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The Stock Market, Insider Trading, and Faith in the Markets

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Last week the Senate passed the STOCK Act, aimed at reining in insider trading by lawmakers. This week the House takes up a similar bill.

Insider trading is illegal no matter who does it. But our elected representatives are in the unique position of being exposed to certain political intelligence that could be regarded as inside information.

Right now they are required to disclose stock trades annually. The Senate bill would require disclosure every 30 days. The effort to impose transparency enjoys bipartisan support. But some argue that it is mainly intended to help restore the public's confidence in Congress, which has seen approval ratings dip into the low teens.

Christopher Clark is a partner in the Litigation Department at Dewey & LeBoeuf, and heads up the White Collar Criminal Defense and Regulatory Investigations Practice Group. He was formerly an Assistant U.S.

Attorney in the in the Southern District, where he was a member of the Securities and Commodities Fraud Task Force. He recently represented Mark Cuban against SEC insider trading charges.

LRS: What will the STOCK Act actually achieve ?

Clark: It's fair, and I'm in favor of fairness. The SEC has expressed its view that if it needed to prosecute members of Congress it could do so under existing laws. But there is some uncertainty about that.

LRS: Is it just about transparency, or will the new law actually prevent crime ?

Clark: People shouldn't feel like Congress is taking advantage. The law will make you disclose what your trading is, but it also specifies that it is illegal for members of Congress, and certain other Federal employees, to trade securities based on material non-public information obtained in their government job.

LRS: Is the government's current aggressive focus on insider trading appropriate ?

Clark: Right now, given the economic impact of insider trading, the amount of resources being given to it is incredible. Stocks are owned by millions of people. Someone's $100,000 gain on a company with an $8 billion market cap means nothing to the market. In fact, the government will spend many hundreds of thousands of dollars to make a case on that $100,000 gain.

The amount of time and money that gets spent on insider trading cases, compared to large accounting fraud cases for example, is way out of whack.

LRS: Should the SEC be spending its time on something else ?

Clark: No one knew about options backdating, and that went on for years, til it became news. Now it's insider trading.

Meanwhile, everybody screams and yells and goes crazy when MF Global happens. You might have 30 insider trading prosecutions going on, and the impact on the market is almost meaningless. But you don't do anything on MF Global, where there are billions of dollars missing, and no one's being held responsible. And we're not talking about investors losing that money on bad investments. We're talking about a billion dollars, a bag of money, just missing.

The only rationale is that they do it so people have faith in the markets, that they aren't rigged. But people lose faith in the markets sooner if they lose money like in MF Global.

Insider trading is a way to capture the public's eye.

LRS: Is this something that grew out of the financial crisis ?

Clark: Lehman Bros. collapsed and - if there was misconduct - it's got a heck of a lot more impact than insider trader does. We're talking about institutions that collapsed.

LRS: Some say the SEC should be abolished. What do you think ?

Clark: That's a bad idea. All the rules are written by the SEC.

There's a role for regulators. But it might be better if they could really concentrate on the things that could have a big serious impact on the markets. They should set their priorities differently.

But Congress plays a role here. If at the SEC they decided to re-focus, they'd be dragged into Congress to explain.

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