The Securities and Exchange Commission (SEC) forbids trading securities on the basis of insider information---knowledge not available to the general public about events that affect securities prices (e.g., lawsuits, new product development, or plans for mergers or takeovers). Insiders presumably could get a jump, allowing them to profit by buying or selling before information concerning profits was available to the public. The judge's ruling in SEC v. Materia (1984) illustrates a typical case of insider trading.

  

Our era aptly has been styled the "age of information." Francis Bacon recognized nearly 400 years ago that "knowledge is power," but only in the last generation has it risen to the equivalent of the coin of the realm. Nowhere is this commodity more valuable or volatile than in the world of high finance, where facts worth fortunes while secret may be rendered worthless once revealed.

 Anthony Materia was employed by a printer of financial documents, including many concerning proposed tender (merger) offers. Because even a hint of an upcoming tender offer may send the price of the target company's stock soaring, the identity of a target is zealously guarded. It is customary, therefore, for offerors (or their law firms) to omit information that might identify a merger target until the last possible moment.

Code names are used, blanks are left unfilled until the in eve of publication, and misinformation may even be included. early drafts. In sum, a quick reading of preliminary paperwork would not reveal this confidential information

In his job as a copyholder, Materia read clients' drafts aloud to a proofreader, who ensured that page proofs conformed to the copy received from the client. Despite scrupulous efforts to keep confidential information secret, Materia divined the identities of at least four tender offer targets between December 1980 and September 1982. He purchased stock within hours of each discovery, and within days---after the offer had been made public---he sold his holdings at substantial gains.

Determined to combat securities fraud, Congress enacted comprehensive yet open-ended statutes capable of adaptation and refinement. In recent years, developments in capital formation and novel means of effecting corporate combinations have spawned a new genre of confidential information. Courts are increasingly called upon to address a myriad of issues regarding the use of such data. We do not believe the drafters of the Securities Exchange Act of 1934---envisaging as they did an open and honest market---would have countenanced the activities engaged in by Anthony Materia.