Some Zuccotti Park Thoughts On Insider Trading
It’s fun to get all riled up about insider trading! So let’s.Do read the Professor Bainbridge post linked above:
But first, I see you have some XYZ shares. Would you like to sell them to me? Here are some things you might want to know about it:
1. Warren Buffett is secretly buying loads of it.
2. Congress is going to do something that will make it go up, like kill pending legislation that would restrict its profits.
Let’s say I know those things and you don’t. I buy XYZ from you. Have I committed a crime? Maybe – but it’s not as easy as that.
Let’s start with what insider trading is. Actually let’s start with what it isn’t. Henry Blodget gives a popular simplification, “The definition of insider trading is trading while in possession of material non-public information.” If you think that, then clearly Congresspeople are committing crimes by trading on the knowledge that they’re going to earmark loads of cash to a company or deregulate it or just blow up the financial system or whatever they’re up to.
But that’s not the definition of insider trading, or at least of illegal insider trading. You can tell that by doing this little thought experiment:
1. Buffett knows he’s going to buy ten yards or so of IBM
2. He knows that that will move the market, so it’s material
3. He hasn’t told anyone yet, so it’s non-public
4. So he’s got “material” “non-public” information about IBM
5. He buys it anyway
6. Has he committed a crime?
Duh, no. Obviously buying while knowing that you’re buying can’t really be illegal, even if you’re Warren Buffett.* Just trading while you have material nonpublic information isn’t enough for it to be criminal. Instead, you need to be “in breach of a fiduciary duty or other relationship of trust and confidence” for it to count. Warren Buffett is okay trading while he knows about his own intentions because that’s, like, why he has those intentions. David Sokol, perhaps not so much. In fact, the SEC is so solicitous of Buffett keeping his secret sauce secret and saucy that it lets him avoid otherwise applicable rules about disclosing stock holdings so that he can build his stake without pushing the stock up.
Similarly, it’s not illegal for Congress to trade just because it has inside information: it has to have some sort of duty to or agreement with someone to keep that information secret. Now, maybe it does. Blodget cites a law professor who claims that Congress does have that duty, to the people who elected it, and that “nonpublic congressional information constitutes property which, like congressional funds and tangible property, rightfully belongs to the federal government and its citizens,” which so depressingly and obviously should be right but which I suspect isn’t. Other law professors are skeptical, and the fact that there was a proposed law (which went nowhere) to make Congressional insider trading illegal certainly suggests that – well, that Congress thinks it’s currently legal, for whatever that’s worth.....MORE