State-based insider trading liability takes the form a derivative action by stockholders against insiders. In such an action, the basic claim is that directors (or “insiders”) used confidential information of the corporation for their own benefit and not for the benefit of the corporation. As a derivative action based, state-based insider trading liability is prosecuted by stockholders and not by state regulators or the SEC. Oracle as well as the Beam v Martha Stewart case from earlier in the semester are examples of stockholders bringing derivative suits against board members who have allegedly engaged in insider trading in the stock of the corporation.
Consistent with other derivative actions, in state-based insider trading cases, the remedy, if any, is paid to the corporation in the form of disgorgement of profits. Because the state-based action is derivative, neither stockholders nor any governmental entity is entitled to receive any of the profits disgorged as a remedy. Those illicit profits are paid back to the corporation and are not paid as fines to the SEC or any other regulator. In addition, state-based insider trading liability is civil and not criminal.
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