Friday, June 17, 2016
Washington Post: Insider trading enriches and informs us, and could prevent scandals. Legalize it.
Steve Cohen is a tough guy to feel sorry for. The founder and manager of SAC Capital Advisors, Cohen is estimated to be worth $9.3 billion, making him the 117th richest man in the world and the 41st richest in the United States. He just bought a $60 million house and blows a lot of his money on really expensive art, including that stupid Damien Hirst shark corpse.
And so a fair degree of schadenfreude ensued when federal prosecutors charged SAC Capital with wire fraud and four counts of securities fraud yesterday. As my colleague Jia Lynn Yang explains, the indictment, “paints a picture of a hedge fund where a constant pressure to gain an edge in trading led to the widespread use of inside information, resulting in hundreds of millions of dollars of illegal profits.”
Here’s the thing though — those profits shouldn’t be illegal. As unsympathetic a figure as Cohen is, and as sleazy as insider trading sounds, there really isn’t much of a reason to ban it.
The first question when evaluating any criminal law ought to be, “Who does the practice this bans hurt?” After all, if the thing you’re doing doesn’t hurt anybody, the case for throwing you in prison — even “minimum security” prison — and subjecting you to all the horrors that entails is pretty weak. So who does insider trading hurt?
The obvious answer is uninformed investors. Let’s say that I’m walking around the newsroom and hear that The Post is about to post really big losses for the previous quarter. I rush to my computer, log onto Scottrade and sell a bunch of my Post shares (full disclosure: I don’t actually own any Post shares; hear that, Mr. SEC man?). When the stock drops following the public release of the loss figures, the poor schmuck I sold the shares to is out a bunch of money. He’s the victim; I shouldn’t have shafted him like that.
But wait a second — what was that guy doing buying and selling individual shares of The Post in the first place? Doesn’t he know that your odds of beating the market as an individual investor are ridiculously low? He should just throw his money in an index fund like everybody else (and so should Dylan-for-the-purposes-of-this-thought-experiment, for that matter).