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The Corner

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An Investigation to Watch



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Like my fellow NR cruisers I’m back on dry land and digging out, with very fond memories of time spent at sea with really wonderful people.

It doesn’t seem as if there’s been much discussion ‘round these parts of a big story broken by the Wall Street Journal a few days ago: the SEC, FBI and federal prosecutors are targeting giant investors (big hedge funds, mutual funds, and other institutions) in what looks like a huge insider trading case. This ought to be very worrisome, especially in a bad economy.

As a prosecutor, I didn’t like this species of securities fraud. The criminal law is supposed to be written with sufficient clarity that a person of ordinary intelligence is put on notice of what is forbidden. Insider trading, by contrast, is forever evolving.

It involves trading on the basis of “material, non-public” information. But what information is non-public? Besides the closely held business information one is told about, does it also include similar information that one figures out on his own? And who has a fiduciary duty not to share such information with others? The statutes and regs don’t give us a definitive answer, and the courts, egged on by the Justice Department, are forever modifying the concept, attenuating it from obvious corporate insiders to persons who are six degrees of separation from those insiders but are somehow supposed to know, as they trade stocks, that they oughtn’t have the advantage of the information that has fallen into their laps. 

What I most dislike, though, is the premise: the government’s farcical belief that you can somehow create a marketplace that is perfectly fair and equal, and where no one trades on information until it is publicly available to everyone. Not only is that sheer lunacy. It further warps the value of stock shares by artificially delaying the revelation of important information that ought to be factored into the market price. So merit is penalized as the studious, shrewd, careful investor is portrayed as a cheat, while the small, unwitting investor can get burned because he trades stocks in the dark about important developments that haven’t yet been publicized.

The new investigation seems to be taking insider trading to a new level: the government appears to be targeting those networks that gather, analyze and swap information — as if markets are only fair if everyone is kept uninformed until some magic moment when the government decides the time is ripe for revelations and trades. Obviously, real fraud ought to be punished when it occurs, and we should withhold judgment until we see what the investigation yields. But what is so far known smacks of criminalizing ordinary business activity, and of pounding businesses with FBI raids of their records as well as the need to spend zillions on legal representation. I’m not sure that’s the best way to spur an economic recovery.



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