Is Insider Trading A Crime?

Very Recommendable Article

The Cato Institute just published a commentary titled “Free the Insider Traders: Stop Treating Market Efficiency Like a Crime”, which also appeared on Forbes.

Some salient quotes (emphasis added):

1. “Objectively, the insider trading ban makes no sense. It creates an arcane distinction between “non-public” and “public” information, and treats them differently. It presumes that every investor should possess equal information and never know any more than anyone else. It punishes traders for seeking to gain information known to some people. It inhibits people from acting on and markets from reacting to the latest and most accurate information. It effectively pushes everyone to base today’s trades on yesterday’s information in the name of fairness.”
2. “To the extent that SAC’s [insider] sale began a market adjustment, Martoma [a recently convicted insider trader with SAC] actually reduced future stock price fluctuations. SAC avoided losses suffered by other shareholders, but it did not hurt the latter. They would have lost money nonetheless. ” [I fully agree!]
3. “Of course, some forms of insider trading are properly criminalized—typically when accompanied by other illegal actions. For instance, fraudulently misrepresenting information to buyers/sellers, burglarizing a firm’s office to steal data, or violating federal disclosure rules. However, the common anonymity of participants in stock market transactions limits the first. In most cases, it would be impossible to offer fraudulent assurances even if one wanted to. The other examples are equally rare.”
4. “The government has regularly expanded the legal definition of insider trading, yielding bizarre results and punishing people without warning. For instance, in 1985 an ambitious prosecutor with minimal concern for civil liberties by the name of Rudolph Giuliani indicted a Wall Street Journal reporter for leaking his “Heard on the Street” columns to a stockbroker before publication. Doing so might have violated newspaper policy, but that was a problem for the Journal, not the U.S. Attorney. The information was gathered legally; the journalist had no fiduciary responsibility concerning the material; there was nothing proprietary about the scheduled columns. The case went to the Supreme Court, which deadlocked four-four, upholding the charge.”

The Short Answer

No! Insider trading is definitely not a crime if it is not committed in conjunction with other criminal activities.

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