Apr
14
Blog Post 12
April 14, 2015 | Leave a Comment
Insider trading is a problem in the corporate world of America. At first I thought that this made no sense. People share secrets all the time. But when this information could mean millions or billions of dollars, then it’s a big deal. It’s especially so when the money doesn’t belong to those individuals sharing private information, but is used as such. Leveraging nonpublic information to gain an unfair advantage is rightfully punishable by law.
James Kidney pointed out something that was new to me. In his article, he mentions how the SEC spends too many resources chasing the little guys. The fifth level removed from the original source was getting prosecuted. Apparently, the SEC chair and director of the Division of Enforcement explains this through the “broken windows” theory of “law enforcement.” Interestingly enough, this method was applied in the cleanup of the MTA. Studies showed conflicting effectiveness, but the idea was essentially that stopping petty crimes would prevent a crime culture and discourage larger crimes. However, this is completely counterintuitive in the finance world. It simply doesn’t make sense that the neighbor gets punished instead of the person who originally leaked the information. The Court of Appeal’s decision on the Newman case was good to let those unaware of their doings free, thus allowing for more resources to catch the bigger fish which would in turn be more effective in preventing future larger insider trading issues.
But on the flip side is William Black’s article. He talks about how the same decision can be leveraged by the elite Wall Street folks to stay above the law. So the financial analysts of several levels removed from the original source will walk scot-free. Another great point that he brings up is how insider trading severely hurts the honest investors. These unstable actions bring huge amounts of risk into the market economy. In other words, the elites stay above the law and “earn” enormous amounts of money by playing with the middle class people’s money. It’s quite ironic when a corporation maintains that it prides itself in ethics and integrity when news of these scandals stream out continuously month after month.
Like the authors mentioned, white collared crime needs to be more thoroughly investigated. This means updating the outdated laws and regulations to specifically target white collared crime. Such as in the case of Skilling vs. United States, as described by New York Times article, terms like bribe and kickback need to be properly defined to adapt to modern situations. The mail and wire fraud statutes can only serve as a temporary relief to prosecute the cases that skew the lines of insider trading. The idea of increasing the number of dedicated FBI agents and federal prosecutors is also a feasible strategy. Whatever the strategy, the focal point needs to be stopping the head of this wrong-doing. Preventing the operation from the top will definitely shut down everything below.
Insider trading is a problem. Though I am not entirely sure if this should be prioritized over all the other issues afflicting America. I do not know the extent of damage insider trading has caused and the consequences of fully combating insider trading. I’m interested in learning more about this topic and how it compares to other issues like income inequality and unemployment.
Jia Jun (Jay) Wu
