In my editorial “ Consider the Source ,” I speculated that Preet Bharara, the U.S. Attorney for the Southern District of New York, was intent on “postmodernizing” the laws he enforces, starting with the “insider trading” regulations.
Professor Stephen Bainbridge, who teaches business law at UCLA Law School, has now made clear just how Bharara is changing the traditional meaning of that alleged crime.
The key fact here is Bharara’s targeting of so-called “expert networks.” According to the Wall Street Journal: “One focus of the criminal investigation is examining whether nonpublic information was passed along by independent analysts and consultants who work for companies that provide "expert network" services to hedge funds and mutual funds. These companies set up meetings and calls with current and former managers from hundreds of companies for traders seeking an investing edge.” (“ U.S. in Vast Insider Trading Probe ,” WSJ, November 20,2010).
Professor Bainbridge notes that such expert networks “play a critical role in making markets more efficient. They help professional investors (the ones whose trading activities set prices) do a better job of valuing securities, which makes the market more efficient.” Bainbridge then goes on to quote from Justice Lewis Powell’s “seminal” 1983 decision regarding “insider trading,” Dirks v. SEC :
Bharara is changing the traditional meaning of "insider trading."
“Imposing a duty to disclose or abstain [from trading--RD] solely because a person knowingly receives material nonpublic information from an insider and trades on it could have an inhibiting influence on the role of market analysts, which the SEC itself recognizes is necessary to the preservation of a healthy market. It is commonplace for analysts to ‘ferret out and analyze information,’ and this often is done by meeting with and questioning corporate officers and others who are insiders. And information that the analysts obtain normally may be the basis for judgments as to the market worth of a corporation's securities. The analyst’s judgment in this respect is made available in market letters or otherwise to clients of the firm. It is the nature of this type of information, and indeed of the markets themselves, that such information cannot be made simultaneously available to all of the corporation's stockholders or the public generally.” [Emphasis added-RD]
What might allow Bharara to undo this Supreme Court decision? I suggest it is the rise of postmodern anti-capitalism during the period from Lewis Powell’s receipt of a Harvard law degree (1932) to Preet Bharara’s October 2010 declaration that insider trading is "rampant" on Wall Street. In 1933, the Massachusetts Supreme Court ruled that insider information was a natural perquisite of being an insider. If you envied people who had insider information, then you should make something yourself and become an insider! In 2010, the dominant theory is an egalitarianism that says everyone has a right to the same information. Which means that people having superior information are oppressors violating the rights of those who have inferior information. That theory, stated explicitly or implicitly, is the one that I suspect we will be hearing from Preet Bharara in the months ahead.