An Above the Law/Dealbreaker Debate: Insider Trading Sentencing

You might think that Dealbreaker HQ exists only metaphorically in virtual space, or maybe in the fan fiction you’re hiding in your desk, but in fact Bess and I share a real physical garrett both with our sibling sites Fashionista and Above the Law. Occasionally we even talk to each other. “Talk,” in this context, normally means that Above the Law editor Elie Mystal shouts at us about some outrageous political position. In order to quiet him down a bit, we’ve decided to take it to the internet, thus spawning the first – and maybe last! – Above the Law / Dealbreaker Debate Society.

I have been set the task of defending a proposition like “white collar criminals should not get anything near the jail time they get.” (We are pretty casual with our resolutions here at the Breaking Media Debate Society.) Fortunately I believe that, so here goes.


Let’s start with the basics. It’s not generally a net good to send someone to prison. They have children and friends and dogs who depend on them. So you need a reason to fuck up their lives. The pretty accepted theory is that you punish people to stop them from doing more bad things, to deter others from doing bad things, and/or because you have a moral objection to what they’re doing. The first – “incapacitation” – doesn’t argue much for imprisoning insider traders. It’s pretty easy, once you’ve caught them, to make sure they don’t do it again. Banning them from the securities industry usually does the trick. Everyone in the Galleon case – like almost every insider trader ever caught – is a first-time offender.

The second – “deterrence” – does make sense. People who work at hedge funds really don’t want to go to jail. Compared to their Greenwich homes, jail has worse food, more violence, and fewer golden retrievers. Also they get ordered around by people with less education than them, which is why they left BofA in the first place.

But a little deterrence goes a long way. There are diminishing marginal returns to jail: as Avon Barksdale knew, you only do two days, the day you come in and the day you get out. Because! The thing is! The body cavity searches, the terrible food, the risk of violence, and the general dehumanization all start on the first day. Bernie Madoff got 150 years and was beaten up – hospitalized with “a broken nose, fractured ribs and cuts to his head and face” – within three months. The extra 149 years and 9 months seems a little gratuitous.

To put it in more personal terms, Elie, you managed to write eight million words about a sullen government functionary monkeying around with your balls for a few seconds – now, imagine that being your multiple-times-daily reality. How much of it do you think you’d need?

So incapacitation and deterrence arguments don’t support putting Raj in jail for 20 years. So why do people want that? It seems to come down to some basic retributive theory of “we should punish him because he’s greedy and evil.”

That strikes me as purely silly. Are insider traders greedy? Of course. People are greedy. Everyone wants more money than they have. The stupidest line in Wall Street 2 is when Gordon Gekko says “I once said ‘Greed is good.’ Now it seems it’s legal.” IT WAS ALWAYS LEGAL you schmuck. Greed is not a distinguishing feature of “white collar criminals”; it’s a distinguishing feature of carbon-based life.

Are insider traders evil? Not especially. For one thing they’re not intentionally hurting anyone – listen to the Raj wiretaps and try to find him cackling maniacally; you won’t. The victimlessness of the crime is so obvious as not to need explanation; many thoughtful commentators believe that insider trading is a net good for society because it helps with price discovery and market efficiency. Prosecutors will tell you that insider trading undermines trust in financial markets, but this would be more persuasive if you could find a person on earth who is not invested in the stock market and would be if it weren’t for all the insider trading. Last I checked the markets were scary because of a U.S. recession, European fiscal breakdown, high-frequency trading, ETFs, volatility, sunspots, really take your pick of pretty much anything but insider trading.

So should insider trading be punished? I don’t particularly think so but I won’t lose sleep if the SEC wants to continue promoting pseudo-confidence in the market by banning insider trading. But prison sentences of years or decades are unnecessary and therefore presumptively wrong – and they come from a place of phony outrage and economic illiteracy, not sensible regulatory policy.

One last thing. It is easy to say, as a defense of brutal insider-trading sentences, that it’s not fair for poor minority drug dealers to get sent to jail for decades while rich white oligarchs get off lightly. I happen to agree with that 100%. But that’s a good reason to oppose harsh sentences for drug dealers – not a reason to favor harsh sentences for white collar criminals.

The idea that everyone who runs afoul of the law should be ground to dust by the justice system is a peculiarly American one. Law professor James Whitman has written about our divergence with Western Europe, which he dates to the egalitarian 18th-century revolutions in France and America. France took the view that everyone should be treated like an aristocrat: for one thing, that’s why they mass-produced the aristocratic method of execution (beheading) so that everyone condemned to death could get the dubious benefits of a guillotining. Two hundred years later, that’s why Europe mostly treats its criminals like human beings.

America, on the other hand, revolted with the point of view that nobody should be an aristocrat – thus the Constitution’s ban on titles of nobility. But what that meant is that low-status punishments became the norm for everyone in America. Thus everyone got executed the low-class way, by hanging. And that’s why now America has chain gangs, striped prison uniforms, and a culture that finds prison rape amusing.

I think of this every time I see phony outrage about how white collar traders shouldn’t be “above the law,” where “the law” means cruel prison sentences. It’s perfectly right to be upset that insider traders get off easy while lower-status criminals get cruel sentences, but it’s historically conditioned and it goes the wrong way. There’s no reason to send anyone to jail for 20 years for nonviolent first offenses. We could be like the rest of the world, and try to use the least jail time possible, rather than the most.

Elie here:

I’m glad somebody finally came out and said it. I’m glad somebody finally came out and said the thing that so many people on Wall Street believe. I’m glad that in a clear and largely coherent voice somebody finally sat down and made the case for why a few people who can’t follow the specialized and privileged rules we allow them to live by shouldn’t even be punished too harshly when we catch them in the act. Matt Levine just told you why some of us are more-equal than others. He just told you why some of us should be allowed to live above the law.

And I’m glad he did because it lays bare how disgusting our corporate elites have become. Even when they are caught cheating the system, they think that somehow they should get away with it. Maybe this kind of reasoning works on dumb broads, but America should respect herself enough to not take this kind of treatment no matter how much money the guy has.

People guilty of insider trading and other white collar crimes broke the law. I understand that “the law” is a concept that these white collar types have trouble coming to grips with. If you’ve ever been in-house and had a suite of bankers and managers as your daily clients, you know how many times you have to say “just because you can make money doing it that way doesn’t make it legal.” They live in a world where laws are guidelines, hookers are wives, and punishment involves being slapped on the wrist by an invisible hand.

Matt acknowledges the fundamental fairness of punishing our high-status individuals with the same fervor that we punish low-status individuals. He just doesn’t think there should be a race to the harshest possible punishments. I agree and while we’re sitting here wishing for world that does not exist, I’d also like to say that world hunger is a terrible thing and something should be done to make sure all those poor people have food and cable so they can watch the very best cooking shows.

But back here on planet “that’s not fair,” let’s not forgot that there are already a myriad of laws high net worth individuals can break with impunity without even risking penalty much less harsh punishment. If I want to do cocaine I’ve got to go find some seedy dealer who may murder me to sell it to me while I dodge cops, crack fiends, and my wife. If they want to do it, they call up a guy, it gets delivered, they have a party. If I want to gamble I have to go find some unreliable bookie who will break my body if I owe more than I can pay and might be wearing a wire. If they want to gamble, they “invest in a hedge fund.” If I need a lawyer, I gotta come online begging for free advice or otherwise turn to friends and loved ones. If they need a lawyer, they hire a whole freaking firm of them.

Do you know what kind of greedy, soulless bastard you have to be if you are rich and yet find yourself in jeopardy of seeing the jail end of our criminal justice system?

The difference between the guy who points a gun in your back when you go to withdraw money from the ATM and the Galleon Group is that Raj Rajaratnam was too rich to need a gun and wanted way more money than is in an ATM machine. Rajaratnam is a common thief, only people like Matt who have suckled at the teat of education and privilege can convince themselves that there is anything uncommon about Raj.

It is perfectly right to be outraged by the behavior of a person like Rajaratnam — for exactly the same reason you’d be outraged if somebody used his inside information that you were not going to be home during the time he burgled your house. You can make white collar crimes seem complicated and sophisticated if you want to. And lord knows the (understaffed, undermanned) SEC has a lot more trouble keeping up with the white collar criminals than the our police have keeping up with burglars in your area (I’m assuming you all live in areas nice enough to warrant competent police protection). But just because the SEC is relatively dumb at it’s job doesn’t mean the criminals it chases are sophisticated market leaders worthy of respect or even awe. Their crimes are common and their motives are as old as time.

So when we catch these people, these thieves, we punish them. We punish them for the sake of punishment, deterrence, and our moral outrage, sure. But we also punish them for justice’s sake. How we define thievery is somewhat arbitrary, I’ll admit (though, it’s worth pointing out again that people like Raj are free to commit a host of other things that some might call constructive thievery with no consequences — it takes a special kind of disregard for the laws to even get busted when you are already rich enough to play these games), but justice demands that thieves are punished regardless of how much money they had when they started stealing.

To put it another way: if you can’t even follow our stylized rules for being greedy in this country, you deserve to be cast down with the sodomites.

It’s not that these white collar criminals should get tougher sentences because of moral outrage at Wall Street. It’s thinking that their punishments for breaking the law are somehow too tough and unfair is an indication of just how far from the pack they’ve strayed.

Tell us what you think. Take our reader poll over at Above the Law.

(hidden for your protection)
Show all comments

51 Responses to “An Above the Law/Dealbreaker Debate: Insider Trading Sentencing”

  1. Mexi_Cant says:

    I had no idea you two had to suffer through seeing that interolably obese racist Elie on a daily basis. He's like a black greg that justifies his words by "I went to Harvard" and then forgets to add "due to affirmative action because I had a 154 LSAT"

  2. yawn says:

    " only people like Matt who have suckled at the teat of education and privilege can convince themselves that there is anything uncommon about Raj." Just a little debating tip. You work for a site with a primary market focused on kids who went to good law schools to be the boot-licks of bankers. Known your audience.

  3. Sebastian Ingrosso says:

    lawyers can suck my balls

  4. Tex says:

    Just to correct you on one point: Barring someone from the securities industry does not prevent him/her from violating insider trading laws in the future. There are plenty of insider trading felons who were not members of the securities industry.

  5. minus 1 says:

    This is the first ML post I've read all the way through
    (even that liberal hippie shit…Elie I think you left your gas mask at Wall & Broad… also sorry you are the exact representation of law school guy

    Bravo Matt. Poignant, insightful, and with a lack of tone that is commendable in most debates…a skill you think one would learn spending 3 years "learning" how to argue law.

  6. celestus says:

    Wait, let me get this straight.

    Hold on, still processing.


    While I agree with sending insider traders to jail as long as it's illegal (now there would be an interesting debate), why is Mr. "I'm just not going to pay back my student loans because there's nothing they can do about it" writing such gems as "Even when they are caught cheating the system, they think that somehow they should get away with it." ?

  7. omgz seriuzlee? says:

    wwwwwwwaaaaaaaaayyyyy tldr.

  8. Furiously Devoted says:

    Mystal, you fat obese Walrus waffle fucker, stay away from Bess, her inbox is a god damn national treasure!

  9. Guest says:

    As usual, Elie manages to use personal attacks and poor word choices speech to make his valid arguments sound like hate speech.

    Yes the folks at Galleon should be punished, they broke the law.

    Mike's argument that insider trading is a victimless crime is incorrect, as the person on the other end of the deal ALWAYS looses value equal to what the perpetrator gains.

    • Uhh... says:

      …but they were still wrong. Insidert trading just hastens the inevitable.

      • Guest says:

        That is the common, but weak, argument for legal insider trading. Unfortunately it breaks down with the following logical example: well we all die eventually so murder just hastens the inevitable death.

  10. Tuckhead says:

    The rundown on Above the Law:
    Lawyers hate their jobs and each other
    Law School sucks and results in no job/BigLaw then no job
    Lawyers are perverts, murderers and have bad websites
    Elie went to Harvard twice, failed bar and got fired from BigLaw
    Awesome comments from a guy named Partner Emeritus
    People correcting grammar

    Thank god we have Bess.

    • Bonobo_Bro says:

      I'd like to think my "lights on / lights off" analyses and frequent misguided attempts at understanding financial concepts my roommate who's in PE try to explain to me add some value.

    • Guest says:

      Elie well played attending Harvard and failing the bar but talk to me when you get fired by Goldman bitch.

      – The Mooch

  11. Senile desk head says:

    I like lawyers, they're like that funny referee in "Bedknobs and Broomsticks."

  12. WTF__k says:

    The few times I've visited ATL, I've come away feeling like it was a waste of time, but didn't really know why.

    Thanks for making the reason clear to me, Elie. You're a fucking idiot with poor reading comprehension skills, and you tilt at straw men of your own making.

    Just a tip, for your self esteem – next time you want a debate, pick an opponent who's no so clearly superior to you in ability to express his side of the issue. You're less likely to publicly humiliate yourself.

  13. Texashedge says:

    I know what's going on here. This is a naked attempt to provide a foil for Mr. Levine and gain approval for his tenure here.

    And it's working—I'm rallying around the dealbreaker flag like a beer-swilling armchair patriot in Sandusky, Ohio. Defend our island, Matt. God willing, we will prevail, in peace and freedom from fear, and in true health, through the purity and essence of our natural fluids.

  14. FMF says:

    I'd rather read about a Dealbreaker/Fashionista debate

    • minus 1 says:

      +100, Bess please?

      • Louis Winthorpe III says:

        Totally agreed. Also next time can you somehow link the comments? Or have the "teaser" on both sites but link the article to Dealbreaker (since banks block other comment systems).

        Yes, I'm aware this will slightly skew your unique hits but let's be honest, Dealbreaker is the flagship here.

        But, for real, it could be fun to have a commentary debate with a group of commenters outside of the DB world.

        • early_hominid says:

          Or if not a debate just a shit fight with buckets of shit. If someone throws shit at us, we throw shit back at them. We throw so much shit back at them that they can't pick up shit, they can't throw shit, they can't do shit.

  15. FKAFinkNottle says:

    Elie, you know what I dislike? I dislike idiotic rambling when you have clearly grounds to make cogent points to defend your pov. It doesn't surprise me in the least that you got kicked out of your firm.

    Your argument should proceed as follows:
    1. Insider Trading can be a crime that claims victims.
    2. Consider the situation of a corporate executive, Joe, that knows his company's stock will do awesomely well because they're about to be acquired at 60% premium. He doesn't tell anyone about it till the deal is finalized, but goes out an buys a chunk of stock.
    3. He has effectively gained from an information asymmetry. Bob who sold Joe stock (someone has to take the opposite side of a deal), lacking that knowledge at the time, effectively lost out on the upside of the stock because of Joe.
    4. In fact, Joe, as an executive of the company, just reneged on his fiduciary duty to uphold the rights of every stockholder such as this Bob.
    5. ??
    6. BOOM! Win a fucking argument.

    Next time, stop foaming at the mouth with class-rage. Matt makes some excellent points, but if you were less of a mouth breather, maybe you could articulate your position better.

    • guest says:

      Thank you, FKAFN. Matty's argument is just too naive, but there was nothing to rally around with Elie. I'm glad that you put this down because this is exactly why these financial white collar crimes are clearly not victimless. And to think that the damage imparted 'by financial whiz thieves' is somehow mitigated because they didn't hold a gun to your head is ridiculuous. Hello, Enron!

      Why is violent crime prosecuted so heavily? Likely because one of the most fundamental of rights is threatened – life. Does not a devastating financial ruin threaten this same inablienable right? Does it have to be restricted to such an egrigious case in which a dying cancer patient is swindled out of their money leaving them no means to continue treatments to extend their life? Do we look the other way when we feel 'the victim still has time to restore some semblance of their former life?' IMHO, that's preposterous.

      • guest says:

        The above two posts need to be the argument instead of Elie.

        Matt proposed serious, thought provoking arguments and the Elie guy was just a bleeding heart and used emotion to leverage his argument. A fail in my opinion.

    • Larry the Liquidator says:

      Are you really going to attempt to outlaw 'information asymmetry?' That's the dumbest thing I heard since the Gorilla turned down the 5th rate Korean bank.

      Insider Trading laws *increase* information asymmetry, and reduce liquidity, which is bad for EVERYONE. Joe, the company CEO, has *never* been prosecuted for not selling his stock upon learning of good earnings ahead of the Rest of the World, and never will be.

      Finally, these are big-boy/girl markets. If I buy a stock at 20 and decide I will sell at fair value at 40, that's what I do. Whether it gets taken out, or not, at 50 a week later is irrelevant to grown-ups [and you nicely assumed away deal-risk, no M&A has ever gone tits-up in your world I see].

      As Seth Klarman himself has said, 'we have no duty to tell our counterparties they are wrong, because we ALWAYS think they are wrong.'

      Every single trade you do, the guy on the other side may have or had more information than you, every trade, for your entire life. Only pussy lawyers cry and sue about it.

  16. Cartman says:

    Cripple fight!

  17. Guest says:

    I thought Elie had moved his office to security line at the airport !

  18. HFguy says:

    "Tell us what you think. Take our reader poll over at Above the Law."

    Why is the poll not at DB. Dont try to drag the audience of DB to ATL. Dont try to fix a blog by breaking another one.

    We all saw what you did there. :)

    – Guy who notices subtle things in life

  19. guest says:

    The law, in its majesty, forbids both the rich and the poor from sleeping under bridges. Also, they can’t trade on insider information.

  20. Quasi-dumb Broad says:

    You lost me at "dumb broad". Seriously? I don't get insulted easily, but you sound like a fucking uneducated idiot when you say something like that.

  21. Herb Schmertz says:

    (I’m assuming you all live in areas nice enough to warrant competent police protection).

    Working on that.

    -UBS MD

  22. The abuser says:

    Three words: congigal visit sex

  23. The abuser says:

    How many g's in giggaboo.

  24. BigBadAss says:

    lol, lawyers are wimps


  25. Put_Option says:

    Elie, though it is impressive how you formulated your argument, I can't help but feel annoyed by you. You attacked Matt as opposed to attacking the issue. From your opening lines, your smug attitude and soapbox mentality laid waste to your lucid and solid points against insider trading.

    You wanna know why people don't like lawyers? Lawyers create nothing. They only have jobs when others act and charge fees for being nothing more than an inconvenience.

    I've had to deal with M&A lawyers since I was a first year analyst, and I can safely say that all I've met–in New York City, at least–have added little to no value to a transaction. Sure getting an airtight NDA/NCND or an ironclad SPA/APA is great, but charging any success fee % on the closing of transaction and using the SEC/FINRA 'loophole' as an exemption to being licensed is unacceptable.

  26. Infinite Jest says:

    Nobody got the David Foster Wallace reference?

    – literary quant

    • Seemed Obvious says:

      1) hanging
      2) golden retrievers
      3) cultural touchstones
      4) Drug references
      5) run-on sentences
      a) lack of footnotes or eschatology

  27. guest says:

    let's be honest, Matt. You are the reason those hippies are down on Wall Street (or, a large park across from the WTC site) trying to kill everything good about capitalism.

    Capitalism is good, and it does work. It's helped the US jump light years ahead of 95% of the rest of the world in development. When you take away confidence in the system, which is what the average Joe on the street is looking for right now, then you erode the thing that makes it work – which is the belief that working hard and being educated will get you ahead in life. It's what keeps the middle class going. Why you would not want to punish inside traders goes against logic.

    By not putting him in jail, you're telling 275mm non-elite people in this country (being very conservative) to go pound sand. You're going to run into some malcontent. I'm not saying it's right or it's wrong, but that's the fact of the matter. "Making you afraid of it and telling you who's to blame for it" -thats how politicians and newspaper work. If you think you can write an op-ed to tell people that there is nothing wrong with what he did, then everyone in this country should be happy you are not in high-finance, because you are dumb as a rock.

    Putting Raj away, and all the other people trying to game the system, is the only way to restore whatever confidence some of you elitist bastards have already killed (Raj may have been caught on a wire, but at least he wasn't dumb enough to think that hawking unhedged CDS's to his MBA school compadres was an intelligent investment. idea.).

    Stay away from the financial industry, Matt – we need less of your kind screwing up what used to be a good thing. Those who can't do, teach. Those who can't do or teach apparently become writers.

  28. thought says:

    Matt : Deter – little goes a long way (in theory). Marginal return; "For one thing they’re not intentionally hurting anyone";The victimlessness of the crime is so obvious as not to need explanation.

    Disagree with decreasing marginal return to deterrence. For the sake of argument, if punishment for insider trading was death penalty, would it have an effect on the financial markets? I'd say yes. Unlike a desperate homeless person who feels nothing to lose when swinging for the stars in a violent theft, your average financial service employee likely feels that the risk far outweighs the reward. Sure, the difference between 15 and 30 years has little effect, but 180 days vs. 20 years has to be weighing on market participants.

    With regard to 'unintentional' and 'victimlessness', I think it's clearly absurd.

    • thought says:

      Elie : (paraphrasing) Rich can flout many laws already; since rich are given a handicap on getting caught, the punishment should be greater.

      This argument is so flawed. I disagree with Matt that the punishment is excessive because those of us that are demanding justice for these white collar crimes are actually only asking for equality, not an overcorrection for past mistakes.

  29. I'm a Dude says:

    this was not a debate, this was a rant by some looser named elie.

  30. Anonymous says:

    To impress a chick do the helicopter dick.