Deal Judge: It's Time To Give Up On Insider Trading


Ed. note: This is a new weekly column by Elie Mystal, Managing Editor of Above the Law Redline, wrapping up the week that was in law and finance. Elie is not a practicing attorney, and anything he says that you listen to can and will be used against you.

The Only Issue I Care About This Week: We Have Better Things to Do Than Prosecute Insider Trading. That's the title of a Justin Fox article in the Harvard Business Review. Sadly, I think he's right.

In broad strokes the world can be divided up into three types of people:

* Group 1: Yokels who hear "insider trading" and shout "rabble rabble" at someplace they think is called "Wall Street" while they sharpen their pitchforks.

* Group 2: Wealthy elites and their media spokespeople who believe insider trading is a "victimless crime" as if Peter Gibbons from Office Space is their spirit totem.

* Group 3: Prosecutors who want to be Governors and are trying to shore up the yokel vote.

It's all terrible. EVERYBODY IS WRONG ALL THE TIME. The people who care about rich people "cheating" don't even understand what insider trading is anymore. The people who cheat have priced in the risk of getting caught. Over-matched regulators bite at the ankles of symptoms while being totally unable to address root causes.

I believe that we could live in a world where people who trade on material non-public information suffered criminal penalties severe enough to make them stop. But I also believe the Mets are one bat away from being a contender. Reality, it turns out, doesn't give a crap about what I believe.

So, I don't know, screw it. "Some legal scholars have taken this to mean there shouldn’t be any prohibitions on insider trading at all, and I’m not sure they’re wrong," says Fox. My way hasn't worked. Let's start with intellectual consistency, and work backwards from there.

Your obligatory Ben Edelman reference: The Ben Edelman counter-narrative is already in full swing. He apologized. Then in Slate fellow professor Joshua Gans stood up for Edelman. Of course he blames Sichuan Garden people for forwarding a private exchange to the Boston Globe. Gans doesn't like it when Chinese food resturants and newspaper gang up on a poor Harvard professor who doesn't even have tenure yet.

But Gans also paints Edelman as a populist hero:

In Edelman’s exchange with Ran Duan of Sichuan Garden, you can see his maverick side at work. He knows this isn’t personally a big deal, but he also knows he’s complaining about the same thing he tries to hold big businesses accountable for. And if no one calls them out, the law is meaningless. Put simply, things that hurt lots of people a little bit are socially damaging, but it’s hard to initiate action against them. It is death by a thousand little cuts.

No, no, no. The law is not "meaningless" without giant dickbags like Edelman. It is not the case that the only way you can stand up for yourself is by being mean to other people. Edelman is not being a "maverick," he's being a dick, because he thought he could get away with it.

Gans writes:

I want our Harvard professors to be more like Ben Edelman and take up causes that are controversial but that they are passionate about. The moment we let them be punished disproportionately for these traits, conformity wins.

Wrong again. The moment somebody gets punished not for what they said but for the petulant, boorish manner in which they say it is the moment Harvard can begin shedding its reputation as an incubator for jerks.

Ben Edelman is not Doctor House. He's just a bully. The law does not require his temperament.


After The STOCK Act It Will Still Be Legal To Trade On Congressional Inside Information*

Here's a sort of touching monologue from David Einhorn's call with Punch: If you’ve done the analysis, and come to the conclusion that on it’s own, the company is not going to make it, it makes all of the sense in the world to raise equity at whatever the price is, so that you can know that the company, you know, is – is going to make it. Now, what that brings to my mind though is, you know, obviously we haven’t done your analysis, we haven’t done -- signed an NDA; I don’t know that we’re going to sign an NDA, because we prefer to just remain investors, but from my perspective, and I’ll be just straight up with you, is that gives a lot of signalling value. And the signalling value that comes from figuring out the company has figured out that it’s not going to make it on it’s own is that we’ve just grossly misassessed the -- you know what’s going on here. And -- and that, that will cause us to have to just reconsider what we’re doing, which is not the end of the world to you. You will continue on even if we don’t continue on with you. You could sort of see why the FSA read that to mean that he was insider trading. Like ... (1) You have told me something with signalling value. Sorry - "a lot of signalling value." (2) I will now act on that signal. (3) Don't be mad. "Signalling value" sure sounds like it means "material nonpublic information," doesn't it? Now as we've discussed before, trading on that information would not be enough to make Einhorn guilty of insider trading in the US, though maybe it wouldn't be exactly a great idea here either. Why? Because in our weird but sort of sensible insider trading laws, it's just not illegal to trade on material nonpublic information. It's only illegal to trade based on material nonpublic information that was obtained in violation of some sort of duty of confidence. Since Einhorn didn't sign an NDA, he had no duty of confidence. And since the Punch CEO and bankers weren't tipping him for nefarious purposes, but were instead sounding him out on the company's behalf as a shareholder and potential investor in a new capital raise, they weren't breaching their duty of confidence. You could quibble with the details of that but it's basically the law here. In England not so much. That also seems to be the law for our friends in Congress, who recently passed a law making it illegal for them to insider trade, which is worrying some people who make their living from trading on Congressional inside information: