All of this theater can’t hide the dubious public policy underlying these prosecutions. Insider trading is, at worst, a breach of fiduciary duty which, like other such breaches, can be dealt with under state law. There’s only the thinnest basis for getting the federal government involved — that insider trading might increase trading spreads and therefore might reduce trading by outsiders. But sensible outsiders don’t do a lot of trading.
Even if there’s a case for a federal law against insider trading, criminalizing this conduct and unleashing aggressive publicity-seeking prosecutors to enforce the criminal laws is particularly dubious. The vast majority of trading on non-public information does a lot of good by making stock prices more accurate and, occasionally, exposing fraud. (Sometimes it seems legal insider trading does more to inform the markets than does the SEC — remember Madoff?).
The line between legal and illegal insider trading is shadowy at best. Branding anybody who crosses the line as a hardened criminal subject to a potentially huge jail sentence or at least career-ending prosecution could shut down or at least discourage legitimate firms that deal in non-public information, including the expert services that Bharara’s investigation is supposedly targeting. Bharara may succeed in cleaning the markets of a lot of good information along with a few criminals (actually, no criminals if this crime wave is like the one targeted by Giuliani).
Finally, there’s the journalistic aspects of all this. One can be forgiven for sniffing an implicit deal here between Bharara’s office and the WSJ. The WSJ got a prized story, to which it devoted four top reporters (according to the byline). In return it reported the story exactly the way Bharara’s office wanted the public to see it — as “expos[ing] a culture of pervasive insider trading in U.S. financial markets,” rather than as a costly lark by a publicity-seeking prosecutor. This smells a little like the way the traders in “Wall Street” used a newspaper called the “Wall Street Chronicle” to leak non-public information (Blue Horseshoe loves Preet Bharara).
Professor Larry E. Ribstein is the Mildred Van Voorhis Jones Chair in Law and the associate dean for Research, University of Illinois College of Law.
This story originally appeared on the blog Truth on the Market. It has been republished with the author's permission.
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