Measuring Insider Trading Damages for a Private Plaintiff

This article discusses various measures of the damages of a private plaintiff who sues a stock market insider trading defendant.The measures are: "pure" out of pocket, "expedient" out of pocket, rescissory, and cover.The "pure" out of pocket measure is the difference between the transaction price and the real or actual share value.Implicitly, this measure assumes that but-for the defendant's fraud, the plaintiff would have traded at the same time anyway, but at a better price.The so-called "expedient" out of pocket measure accepts the "pure" out of pocket measure in principle.Nevertheless, to avoid the practical difficulty of determining the real value of the stock at the time of the plaintiffs trade, the "expedient" out of pocket measure substitutes for this "true value" the market price after dissemination of the correct or previously nonpublic information.A variant of the "expedient" out of pocket measure looks to either the dollar or percentage price change at curative dissemination and uses this change as a measure of the damages to the plaintiff.The price change at dissemination could be applied to the plaintiff s transaction price to estimate the true value at the time of the plaintiff s trade.More complex variations exist to correct for the effects of extraneous factors.The rescissory measure attempts to undo the fraudulent transaction and return the defrauded party to her position before the fraudulent inducement caused her to enter into the trade.In other words, rescissory damages award a plaintiff the dollar amount at the time of judgment necessary to put her back in her original position prior to the fraudulent transaction.This measure implicitly assumes that the plaintiff would not have traded but-for the defendant's fraud.For the rescissory measure, courts usually require the plaintiff to prove a contractual relationship with the defendant.Most stock market insider