Insider Trading Needs a Law That Says What It Is
Practically all bad stuff with securities is lumped into a single statute.
This post originally appeared in Money Stuff.
Here are a blog post and related paper from Miriam Baer of Brooklyn Law School with the excellent title “Insider Trading’s Legality Problem,” describing one reason why it’s bad that there's no actual statute defining and prohibiting insider trading:
Criminal statutes do more than prohibit wrongdoing; they also allow us to differentiate among the variations of given offenses.
Insider trading isn’t merely a civil offense. As in the case of Salman, it often triggers criminal penalties. Criminal law derives its legitimacy in part from the “legality principle,” a set of related rules that demands that criminal laws be duly enacted in advance and in terms specific enough for the average person to understand what is forbidden.
When legislatively enacted statutes conform to the legality principle, they do more than provide adequate warning of what is and is not forbidden. Under the best circumstances, they can improve criminal law’s content, precisely because they permit the legislature to think about a family of crimes holistically and differentiate similar, yet morally distinct, conduct. Through differentiation, we become better at singling out the abstract factors that make some crimes worse than others.
I agree with this completely but would add that it's not unique to insider trading. Insider trading is part of a very big mishmash of things that just count as “securities fraud.” Insider trading, the stuff Jesse Litvak did, algorithmic spoofing, faking the accounts of a public company, running a Ponzi scheme—all of these things are for the most part prohibited not by statutes about insider trading and bond-price lying and spoofing and accounting and Ponzis, but by a single vague statute about securities fraud.
One problem with that is that it is hard to know what counts as fraud, and courts are constantly making new rules about what exactly is illegal in insider trading or bond-price-puffery or whatever. But another problem is that, once something does count as fraud, it counts the same as everything else. The securities-fraud statute doesn’t differentiate one kind of insider trading from another, but it also doesn't differentiate insider trading from Ponzi scheming, or spoofing from accounting fraud. The main practical differentiation is in the sentencing guidelines, and is based on dollar amounts: You go to prison longer if your fraud (or spoofing or insider trading or whatever) involved more dollars. But it seems to me that this is rarely the most important moral distinction; a reasonable legislature might decide that Ponzi schemes are worse than insider trading, and even that a smaller Ponzi is worse than a bigger insider trade. But it doesn’t. Practically all bad stuff with securities is lumped into a single statute, and nobody bothers to figure out which things are worse than the other things.
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