Operation 'Perfect Hedge' – the Criminalization of 'Greed'
As most of our readers are probably aware, the ongoing FBI investigations into insider trading at prominent hedge and mutual funds has just yielded another batch of arrests and indictments. This seems to be still the same investigation that ensnared the founder of Galleon, Raj Rajaratnam, a little while ago. Apparently the investigation has been going on for four years running.
One shudders to think about the resources the pursuit of actual crimes has been deprived of as a result. Merely looking at the FBI press conference, we can see that those overseeing the investigation are already quite a voluminous congregation. Considering the pomp and fanfare with which these arrests have been announced, you'd think we have been saved from an alien invasion or something of similar import.
Mind, the FBI did a good job, in the sense that it successfully enforced existing law. It is the law itself that is the problem.
We already discussed this in some detail in a past article: one major problem with the insider trading legislation is that it is fiendishly difficult to decide at what point exactly an informational advantage becomes 'criminal'.
As a hypothetical example, let us say that someone works out a new neural network type algorithm that after some testing seems to be capable of predicting the daily movements of a certain stock with 95% accuracy (of course that is impossible, but bear with us). One would certainly have to conclude that this is 'material information'. Moreover, it is certainly also 'non-public' information. Will the inventor be free to profit from his algorithm, or is he committing a crime by not telling the whole world about it immediately?
This unrealistic and exaggerated example is only meant to serve as an illustration of the difficulty involved in determining what kind of information should or shouldn't be regarded as a bar to trading. Obviously there is a lot of room for subjective interpretation here, which in turn is an open invitation to abuse (we are not saying that the case in question is an example for such abuse – we are merely stating that the door for abuse is wide open).
As it were, this particular problem is probably not relevant to the case at hand. In connection with these most recent indictments, the FBI seems to have a very solid case in terms of the insider trading laws, as the specific 'material non-public information' concerns foreknowledge of the quarterly earnings reports of a number of companies, on the basis of which the accused executed their trades. They also paid the insider forwarding the information to them a hefty bribe, so presumably it won't be easy for their lawyers to convince a jury of their innocence.
Such cases have proved to be an 'easy sell' in the past. Juries are generally quite eager to stick it to those rich Wall Street bastards who unfairly enhanced their already large compensation by means of 'unfair' informational advantages. It is generally assumed as a matter of course that these activities must be harming someone. It probably won't help the defendants' case if they tell the jury that they paid for the information after all, so there naturally had be something in it for them.
If one looks at the public comments on such cases (in e.g. the comments sections of media reports on the internet), the public at large seems definitely of one mind in condemning insider trading. The only fresh aspect to these condemnations is that they are lately tempered by the recognition that the same laws that will probably bring these hedge fund traders behind bars for a great many years don't seem be applicable to congressmen. Politicians are privileged to trade on insider information as much as they like. That is of course indeed unfair, as it violates the principle of equality before the law.
Before we continue, let's have a look at the FBI's press conference:
https://blogs.wsj.com/law/2012/01/18/insider-trading-news-conference-live-stream/?mod=e2tw
It starts out with the declaration (paraphrasing) that what was nabbed was a 'tight-knit circle of greed', a conspiracy of 'professionals willing to traffic in illicit information' in order to obtain 'an illegal inside edge over ordinary law-abiding investors'.
One can imagine that the ordinary law-abiding investors are outraged to hear this. One must also conclude that the major crime here seems to be 'greed'.
It is also alleged that they 'degraded their markets and the first principle of 'ordered capitalism', that the markets be free and fair.'
We must admit this is the first time that we have heard our corporatist system described as 'ordered capitalism'. It's an interesting terminology. It would of course be great if our markets were truly 'free' – however, it appears to us that 'ordered capitalism' and 'free markets' should probably not be conflated. As to 'fairness' – if property rights are enforced and defended and all are equal before the law, we have all the 'fairness' we need. As an aside to this, modern-day politicians and bureaucrats have as a rule a rather more broad definition of the term 'fairness'. Whenever something is garnished with the adjective 'fair', it is usually a sign that one should hold on to one's wallet.
It appears from the great number of people nabbed in the investigation that 'insider trading activity has become rampant and routine' – if that is true, its advantages have probably become limited, but let's not digress. We are supposed to be 'disturbed'.
What Insiders Know and Don't Know
It is very interesting what the New York assistant director of the FBI, Janice Fedarcyk had to say.
Connected by friendship or business association, seven individuals (of the total 63 nabbed, for some reason only the seven are discussed), exploited material non-public information on the quarterly earnings reports of Dell and Ndivia before they were released.
As noted above, in this sense the case appears to be quite solid in terms of the existing law. The traders concerned also acted in a manner that reveals that they well knew that they were breaking the law (for instance, they arranged to make payment for the information they obtained in a manner designed to conceal it). Convictions will likely be obtained.
But then Fedarcyk makes an assertion that is not only unprovable, but is in fact entirely wrong.
