June 2007 Vol. 105 No. 8 THE REVIEW

Getting the Word Out about Fraud: A Theoretical Analysis of Whistleblowing and Insider Trading

Jonathan Macey

The purpose of this Article is to show that corporate whistleblowing is not analytically or functionally distinguishable from insider trading when such trading is based on “whistleblower information,” that is, the information a whistleblower might disclose to the authorities. In certain contexts, both insider trading and whistleblowing, if incentivized, would reduce the incidence of corporate pathologies such as fraud and corruption. In light of this analysis, it is peculiar that whistleblowing is encouraged and protected, while insider trading on whistleblower information is not only discouraged but criminalized. Often, insider trading will be far more effective than whistleblowing at bringing fraud and corruption to light, both because insider trading is more credible and because it does not depend on the efficiency of government actors. Whistleblowing and insider trading on whistleblower information, however, are different from blackmail, which also involves information about a third party’s illicit conduct. While both whistleblowing and insider trading on whistleblower information should be encouraged, blackmail should be prohibited because it impedes the discovery of fraud and corruption. Finally, despite the theoretical similarities between whistleblowing and insider trading, there are some important practical differences in the ways that whistleblowing and insider trading affect markets, indicating that these activities are complements rather than substitutes in the fight against fraud and corruption.

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