Academic journal article Michigan Law Review

Insider Trading Law and the Ambiguous Quest for Edge

Academic journal article Michigan Law Review

Insider Trading Law and the Ambiguous Quest for Edge

Article excerpt

INSIDER TRADING LAW AND THE AMBIGUOUS QUEST FOR EDGE

BLACK EDGE. By Sheelah Kolhatkar. New York: Random House. 2017. Pp. xx, 344. $28.

The quest for information in the securities markets bears more than passing similarity to sex: much desired, okay to get it for free, but illegal- and morally condemned-if you are paying for it. Marking the dividing line between getting info gratis and paying for it can be rather murky. Just paying for dinner probably does not count; the bag of cash does. But you have to know that you are paying for it to make it illegal; if you don't know how you happened to get lucky, you are on the right side of the line.

The line between paying and getting something for nothing lurks in the background of Black Edge. Black Edge is Sheelah Kolhatkar's1 journalistic account of the investigation by the SEC, FBI, and DOJ into SAC Capital Advisors, the hedge fund managed by Steven A. Cohen, one of Wall Street's most successful traders. Knowing more than others-"edge"-is smart business unless you got the information the wrong way (and you know it), in which case, your edge is the product of criminal fraud, the "Black Edge" of the book's title. The book, although nonfiction, is written in the style of a Grishamesque thriller, minus the dramatic finish. (And, sorry, dear reader, there is no sex.) Indeed, the anticlimactic conclusion is the book's key takeaway from a legal perspective. Cohen, the white whale of the government's investigation, evades criminal prosecution, despite the conviction of a number of lower-level individuals caught up in the government's pursuit of Cohen (p. 294). Cohen's firm, SAC Capital, ultimately pleaded guilty to criminal indictment, paying out $1.8 billion in criminal fines and civil penalties (pp. 258-59). The SEC barred the firm from managing investors' money for a period of two years, but the firm continues to manage Cohen's multibillion-dollar private fortune under the name Point72 Asset Management (pp. 288, 292). Cohen faced no personal sanction, but as the owner of SAC Capital, he took a financial hit from the fine paid by his company, although he remains comfortably a multibillionaire (p. 258). Point72 is poised to return to managing other people's money in 2018.2

Kolhatkar is a journalist, not a lawyer, but her book highlights the tension between populism and the rule of law that bedevils the regulation of insider trading. The widely held moral condemnation of insider trading views the crime in black-and-white terms: greed leading to abuse of trust. That moral judgment is animated by a strong populist impulse. In the public mind, insider trading is the signature crime of the wealthy and powerful. The resentment is no doubt exacerbated by the fact that insider trading is associated with speculators. The average person sees the work of professional traders as largely pointless-a zero-sum game. Traders are not producing anything, good or service, but they nonetheless earn enormous sums of money. As a society, we are devoting a lot of resources to promoting liquidity and share-price accuracy-real economic benefits to be sure, but amorphous ones not readily apparent to the public at large. The public's suspicion of the trading class is further fueled by ambitious prosecutors hustling for headlines, who do not miss an opportunity to feature insider trading in well-publicized news conferences.

Despite the politicians' definitive condemnation, the legal prohibition against insider dealing is beset by murky lines, the product of its essentially common law origins. Courts have made it up as they go along because Congress and the SEC have refused to define insider trading by statute or rule. The murkiness of the law, however, also betrays a certain ambivalence in our moral view of insider trading. From an economic perspective, using nonpublic information for trading undermines the liquidity of securities markets. Information asymmetries among traders discourage participation in trading markets, regardless of their source, because the uninformed- "dumb money"-seek to avoid trading with those who know more-"smart money. …

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