This CLE deals with securities law. We have a whole panel of white collar defense lawyers, SEC enforcers, and one federal judge combing through the thicket of Supreme Court developments over the past year regarding insider trading. That is, how we know whether or not someone can be punished for knowing some piece of information during a trade of stock.
The whole area of law is nonsense and should be scrapped.
I might (and probably will) take more time later to write more carefully on this, but here's the preview summary:
The simple theory of insider trading law: There's a market price for stocks. That price is based on what the market knows--that is, information publicly available regarding that company's stock. If someone sells or buys stocks based on information regarding that company not known to the market, then that person has an unfair advantage and should be sent to prison. Yes, prison.
This is nonsense.
Let's say a company has a stock price of $10. There's a publicly unknown fact that would drop the company's price to $9. The insider (we'll call him Smarty) knows the fact, and sells all his stock before the fact is known. A buyer (we'll call him Ignoramus) buys it at $10, or if anything a little less, as Smarty's sale will create some downward pressure on the stock price. Then the fact becomes known and Ignoramus's stock is now worth $9. Unfair, we cry! Poor Ignoramus! Punish Smarty!
Alright. So what's the situation if Smarty doesn't sell before the info is publicly known? Smarty's decision not to sell has no effect on Ignoramus--Ignoramus has no idea who Smarty is and doesn't care. So Ignoramus still buys at $10, and then the info becomes publicly known and Ignoramus's stock is then worth . . . $9. Same result (except that Ignoramus's losses may be marginally greater, because Smarty was prevented from creating the downward pressure on stock price noted above).
Why do we punish Smarty? I can't come up with a reason other than envy. Envy should never be the basis of any law.
