The trial of American businesswoman Martha Stewart is shortly about to get underway. I am, on the basis of what I have read about the charges brought against her, unconvinced she was guilty of insider trading, and in fact deeply disturbed that prosecutors have chosen to go ahead with this case on the basis of what looks like thin evidence, as described in detail in this article in Reason magazine.
I have a problem with insider trading as it is defined by lawmakers in the United States, Europe, and in certain other parts of the world. In all too many cases, insider trading is so loosely defined that any entrepreneur with a quick dialing finger and fast ability to spot information – surely a praiseworthy thing – could, according to some definitions, be found guilty of insider trading. Insider trading has become rather similar to anti-trust in this regard, in that capitalist-bashing lawmakers can use it to cut down the successful.
I do not see any relief coming soon from our legislators. Insider trading is often a way for politically ambitious legislators and public prosecutors to make a name for themselves. And even in those cases where a chief executive or other senior business person has acted wrongly, one usually finds that the act in question amounted to fraud, theft or some other crime already covered in company and in our existing Common law. For example, if say, CEO Fred Smith uses information obtained in secret and in a way that violates his own company’s rules, he should be sacked for breaking company rules and the terms of his contract. No broader insider trading law is necessary.
Also, there is no reason why, for example, a market like the Nasdaq exchange could not stipulate that all listed firms adhere to certain standards of corporate behaviour. Exchanges which let companies do what they want may have to pay a “reputational price” in that some investors will choose to migrate to more upright exchanges. This happens to a certain extent already, because stock exchanges in countries with loose regulations and opaque reporting standards – as has been the case in parts of Latin America, for example – lose out to exchanges like the Dow Jones our own FTSE. In fact, globalisation is forcing a “race to the top” in terms of corporate behaviour as stock market leaders around the world seek to attract capital. The market wins again. (By the way, the collapse of Italian food group Parmalat has helped underscore the reputational damage to a whole country – in this case Italy – when a firm is thought to have behaved wrongly).
On a more economically theoretical basis, insider trading, even if one could definite it clearly, usually poses no actual “harm” either to the broader investor if one accepts that capital markets are typically highly efficient in these days, when price anomalies are usually exposed in seconds in this electronic age.
Time to put insider trading laws under the spotlight, and hopefully, in the dustbin.