Should Insider Trading Be Legal?
Imagine a world where insider trading is legal.
As chief executive, you could short your own stock just before reporting your disappointing numbers to Wall Street.
As investor relations or PR counsel, you could trade ahead of any news you may hear in advance as a routine part of your job. So could accountants, attorneys, auditors, consultants and employees--all the way down to the janitor digging through the office recycle bins.
Hedge funds could deploy armies to sidle up to corporate insiders--buy them dinners, take them on fabulous trips, shower them with gifts--just for information.
Stockbrokers and financial planners would never have to worry about going to prison after hearing a hot tip at a cocktail party.
The rules would be well-understood: Whoever gets the best information wins.
"I want the laws completely erased," said John Tamny, editor of Forbes Opinions and RealClearMarket in an email exchange.
"Let the markets sort out the information that's out there."
He argues insider trading is vaguely defined, and to criminalize it merely blocks the flow of information markets need to thrive. He is hardly alone.
"As sleazy as insider trading sounds, there really isn't much of a reason to ban it," Dylan Matthews of the Washington Post's Wonkblog wrote last week.
He argues insider trading laws only create "the illusion of fairness." Small players are convinced they have a fair chance to when in fact they are routinely eaten for lunch by large institutional players.
In an opinion piece for Reuters last week, Bethany McLean makes a similar argument. She takes aim at regulators and prosecutors who boast that their efforts actually ensure the market isn't rigged. Like New York's Attorney General Eric Schneiderman, who declared in a press release last month: "The securities markets should be a level playing field for all investors."
They should be level, but they are not. "Life isn't fair," Ms. McClean wrote, "and as we all know now, the playing field hadn't been leveled."
It's just the right slant for the ruling class, though. Members of Congress, whether it's Republican John Boehner or Democrat Nancy Pelosi, often do surprisingly well in the market. Imagine knowing what legislation would be introduced before everyone else and being able to trade on it.
Last year, after TV news magazine "60 Minutes" reported on the trading activities of key members of the House and Senate, Congress passed the "Stop Trading On Congressional Knowledge Act." Then earlier this year, with hardly anyone noticing, lawmakers passed another bill to reverse key provisions of the law.
Perhaps the folks at hedge fund SAP Capital Advisors, who have recently pleaded guilty to insider trading charges, should have run for Congress. Last week, the Securities and Exchange Commission served the firm with a criminal indictment and continues pressing civil charges against its founder Steven Cohen.
The agency hasn't done much about accounting fraud, or other shenanigans that lead to the 2008 financial crisis, but insider trading remains a priority.
Over the past three years, the SEC boasts of filing 168 insider trading cases, more than any three-year period in the agency's history. These actions were filed against nearly 400 individuals and entities with illicit profits or avoided losses totaling about $600 million. But it's likely they still only represent a sliver of the problem, the sliver of people who happened to get caught.
Recent cases have included some of the biggest players on Wall Street, such as former hedge-fund manager Raj Rajaratnam and former Goldman Sachs board member Rajat Gupta. They've also included many smaller players, including,
--A group of Swiss traders trading Heinz ketchup stock.
--A stock broker who traded Burger King shares.
--A former Major League Baseball player who befriended his neighbor who just happened to be the CEO of a medical-device company.
--A bunch of high school friends in New Jersey who traded stock of a health-care company where some of them worked.
The number of cases suggests the practice is so widespread that anyone who can't compete with insiders should buy indexes and exchange-traded funds.
So far, arguments to abolish insider trading laws are getting little traction. The idea that some people are in a position to know more than others can offend our collective sense of fairness, but it doesn't generate all that much outrage. Mr. Tamny said he's been surprised by the weak response to his columns over the years arguing insider trading should be legal.
"What surprises me," he said, "is how uninterested people are in it."
(Al's Emporium, written by Dow Jones Newswires columnist Al Lewis, offers commentary and analysis on a wide range of business subjects through an unconventional perspective. The column is published each Tuesday and Thursday at 9 a.m. ET. Contact Al at al.lewis@dowjones.com or tellittoal.com)