disclosure are not illegal. The Article concludes that the problem can be solved—or at least curtailed—with more effective internal controls on the federal officials who selectively disclose government information. It thus begins a discussion as to how such controls could be developed without compromising the quality and timeliness of disclosures to persons, including voters, who must have information in order to make informed decisions.
Comments
A Fearless Search for the Truth No Longer: State v. Henley and Its Destructive Impact on New Trials in the Interest of Justice
By Monica Mark
Discretionary reversal, also known as the authority to grant new trials in the interest of justice, is one of Wisconsin courts’ most crucial powers. It is also one of the most complex. For almost a century, the Wisconsin Supreme Court has given meaning to discretionary reversal by exercising its powers in service of the truth, making discretionary reversal a powerful tool for the wrongfully convicted. However, the supreme court’s recent shift toward a tough-on-crime mentality has placed discretionary reversal at risk—and nowhere has the power been so damaged as in State v. Henley.
This Comment explores the history of discretionary reversal, the meaning of the statutes’ two prongs, and the devastating impact of Henley. It explores why the Henley court was wrong in stripping circuit courts of the power of discretionary reversal, and recommends the best way for courts and practitioners to administer these powers moving forward as they were meant to be administered—in a fearless search for the truth.
Wisconsin’s “Greater Latitude” Rule: A Backdoor to Unconstitutional Propensity Evidence
By Nicholas L. Hahn
Wisconsin’s greater latitude rule is unconstitutional as a due process violation because it not only admits propensity evidence, but it also fails to exclude evidence when its undue prejudice substantially outweighs its probative value. First, the greater latitude rule is unconstitutional under a theory based on the reasoning of Crawford v. Washington, which struck down hearsay rules that conflicted with the original meaning of the Sixth Amendment. Using Crawford’s originalist reasoning, the greater latitude rule conflicts with the original meaning of due process. Second, the rule also interferes with the modern conception of due process, which requires procedures that produce accurate, reliable means of adjudicating criminal cases. By analogy to persuasive authority, the rule should be unconstitutional under the reasoning of federal appeals courts that have dealt with similar issues. I advocate a return to Wisconsin’s traditional approach to admitting propensity evidence, which would accord with the United States Constitution and other jurisdictions’ rules. This approach would also provide a basis for effective appellate review.
Heads I Win, Tails You Lose: The Psychological Barriers to Economically Efficient Civil Settlement and a Case for Third-Party Mediation
By Brian M. Spangler
Nearly ninety-five percent of all civil suits are settled outside the courts. Thus, a vast majority of litigation is resolved outside a system with controls for fairness and equity. Judges and legislators rely on standard economic theory, which suggests that litigants are rational actors seeking to optimize their self-interest, and assume that litigants will negotiate an efficient, equitable result outside the confines of the judiciary. While this seems rather intuitive, this simple assumption is largely unfounded.
This Comment, utilizing prospect theory, suggests that litigants are subject to a wide range of decision-making biases that affect their ability to reach economically rational and efficient settlements. These inherent psychological biases result in suboptimal, and ultimately unfair, civil settlements for all parties involved. This Comment proceeds to suggest that the use of third-party mediation promotes fairness and economic efficiency and eliminates many of the inherent biases that plague traditional civil settlement negotiations. As such, courts and legislatures should attempt to increase the use of mediation in settling civil disputes.