It’s easy to be thrown off scent when trying to divine the vague, ill-defined, unconstitutional laws under which the Securities and Exchange Commission hunts for corporate prey. Suffice it to say that the SEC operates with the understanding that competition in capital markets must proceed from a level playing field. All investors are entitled to the same information advantage irrespective of effort and abilities.
In a word, information socialism.
In their latest efforts to bring ruin to capital markets, SEC blood hounds have ensnared some of the country’s most powerful hedge-fund firms. Indictments are replete with SEC cloak-and-dagger.
There is a Don, “Don Chu,” which is how the accused, Don Ching Trang Chu, is called. A co-conspirator is “CC-1.” And a cooperating witness: “CW-1.” The companies violated, allegedly, are Atheros Communications, Inc. (“Atheros”), Broadcom Corporation (“Broadcom”) and “Sierra Wireless” â”€ aka “The Tech Company.”
The Don “is accused of providing inside information on [“The Tech Company”] to one of those cooperators, a hedge-fund manager, and of arranging meetings for the manager with public company employees to receive nonpublic information,” reports the WSJ.
Then there is the “The Firm.”
The ominous entity at the center of the investigation is “an ‘expert networking’ firm.” In “United States of America v. Don Ching Trang Chu, a/k/a ‘Don Chu,’ the Defendant,” the “Firm” is the California-based Primary Global Research, LLC. The Thing “advertised itself as an ‘independent investment research firm that provides institutional money managers and analysts with market intelligence.'”
In less sinister parlance, “The Firm” is engaged in researching, collating and selling information about publicly traded companies. Company premises are not broken into. Mailmen aren’t bribed. Espionage, as far as we know, is not a factor.
More importantly, so long as employees of the companies researched have not violated confidentiality clauses in their employment contracts – there is nothing wrong with such information gathering. If employees have violated their contracts, then the harmed corporation ought to be prosecuting them in civil court. As a matter of property rights, it’s up to the rightful owners of the company – the shareholders – to regulate information about the company and to decide what their employees do with information gleaned about it.
Nevertheless, by the end of this prosecution, expect “The Firm” to have as bad a reputation as the firm in the 1993 film so titled, starring Tom Cruise.
If anything, insider trading may benefit the market, in general. It facilitates the circulation of information about the status of the company and prevents misallocation of funds. It’s hard to imagine the share price of Enron or WorldCom reflecting so poorly on the real value of the stock had insider trading been permitted. Those with inside information would have dumped their stocks as soon as they got wind of irregularities, and others would have followed, saving many people a great deal of money and misery.
If a stock is destined to tank, everybody is going to lose money. For a variety or reasons, some people are in a position to lose less than others. What could possibly be the objection to this, other than envy? Ultimately, when he sells his shares, signaling to other shareholders to follow suit, the insider is performing a service in the market. If investors are too stupid to grasp the information conveyed by a sale, they should stay out of the stock market. Besides, it’s both fit and proper that when he sells, the insider will make more of a profit than the late seller who doesn’t have his hard-won advantage.
Older interpretations of securities laws issued by the Supreme Court rejected the notion that all trading parties have to have parity of information, maintaining that “there is no duty to disclose nonpublic information.” These more constitutional – less casuist – rulings conceded that it is up to company shareholders and their employees to regulate insider trading through contracts.
Cornell’s Jonathan R. Macey once averred that the SEC is teetering perilously on hounding any trader who trades on “the basis of an information advantage.” The accused (The Don) was wiretapped in Police State America, saying this: “I don’t want [to be] involved in the [United] States. It’s dangerous. S.E.C. [the United States Securities and Exchange Commission] is too strong.”
Because insider trading charges are legally spurious, criminal intent is hard to prove. Equally iffy is the circumstantial evidence: How did an accused pick up the barred information? Why didn’t he cover his ears and hum loudly to avoid absorbing the forbidden knowledge? Thus are the overweening feds forced to turn to entrapping victims with trumped-up charges.
Section 1001 of Title 18 in the United States Code is a popular alternative that worked well in placing Martha Stewart, that dangerous doily doyenne, behind bars. The section makes it an offense to make “a materially false” statement to a federal official – even when one is not under oath. (It is perfectly proper, however, for said official to bait and bully a private citizen into fibbing.) In the coming months expect to hear a lot about Section 1001, as it neatly facilitates a plethora of unconstitutional, due-process violations.
Ask yourself this: By selling his property on the basis of an information advantage, has the so-called inside trader violated the rights of other shareholders or potential buyers? The answer has to be a ringing no. The rights of other potential buyers have not been violated, because there is no natural right to a guaranteed profit; one does not have a right to be shielded from losses.