Apr
14
Class 20 – Blog Post #14
April 14, 2015 | Leave a Comment
Insider trading is defined as the trading of a public company’s stock or other securities by individuals with access to nonpublic information about the company. The definition sounds simple enough but in reality, insider trading is much more complex. Under restrictions and laws, insider trading has become much more difficult to determine. No more is it just between a company source and an outsider with blatant compensation for direct inside information. It’s become muddied with different levels of outsiders and harder and harder to prosecute the one company source.
In Mr. Kidney’s rant against the prosecuting practices of the SEC and DOJ, he brings up some very good points. While he has won many victories against accused defendants, most of them have been four or five times removed from the company source. Are these the people they really should be focusing on? The people who heard it from a friend of a friend of a friend of a friend of a friend? It sounds absurd. And to be using all this taxpayer money and resources to create a loose story? Mr. Kidney called it “legal fiction” with the emphasis on fiction. If a former SEC lawyer barely believed in the stories he fabricated, how can the entire system just go along with it?
The SEC and DOJ are notable government organizations but they are bureaucratic nonetheless. They are boosted by numbers and the employees are boosted only by following those numbers. It’s a shame to read about “window dressing” cases where the SEC prosecutes old and irrelevant cases in order to raise their numbers. It’s similar to stop and frisk in police enforcement. Many officers have to meet a quota in the number of stops and arrests they had to make per month. If they didn’t make it, they would be given poor evaluations and possibly denied benefits such as vacation days. As a result, this increased the number of stop and frisks, especially on African Americans and Hispanics, in order to reach those quotas. In this case, boosting numbers of cases is harming those who barely had a hand in insider trading like the high school dropout that Mr. Kidney prosecuted. Numbers don’t equate change and most of the time it harms those it’s supposed to help.
In the article in New Economic Perspectives, the author is evidently furious with the Second Circuit’s decision. I think, if I didn’t read Mr. Kidney’s speech first, I would’ve been furious alongside him. However, this gives the SEC and DOJ less catering to lower end insider trading cases and more resources on the high profile cases against senior officers. This means more effort in going after those “penthouse floors” that Mr. Kidney stated. However, this decision does not make it any easier in prosecuting those officials. They can still hire the most elite lawyers and they can still claim plausible deniability.
Do you prosecute a bunch of “broken windows” to send a warning or do you prosecute that one penthouse floor to really get your message across? I say that penthouse floor, especially in the long run. Sure, it uses more resources, more time, and more manpower. But it also gives more press coverage, more assurance, and more confidence to fair investors. If such a big fish can be caught by the SEC, all the small fish will be terrified automatically.
Stella Kong
