May 12, 2011
Even More Insider Trading Prosecutions?
Forgive me for another post today after my long diatribe on federal securities law, but I will be traveling on Friday, so consider this an early Friday post. A couple of weeks ago, I argued that the government has better things to do with its limited securities regulation enforcement dollars than prosecuting insider trading cases. I'm afraid it's going to get worse before it gets better.
Today's Wall Street Journal argues that the guilty verdict in the Raj Rajaratnam case is likely to lead to even more insider trading investigations and prosecutions. The article quotes former federal prosecutor Robert Mintz, who says, "This conviction will undoubtedly embolden prosecutors, and we can expect more of these cases in the future."The article also argues that the Manhattan U.S. Attorney will "ramp up prosecutorial methods once reserved for mob and terrorism cases."
I wish the government would spend a little more resources on mob and terrorism cases and a little less on insider trading. I don't know about you, but I'm more worried about mobsters and terrorists. Even within the world of securities regulation, there are many better ways to spend those scarce enforcement dollars. It wasn't insider trading that caused the recent economic problems. It wasn't insider trading that caused Enron and WorldCom to collapse. And it won't be insider trading that causes the next big corporate failure.
How much insider trading would you permit in the market if you were regulator? By percentage of trades, would it be 1%? 5%? 95%? I would argue that there is a point on the spectrum where the perception that markets are rigged will lead to less capital being allocated to them (e.g. I'll keep my money in CDs instead of equities because the equity markets are totally unfair.) There's a paper (I forget the authors) cited in _Economics 2.0_ that studies participation in capital markets by country. Summary finding is that (surprise) people don't invest in markets that they perceive to be rigged against them.
I think history shows that larger, more liquid capital markets are beneficial to the economy as a whole. Other actions that promote these ideals have been very successful at bringing more cash into markets: deregulating brokerage commissions, 401(k)s, ETFs, etc. I'd argue that refereeing the markets is square-on the goal of broadening markets generally.
As a side note, it's pretty obvious that our capital markets are rigged in favor of the big banks. _13 Bankers_ is an excellent history of the interconnection between politics and finance that permits this. Every trader needs to have a strategy that recognizes the fact of the unfair markets.
And to answer your implied question, I'm much more worried about being constantly cheated by bankers than I am of terrorism or the mob. Not living in a big mob town, I never come in contact with mobsters. And not living in New York, I've never come in contact with a terrorist. However, my wealth is constantly at risk in our capital markets. Every day, in reality and not in theory at risk. At risk of theft from bankers paid with my tax dollars. So sure, terrorism is a problem for some, but financial terrorism is a problem for all of us, every day.
Posted by: AX | May 12, 2011 3:28:06 PM
Insider trading cases get the SEC more headlines for the buck than preventing Ponzi schemes and the like. Exhibit A - the warnings they had about Bernie Madoff and ignored. One reason they ignored them was the comparative advantage of the SEC staff. They're mostly lawyers, who can certainly argue about the reach of 10b-5, but they're clueless about how markets operate, and don't care to learn.
Posted by: Bill Carney | May 13, 2011 8:19:57 AM
I also want fair markets and I also want to protect people's wealth. But I think htere are more effective ways to pursue that aim. Insider trading is, as Bill Carney indicates, easy to pursue, but it's not insider trading that is causing the big market losses. It's fraud and market structure issues. And, in a time of limited budgets, that's where the money ought to be. But, as Bill Carney points out, market structure issues don't produce big headlines.
Posted by: Steve Bradford | May 16, 2011 6:22:29 AM