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An Above the Law/Dealbreaker Debate: Insider Trading Sentencing

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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.