Back in August 2004, commenting on the Martha Stewart developments, I wrote an article (republished in this post) on the "Elusive Law of Insider Trading" that stated:

Although we may feel that we will know insider trading when we see it, case after case shows that this simply is not so. Indeed, after reviewing the exact same set of facts, federal prosecutors elected not to charge Ms. Stewart with the crime of insider trading while the Securities and Exchange Commission (SEC) came to the opposite conclusion and filed a civil lawsuit against her alleging insider trading.

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It can be argued that the continued vagueness of the insider trading laws serves the useful purpose of deterring all trading based on nonpublic information, whether it is technically "legal" or not. While vague laws may have that desired effect, a fairer and more direct use of the law to achieve society's goals in this area would be for Congress to identify what is legal insider trading and what is not, and to articulate the distinction in a coherent statute.

Cases like this one brought and settled yesterday by the SEC against Thomas Bucknum, the former General Counsel of publicly traded Biogen Idec Inc., only reinforce my belief that the law of insider trading is in many instances elusive, if not unknowable.  A short recap of the facts of the Bucknum case (borrowed from this post today by the WSJ Law Blog) is as follows:

1. Bucknum called his broker at 8:45 a.m. and placed an order to exercise options to purchase 87,900 shares and then sell them. [Note: It also appears to be a critical fact that "the broker understood from that conversation that Bucknum wanted to sell the shares at a price of $68 per share or better."]
2. Because Bucknum was an officer of the Biogen, his brokers needed to get clearance from the company in order before executing Bucknum’s order.
3. Around noon, Bucknum learned that a patient taking Tysabri had been diagnosed with fatal brain disease and that another patient may have contracted the illness.
4. About 1:30 p.m., Bucknum called his broker’s associate, who told him he had received clearance from Biogen, and Bucknum told him to sell the stock. [Note: The associate also told Bucknum the stock was trading "near $68."]
5. The shares were sold around 2:00 p.m. for a $1.9 million profit
6. Ten days later, Biogen and its partner Elan said they were pulling the drug; shares fell 43%.

So to be clear:  Before becoming aware of the bad news, Bucknum had, according to the SEC's complaint, instructed his broker to sell the stock in his account at a price of $68 or better.  This would seem to fall squarely under Rule 10b5-1, which states that

a person's purchase or sale is not "on the basis of" material nonpublic information if the person making the purchase or sale demonstrates that:

1. Before becoming aware of the information, the person had ... (2) Instructed another person to purchase or sell the security for the instructing person's account....

As far as I can tell, the twist here--and Bucknum's downfall--is that at the time of the 1:30 p.m. call, the stock was not trading at at a price of $68 or better.  Rather, after Bucknum was told it was "near $68," he then re-instructed the broker to sell the shares at that lower market price (which turned out to be $67.12).  I suppose this means that his initial instruction to sell the stock cannot be used to protect him from charges of later trading on the basis of material nonpublic information because that initial instruction could not be carried out due to a market price below $68.

The bottom line appears to be that had the price of Biogen stock been about a buck higher on that fateful day, or had Bucknum initially placed a market order to sell the shares as opposed to a limit order, Bucknum's trades would have been legal under Rule 10b5-1.  But really, who knows what the SEC would do in such a case?  Even if the facts were as just described and Rule 10b5-1 did technically apply, would anyone trying to obey the law have the certainty to go through with that trade?  As I said with respect to Martha Stewart, the effect of this ambiguity is to deter all trading based on nonpublic information, whether it is technically "legal" or not.