Insider trading cases flare up

Holman Jenkins:

Beating a dead horse in argument is frowned upon, but sometimes it takes a good thrashing to reveal the absurdity beneath the surface reasonability. So it has been with the evolution of insider trading law.

Once it was deemed that the person acting on the information was naughty because, however valuable and accurate the information, acting on it involved a betrayal. An executive who traded on inside information betrayed his shareholders. A lawyer who traded on advance word of his client's deal betrayed his client.

You could buy or not buy this theory, based on whether you think the benefit of having the information in the stock price outweighs using criminal law to improve the climate of trust between principals and agents. But it was not insane. Insane is what has happened to insider trading law over the past generation, and by all portents may reach its culmination in today's widely leaked FBI crackdown on hedge funds and research firms.

Insane is treating the information as the offender. Insane is seeking serially to expand the circle of people who can be criminalized for trading on it, as if it were desirable to keep accurate information out of stock prices.

The latest investigation has led to raids on hedge funds and people who run research shops being visited by the FBI and threatened with jail. That much we know....

You probably want to read the whole thing to get the thrust of his argument, but I think he misses the central point of the regulation of insider trading. It is about insuring the integrity of marketplace. It means that material non public information get disclosed to the market as a whole at the same time so that everyone can trade on that information if they desire.

It does not mean that a researcher who digs out public information that others have ignored is at risk. It does not mean that an observer who sees certain patterns and trades on his observations is at risk. But if he has a friend who sees the information in a tender offer before it is made public and then trades on it, that is a no no.
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