Andrew Ross Sorkin takes a break from buying drinks for media moguls at their fancy convention in Sun Valley (our invitation presumably got lost in the mail) to comment on recent criticism of his column an the "proliferation of rumor-mongering and its dangerous effects on the market." He mentions the criticism of Portfolio's Felix Salmon and The Deal's Bob Teitelman.
Oh, and he mentions us. Actually, he quotes us at some length and then describes our argument that proposals to jail rumor-mongering market manipulators could have a chilling effect on free speech as "self-serving and, frankly, nuts."
"What I'm taking issue with -- and what, to me, seems awfully hard to defend -- is the practice of market manipulation through rumor-mongering," he writes.
After the jump, we go nuts all over again and defend the indefensible!
The basic claim that intentionally spreading falsehoods with the intention of manipulating markets should be illegal is largely irrelevant. This kind of market manipulation is illegal. The question is whether or not we want prosecutors ramping up investigations into rumors and those who spread them. In particular, should prosecutors start aggressively investigating the origins and intentions of rumors that surrounded the crash of Bear Stearns and that have lately been hitting Merrill Lynch and Lehman Brothers. Do we want subpoenas fast as rumors circulate?
We think that this would be a terrible misuse of prosecutorial power. In the first place, there's precious little evidence that the supposed market manipulation even occurred. Instead of evidence there's just pure speculation. "Where there's smoke, there's fire," might be a nice soundbite but its not evidence. Before we unleash the hounds of war on rumor mongers, shouldn't we require more than this?
What's more, the costs of such investigations would likely be worse than the alleged wrong-doing. In order to catch wrong-doers, prosecutors would have to subpoena the private emails, instant messages and testimony of lots of people who did no wrong at all. Each of the investigated would face huge legal bills and know that their lives could be ruined by a prosecutor or a judge who misreads a bad intention into an innocent email.
Even apart from the fact that we lack a body of prosecutors who can resist the temptation to abuse their powers, the methods of proving intentional manipulation are not clear cut. Lacking direct evidence, prosecutors would be forced to rely on circumstantial evidence. This means that juries would eventually be charged with determining whether an investor had a good enough reason to reach his opinion before he passed it on. Rationales judged insufficient could be dismissed as mere pretexts for manipulation.
Keep in mind that truth is not apparently a defense here. Bear Stearns did collapse, which means that every single rumor predicting its collapse was correct. But JP Morgan Chase chief Jamie Dimon wants those who allegedly spread rumors investigated anyway. The question begging reasoning that the rumors became self-fulfilling is just a small sample of the kind of abusive, nonsensical and frighteningly aggressive creativity with which this kind of case could be pursued.
This is what we mean when we say that the kind of prosecutions called for by Dimon and Sorkin would have a chilling effect on free speech. The very threat of investigation would discourage discussions of the financial health of companies, even by the entirely innocent. To put it in economics terms, the Sorkin-Dimon investigations would increase the risks of engaging in speech and, in turn, distorts the incentives for investors to even investigate the financial health of companies. In the case of the financial markets, free speech is vitally important in encouraging price discovery and market efficiency. Anything distorting market analysis should have a high-hurdle before it is pursued.
Perhaps the most frightening thing about this entire debate is that Sorkin's column and Dimon's chat with Charlie Rose have almost certainly encouraged enforcement agents at various government bodies to open investigations. This is how they work over at the enforcement office of the SEC. Open the paper, read the headline, start an investigation. The Info War--as we're calling this struggle against information on Wall Street--has in all likelihood already begun.
Moving Markets With Rumors: A Response [New York Times]