Posted on 03/05/2014 5:46:24 AM PST by SeekAndFind
Look up the sentencing guidelines for committing rape in New York State and you’ll find that the guilty serve anywhere from four to 25 years in jail — which is roughly what those convicted of trading stocks using “material non-public information,” a.k.a. insider trading, serve.
Anything wrong with this picture? I’d say a lot.
I do not write this as a fan of fat-cat traders who know the rules and wantonly violate them. But take a deep breath and consider the actions of Mathew Martoma, the latest in a long line of Wall Street hucksters snared by the government in what may be the largest and most costly effort to rid the world of insider trading in modern history.
Martoma made a chunk of money for his hedge fund by trading on non-public information involving a couple of drug stocks. The scheme, according to the government (Martoma is appealing his conviction), went something like this: Martoma befriended and paid the doctor who was conducting tests on certain drugs being developed by Elan and Wyeth.
When Martoma discovered that the tests weren’t going well, he “shorted” the stocks, betting that share prices would decline once the information was publicly released, which they did. For that, the Feds say, he earned an illegal $9 million bonus and, at least according to the man leading the crackdown, Manhattan U.S. Attorney Preet Bharara, the status of one of the great masterminds in the history of white-collar crime.
Martoma faces as much as two decades in jail for cheating the system, but who are his victims? Well, that’s more difficult to determine. Peel back the reality of what exactly goes on in an insider trade and you come away scratching your head over who exactly was wronged.
Yes, Martoma had illegally obtained (“misappropriated,” in the legalese pertaining to insider trading) non-public information that would allow him to profit over other market participants who lacked that information. But the people on the losing side of the trade would have lost money anyway. No one forced them to buy the stock in the open market. In other words, they were victimized not by Martoma but by their own lousy bet.
So why are we hearing so much about insider trading? Bharara will tell you he’s protecting the “integrity of the markets.” If average people believe that the system is rigged or that certain privileged investors have an advantage over others, they won’t buy stocks.
Sounds good until you peel back that one as well. Average investors flocked to the stock markets during the bad old days before the insider-trading crackdown began in 2008.
Indeed, most of the average investors I speak to hate the notion of someone having an unfair advantage, but they base their investment decisions on stuff like monetary policy and the health of the financial system, which is why the markets tanked during the 2008 financial collapse and began a massive rally when the Fed started printing money in 2009.
Okay, but haven’t many small investors sat out the current rally (buying gold, for example, rather than stocks) precisely because they think the markets are rigged? Maybe, but the rigging they’re worried about is the notion that the markets are being primed not by a strong economy, but rather by the printing of money, and when that ends, the whole system will come crashing down as it did in ’08.
As I point out in my book Circle of Friends, which chronicles the current insider-trading hysteria, the Feds, and the Obama administration in particular, have some very political reasons for diverting so much time, effort, and money (getting wire taps isn’t cheap) to make something as simple as trading on information that others don’t have into a serious crime.
Keep in mind, insider trading has been a crime since at least the late 1960s, though the courts have grappled for years with exactly what constitutes an illegal trade. In other words, there is no specific insider-trading law, just a bunch of court precedents that are supposed to guide law enforcement in determining what is and isn’t a dirty trade. All of which has made it difficult for the feds to put people we all think committed insider trading in jail for insider trading. Neither Michael Milken nor Martha Stewart went to jail specifically for insider trading. Rather, both committed other crimes that were tangential to their trading activities.
Something changed around 2007, when law enforcement began to seek and receive court approval to wire-tap the telephones of those suspected of insider trading.
Until then, wire taps had been reserved for terrorists and mobsters – i.e., people who kill other people — for the simple reason that the courts didn’t want law enforcement to be spying on just anyone for just any crime.
By treating possible white-collar criminals as if they were in the same category as Osama bin Laden or John Gotti, law enforcement could hear the targets discuss their crimes in their own words, and prosecutors could play those conversations back to their juries, making convictions that much easier.
And the timing was perfect. Following the financial crisis, and in the midst of the subsequent Great Recession, the Obama administration believed it needed to show the public that Wall Street wasn’t above the law. There was just one problem: Prosecuting bankers for taking too much risk in the complicated transactions that were at the heart of the banking meltdown is difficult.
But prosecuting traders for profiting off inside information when you have them wired for sound was, according to one regulatory official, “like shooting fish in a barrel,” even if these traders had nothing to do with the meltdown in the first place.
And, while they were shooting those fish, consider what else had been happening in the runup to the meltdown: Bernie Madoff was getting away with the largest Ponzi scheme in history, where people lost their life savings because someone had actually stolen from them.
At the same time, the banks were engaged in risk-taking of such epic proportions that the economy still hasn’t recovered some five years later.
Remember both those things the next time Preet Bharara (who is coincidentally on everyone’s short list to replace Eric Holder as attorney general) and his agents show up at some trader’s home in the middle of the night to mete out justice for insider trading, and then ask yourself if it’s all worth the fuss.
— Charles Gasparino is a senior correspondent for Fox News and the Fox Business Network.
The market works because of trust. Once trust is removed the market no longer operates efficiently. The alternative to a market for allocating assets to companies is a central government.
Its only a crime when the little people do it.
It’s very easy to accidentally commit insider trading and, at times the requirement to be a good steward of other peoples money can put a fund manager who learns some non-public information in a difficult position. If however, there were no prohibition on insider trading, fraud could become rampant. What’s needed here are prosecutors with good judgement and tempered reason which are about as common as unicorns.
A heavy penalty is meant to offset the low risk of getting caught.
It is worth noting that before about 1860, ALL investors were “insiders” and they all invested precisely because the banks were supporting their businesses.
Let's say I have a neighbor whose house I pass during walks and I have occasional conversations with her. If she tells me they're going to Europe, the kids are going to expensive private schools and they have that new SUV because their small company is being bought out (future plans with the money they'll get) it would be insider trading for me to accumulate that stock. If she doesn't tell me why it's not insider trading.
Got that?
Second, the whole idea of corporations is helping insiders -- the entrepreneurs who set up ventures -- spread risk out about multiple investors in exchange for a share in potential profits. If those investors decide that they're being routinely screwed at the expense of those same insiders, then they'll park their money elsewhere if they're smart.
I don’t think just befriending the Doctor under false pretenses and learning profitable information through casual conversation ... that sounds alright to me.
Remember what insider trading is all about ... it has to be an insider to the business or business interest and their confederates,knowingly trading and profiting on unpublicized information that they are privy too because of the nature of their job and position. (BTW: I suspect they have many Congressmen and Senators of both persuasions in Federal and State are the confederates).
Back when I started my business in the 70’s I used to go out with my brother and remove the trash from my competitor, go thru the trash and pickup leads, financials, dates of contract renewals and such ... stole his clients and put him out of business in 3 years. To me that’s just fair game. We never broke into anything, cut locks or jimmied doors. Just picking through their unsecured trash.
Ban options. Ban futures. Ban electronic trading.
All trades should be made by people (ie your hired broker-agents) on “the floor” and *ONLY* during trading hours (ie 9 AM to 4 PM -— NEVER after hours / NEVER before hours).
In addition, if you buy/sell on a trading floor for commodities, you must be prepared to take physical possession of the bulk -— you must have money in reserve with which to pay for that possession.
On the Planet Earth everyone has access to info that others don't. The housewife at the mall that saw GAP store popularity in mid '90's was able to buy GPS at $4.50 and sell for $45 just four years later.
Virtually all insider trading is legal and necessary. When an entrepreneur starts a business he's got a right, a need, and a responsibility to put his own money into the company (aka buy shares) and then sell those shares at a profit afterward.
What I get tired of is hearing the loser class whine that those of us working for a living got rich from being a bunch of 'fat-cat' cheaters. OK, so people like to use animal insult names but it's not the right way to talk. I don't call someone a 'stupid bitch' or a 'lazy-coon' not because they'll get violent but because it's wrong.
It is amazing to me that this entire rigged and manipulated game known as “The Market” is supposed to be our source of hope, security, retirement, and wealth. Talk about your house of cards.
--and after we've got total state control of the capital markets we can continue our taking over the labor markets with more wage/hiring/firing laws.
A worker's paradise. /sarc
Yup. Congress exempted themselves from this law.
So, if you have some insider info, partner with your congressman to break the law.
Its how Nancy Pelosi has increased her net wealth some 2600% since entering congress.
That’s about right. It’s tricky
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