Insider Trading California Style

In this recent post, Professor Stephen Bainbridge noted that the attorneys defending former hedge fund manager Doug Whitman have argued for the application of California law with respect to fiduciary duties.  He cites this Wall Street Journal Law Blog by Joe Palazzolo.

There is no mention of California's very own insider trading statute, California Corporations Code Section 25402, which, unlike federal law, actually defines the offense of trading on inside information:

It is unlawful for an issuer or any person who is an officer, director or controlling person of an issuer or any other person whose relationship to the issuer gives him access, directly or indirectly, to material information about the issuer not generally available to the public, to purchase or sell any security of the issuer in this state at a time when he knows material information about the issuer gained from such relationship which would significantly affect the market price of that security and which is not generally available to the public, and which he knows is not intended to be so available, unless he has reason to believe that the person selling to or buying from him is also in possession of the information.

Section 25502.5 prescribes a remedy for violation of Section 25402 (which can be treble damages).  Another unique feature of the Section 25502.5 is a provision that requires boards of directors to consider in good faith shareholder allegations of violations of Section 25502.5.  Read literally, however, this provision is passing strange because Section 25502.5 doesn't actually proscribe any activity (Section 25402 does).  Despite this anomaly, California should be applauded for the wisdom of actually defining what it criminalizes.  Section 25502.5 applies only  to issuers that have total assets in excess of $1,000,000 and have a class of equity security held of record by 500 or more persons.

For more on California's insider trading statute, see my article, California’s Unique Approach to Insider Trading Regulation, 17 Insights 21 (July 2003).