When William Cary arrived at the SEC, he adopted as a priority the use of Section 10b of the 1934 Securities Exchange Act to fight insider trading.
State corporation law made federal enforcement of prohibitions on insider trading difficult to prosecute. Decisions such as the Massachusetts case of Goodwin v Agassiz (1933) limited liability by a corporate insider who traded on the basis of nonpublic information. Goodwin and other state cases held that the corporate insider had no liability to a person with whom he traded if done "impersonally" through a stock market. This effectively limited the fiduciary obligation that the Securities Exchange Act sought to impose on inside traders.
Cary believed that it was wrong for corporate insiders who traded with special knowledge of nonpublic information to profit from that information. Within months of becoming Chairman, Cary took the first steps to implement the use of Rule 10b-5 to prohibit insider trading.
In 1961, Cary wrote the SEC administrative opinion in In the Matter of Cady, Roberts & Company, with an interpretation of Rule 10b-5 that was broader than the SEC had ever advanced before. Cary ruled that an insider could be held liable under the securities laws when the insider traded in an impersonal market. The decision would continue the advance of the SEC's application of Rule 10b-5 to a wide array of fraudulent practices and establish the basis for private causes of action in the years ahead. The effect of these new enforcement strategies by the SEC was to increase insider trading actions from 171 in 1961 to 388 in 1963.(11)
(11) Seligman, Transformation, 347.
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