The Saturday, October 24, 2009 issue of the Wall Street Journal’s “Weekend Journal” had a front page article, “Learning to Love Insider Trading” by one of my favorite bloggers. The author is Professor Donald J. Boudreaux, Professor of Economics at George Mason University. His blog, “Café Hayek” is on my daily reading list. More often than not I find agreement with his points of view. Not so with this article. In fact, were I the professor and this a student paper it would get no more than a “D” and even that only for penmanship.
In support of insider trading Prof. Don provides two examples. The first is the governmentally imposed gasoline price fixing and limitations on purchases. How this relates to insider trading is a mystery. Prof. Don writes that it shows the failure of price discovery as it relates to supply and demand. Of course it does. That was the explicit purpose. Governmentally imposed price and supply controls are political in nature not economic. They are imposed for political reasons; they are designed for political benefit and they are wholly divorced from economic purpose. This example fails the test of relevance.
The second example Prof. Don provides involves “unscrupulous management” that drives a company to the brink of bankruptcy but hides the financial facts from both the public and creditors alike. In this example Prof. Don uses actual, literal, criminal fraud to justify insider trading. This is even more mystifying than the price controls example. Knowingly using false information to obtain credit is criminal fraud. Hiding the actual financial condition of a publicly traded company from the shareholder owners also constitutes criminal fraud – at least in my mind it does. There simply is no link between these two non sequiturs and insider trading.
The only other justification the professor provides are quotes from two other economists, Henry Manne and Jeffrey Miron. The quote from Henry Manne is instructive in that Prof. Don explains it as saying, “… when insiders trade on their nonpublic, nonproprietary information …” which is interesting in itself on several counts. First, “insiders trade on their …” except that it isn’t “their” information it is the owners information. The insiders have no right to sell what isn’t theirs in the first place. Second, “nonpublic” is quite absurd since the whole issue is about nonpublic information. If the public knew the information there would be no insider trading taking place. Third “nonproprietary” information is the key to the whole issue. What possible information could be of value that isn’t proprietary? Near the end of the article the professor addresses, or feigns an attempt to address this issue but his examination is, to be polite, weak. By definition, if it is of value it must be proprietary.
Prof. Don’s quote from Jeffrey Miron, “In a world with no ban, small investors might fear to trade individual stocks and would face a greater incentive to diversify; that is also a good thing.” Right, illegally trading on stolen information that effectively robs small investors of prospective gains thereby forcing them to diversify is a good thing. Sigh. Apparently only insiders and large, presumably professional, traders have the right to profit from stolen information. Small traders should buy their mutual funds and shut up.
Trying to exculpate insider trading for its supposed beneficial economic effects is so wrong it’s bordering on the absurd. Seriously this is a “broken window” type of economic theory. It’s analogous to saying that having your car stolen is economically beneficial since you have to replace your car and that creates economic activity.
Trying to exculpate insider trading because of insider non-trading is equally absurd. Professor, insider buying and selling or not buying and not selling is public (or should be) information. You can read about it all the time. There are a number of web sites that provide such information such as, http://www.insidercow.com/ . MSN’s site gives small and large traders access to insider buy/sell information at http://moneycentral.msn.com/investor/invsub/insider/trans.asp . An investor can just type the ticker symbol for the data. When corporate insiders don’t sell shares – for whatever reason – this information is publicly available simply because they don’t sell! Claiming such non-activity as a prosecutorial bias and thereby justifying the insider trading is more non sequitur masquerading as reasoned thought.
In the end there is one issue that Prof. Don ignores that I find most troubling. I am a small business owner, the majority partner actually. Everything my partner and I provide in our business belongs to us. If an employee uses my computer for their personal email they do so at my convenience. As a courtesy I would periodically ask them to remove any personal items so that business functions can proceed uninhibited but it is my computer and I can do with it as I wish. We do not allow them to use our company vehicles for any personal reasons. They can’t use our tools or offices for private functions. Nor can they use our financial data or business plans for their own personal gain. In short what Professor Boudreaux ignores are the ownership rights of the shareholders. None of the insiders has unequivocal ownership rights to the information they are selling. At best they share ownership unless it is a private company and they are the sole owners. But in that case there is no public trading taking place. At bottom all insider trading robs information from the rightful owners for the personal gain of the employee insider.
Professor Boudreaux’s failure to protect the ownership rights of shareholders is a significant and substantive failure on the part of one who otherwise champions individual rights and freedoms.