insider trading

Last month, President Obama signed a law to prohibit members of Congress from committing insider trading using information gleaned from their jobs. But a securities lawyer has a warning for the private sector: The statute could be even more dangerous to private individuals than to Congressmen.

Next week, Rajat Gupta, former CEO of McKinsey & Co. and board member at Goldman Sachs, goes on trial, charged with leaking information about Goldman to stock trader Raj Rajaratnam.

Jed Rakoff, the federal judge presiding in the case, ruled that prosecutors may use a wiretap recording of Gupta talking to Rajaratnam in their opening arguments, the Associated Press reports.

Preet Bharara, U.S.

Every day, it seems, another “insider-trading” defendant is hauled before the courts or sentenced to prison. In fact, many of these “insider traders” are not insiders at all. They are merely people who have acquired information from insiders.

"There is not even a chance we will do one day in jail,” Danielle Chiesi told Reuters last year, speaking of herself and Raj Rajaratnam.

Earlier today, the Galleon insider-trading case went to the jury. I see little hope that Raj Rajaratnam will be declared innocent. But we shall find out soon enough.

I thought it interesting, though, to reflect that in the year Rajaratnam was born (ca. 1957, the year Atlas Shrugged was published), federal prosecution for insider trading essentially did not exist. It is an economic “crime” that the SEC has basically created out of whole cloth in the last fifty years.

The “Law Blog” column of the Wall Street Journal had a troubling article last week. Its headline said: “What, Precisely, is Inside Info? Legal Issue Arises in Raj Trial.” This refers, of course, to the current trial of Raj Rajaratnam, the founder of the Galleon Group, a hedge-fund management firm. The article then goes on to ask: “When is a tip inside information? That is, when does information passed along truly constitute information that others don’t have?”

 Artur Davis, a former Democratic congressman from Alabama (2003–2011), has written an intriguing piece for MarketWatch, suggesting that the Supreme Court may eviscerate the vague “crime” of insider trading, just as it did the vague doctrine of “honest services.” (See “Court could redefine insider trading.”)

The Freeman recently published an excellent article on so-called insider trading: “Inside Insider Trading,” by Warren C. Gibson. Aptly enough, the article is illustrated with a picture of Martha Stewart—who was not prosecuted for insider trading.

Doug Bandow, a senier fellow at the Cato Institute, recently had an excellent article in Forbes on insider trading, giving special attention to the Rajaratnam case. http://www.forbes.com/2011/01/20/legalize-insider-trading-economics-opinions-contributors-doug-bandow.html