> Many people on Wall Street felt that Bharara’s crusade against insider trading was recklessly broad: An analyst like Horvath might knowingly obtain an illegal tip, but if he feeds his information up the chain to a Steinberg or a Cohen, and they take his word that he is not passing along stolen goods, should they really go to prison for that misplaced faith? Is it fair to convict someone of engaging in insider trading if he didn’t know he was doing so at the time?
This quote is interesting. I know that in some countries (including my own,) dealing in stolen goods is in fact illegal, regardless of whether or not you knew the goods were stolen in the first place. The onus lies on the buyer of the goods to remove doubts of where the goods came from, which often amounts to simply asking the reseller for a receipt. If you're given one which is bogus, you can claim ignorance and whoever you bought it from would be guilty of fraud as well as dealing in stolen goods.
Now, I don't know what the law says about dealing in stolen physical goods in the US, but if it's anything like the above then why should illegally obtained information be any different? Shouldn't it be reasonable then to ask whoever is dealing in this information to ask for a receipt, as it were?
In the US, most states have said that in a person to person sale, you are only committing a crime by buying stolen goods if you know the goods are stolen.
But, there are separate laws for commercial entities who deal in second hand goods (like pawn shops). They must do proper due diligence when buying goods or they will be held accountable if those goods turn out to be stolen.
I would assume that financial firms should also be under extra scrutiny in the same way. But alas, our phony government has made it clear whose side they are on.
Criminality has been dependent on internal mental state since the dawn of time. Like when you kill a person, it ranges from self defense to manslaughter to murder (and maybe terrorism now). That is not what "thought crime" means.
"Thought crime" is a poor description because it is not a thought being punished, but an action. You couldn't be punished just for thinking about stolen goods.
Analyzing intent is important to differentiate between people who have likely already learned from their mistake, and those who are likely to exploit others in the future. Punishment is only necessary in the latter case.
That's actually the only reasonable definition of crime in a perfect world. It's because we don't live in a perfect world that we must focus on acts instead of intentions.
It's been an important part of law for a long time, although there's a tendency to explicitly avoid it in legislative efforts in the US since the '60s and the advent of MPC (https://en.wikipedia.org/wiki/Model_Penal_Code)
Problem: Insider trading isn't about illegally obtained information. The SEC defines insider trading as:
> "Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security."
So if I hack into someone's server and steal a bunch of secret financial data, and use that to trade, then I am trading based on illegally obtained information, but I am not committing insider trading, because I have no fiduciary duty or relationship of trust and confidence.
Conversely, if I'm a director of a company being acquired, and I trade on my knowledge of the acquisition before it is announced, my knowledge was not illegally obtained, but I am violating a fiduciary duty to the company.
As a general rule (there are exceptions!) insider trading never involves illegally obtained information. It's either illegal information I wasn't meant to know, or it's information I was meant to know but wasn't meant to trade on.
(Note that the news recently broke of a Ukrainian hacking group that was stealing unreleased press releases and selling them to traders. Headlines almost universally called the group an "insider trading ring", but what they seem to have committed was wire fraud[1]. The SEC is gamely trying to pin some security fraud charges on them, because that's what the SEC does, but the plain text of the underlying law is against them, and that theory has yet to prevail in court.)
In the Dell/hedge fund case the New Yorker is talking about, it seems clear that the Dell analyst had a fiduciary duty to Dell, although he was never charged with insider trading, probably because he didn't trade. And the hedge fund guys clearly traded, but they didn't have a fiduciary duty to Dell. Nor could prosecutors point to some sort of exchange where the Dell guy swapped insider information with someone who then traded. If the information had been stolen, then it might still have been a crime (even if not insider trading). But apparently, it wasn't stolen.
In short: Insider trading is about trading in violating of a fiduciary duty or a relationship of trust and confidence. It's not about trading based on illegal information. This is true despite the fact that a lot of people sort of think it would make sense if it was otherwise.
Edit: A further point of clarification; insider trading law is written to protect a company from the misappropriation of their secrets by insiders for their own benefit. In the example being discussed, it's intended to protect Dell from being harmed by their investor relations guy (Rob Ray, in this case), and it clearly allows the prosecution of Ray if he used Dell's material nonpublic information for his own benefit. Except, in this case, there's no accusation or evidence that he did; he seems to have been trying to use Dell's information for Dell's benefit, and didn't benefit personally at all. That's actually legal. (Well, Dell actually has some rules on what they can let their investor relation's people share, but if those rules were violated then Dell or Ray would be in trouble, not the people they told, and it still wouldn't be insider trading.) But as far as insider trading law goes, the only real possible victim is Dell (it was their information), and the only real possible criminal was Ray, or maaaybe a close relative of Ray, a golf buddy, roomate, etc., or maybe someone who paid Ray to victimise Dell. But Bharara didn't go after Ray or anyone who knew Ray, and he didn't phrase the issue in terms of the damage done to Dell, and that was fundamentally at odds with how insider trading law works.
What Bharara seemed to want is a law that protects small investors from hedge fund traders, not a law that protected Dell from Ray. He's not obviously wrong to want such a law, but he was wrong to think one existed. In any case, keep in mind when discussing insider trading law as it currently stands: It will make ZERO sense unless you remember that it was written to protect Dell from people like Ray, rather than mutual funds from people like Steve Cohen. Even if Dell doesn't really need to be protected from their own investor relation's flaks, and mutual funds really need to be protected from Steve Cohen.
Sweden, and in the case of not knowing you were dealing with stolen goods but still found guilty it seems the worst case scenario is six months in prison. [1]
This wasn't always the case, but I can't quite remember when the law changed. It used to be that you could claim you bought the goods "in good faith" in which case you'd be free of liability unless there were other hard evidence to connect you with the crime – even if you bought that high-end watch off of some dude selling watches on the street out of a cardboard box.
These days however, it's much easier to convict someone (whether selling or buying) because of a clause that includes anyone who didn't know but had reason to believe the goods were stolen. It's easier for the prosecution to prove the latter, and probably gets rid of most "it fell off the back of truck" arguments. That high-end watch from that shady dude on the street would probably get you a fine these days. (Putting people in prison is costly, after all.)
No. If you bought a high end watch from a shady dude well below market price and without any papers, you could be found guilty of a crime (posession of stolen goods) before the law changed as well as after the law changed. Nothing has changed there.
However, if you bought a used watch at a reasonable price with some plausible documentation, this is where things has changed somewhat.
Before, if you had bought the watch in "good faith", i.e. there was no obvious reason for you to suspect it was stolen when you bought it, you were entitled to keep the watch even if it was later found out it was indeed stolen. Even if they later found the previous owner, he wasn't allowed to have it back. He had to go after the thief to get compensation (even if the thief is unknown).
That last thing is what changed. If they find out the watch is indeed stolen, you have to give it back to the previous owner, even if you bought it in "good faith". But you have not committed a crime, you will simply have to give back the goods to the right owner. Now it is you as a buyer that has to go after the thief for compensation (because he scammed you by selling stolen goods).
I am not a lawyer nor a German, but Wikipedia says that German law has no strictly liability [1], which would seem to imply that knowledge (or at least belief or a willful lack of knowledge) that the goods were stolen would be necessary to prosecute that crime. Is that wrong?
You are right in your assumption. § 259 requires intent. Usual interpretation is that the offender needs to know the fact that the good was somehow acquired illegally (but doesn't need to know any details). It's not enough to think of a possibility of such an action, they have to resign to the fact. (There are other obligatory characteristics that need to be fulfilled, but they are irrelevant to this discussion.)
Simply handling stolen goods is not a criminal offence in Germany.
Possessing stolen property on Wall Street only appears to be a crime if you "knowingly possesses stolen property, with intent to benefit himself or a person other than an owner thereof or to impede the recovery by an owner thereof." [0] This ruling makes the insider trading law more like the law dealing with stolen property.
But realistically if somebody tells me to buy or short X, I won't do that without asking why. How is it possible that the person does not realize they are being handed insider information?
If you pay someone to predict stock movements, and they come to you and say, "short Dell and do not ask me why," you would probably act on that information. After all, you're already employing them for their stock market expertise.
As a private citizen without an army of analysts, you would probably subject their claim to more scrutiny. It sounds like insider trading is only "legal" now if you own a hedge fund.
But if you're employing someone to predict stock movements, you presumably are paying them to provide you with advice that will result in profit rather than loss which would make the "why" somewhat implicit. As well, a major red-flag should be raised should anyone tell you "do not ask me why."
Insider trading is legal now if you are powerful and wealthy and not an appropriate candidate for some sort of selective enforcement of the laws, it seems.
If you own a sketchy hedge fund, major red flags could mean that no one else is either privy to or willing to act on that information, meaning that you will make even more money.
And with the new ruling, all you have to do to keep your actions strictly legal is follow that analyst's advice and not ask any probing follow-up questions.
I can imagine if your job is to predict stock movements and you are hired for those predictions (as a company, not as an employee), then I can imagine not wanting to hand out the analysis, as that could then be shopped to others. Without your reputation and/or analysis, someone reselling your predictions is less likely yo be successful.
That said, if you are employed by the company, the work and the product is all owned by them, so there's no reason not to provide all information when asked.
> Insider trading is legal now if you are powerful and wealthy and not an appropriate candidate for some sort of selective enforcement of the laws, it seems.
I think you can replace insider trading in that statement with just about any other criminal act and it's still mostly true, in most parts of the world.
You're paying an analyst to look at Dell. You know that they went to lunch with a Dell investor relations person yesterday. They tell you they think Dell are going to miss earnings this quarter.
None of that is illegal. Unless you're a micromanager you wouldn't ask why they think that - that's their job.
That's a core principle of the law of all those countries, similarly strictly applied. The issue here is not the proof, but the definition of guilt. If you know you are supposed to ask where something comes from, you are guilty if you don't.
It seems like some constituency likes the idea of legalizing insider trading so much that they grasp at a variety of straws in an effort to find some analogous place where it would be legal.
But these are very thin reeds.
"Suppose I have a business where I get stuff to sell on a 'don't ask, don't tell basis', that would be totally legal and no one would complain..." sure
"It's just information, information shouldn't be property"
--> Any employer has information they want private. If someone there was no overt law against spilling out one's employer's private information, it would certainly be a condition of employment. And intentionally doing anything that is - against your condition of employment and costs your employer millions of dollars, is going to wind in serious civil trouble. That state has decided to make this criminal also is entirely logical.
If a shop foreman takes money to shut down a factory for a day to benefit a revival, he would be guilty of theft without "shutting down a factory" being an otherwise criminal activity.
The fundamental thing is taking money from someone, which insider trading certainly does. Those who buy a stock on an insider get money - meaning those who sold the stock lose it.
What about a journalist publishing leaked information? In such a case, it is up to the company to stop leaks. People outside the company have no obligation to help them.
> Those who buy a stock on an insider get money - meaning those who sold the stock lose it.
This is definitely not true; those who buy a stock on inside information are buying from people who independently decided it was a good time to sell their stock. Those people are likely, in the counterfactual universe, to sell their stock anyway.
And while a shop foreman might be guilty of theft for shutting down a shop in response to a bribe (I find this a little unlikely, but won't express further opinion than that), the money which changes hands can't be relevant to that, since the theft would be from the factory owner or operator, while the money comes from a completely different source.
This definitely is true. If the other party had the same information they would have sold or bought at a different price point. (or maybe not at all+) That has to be because that's the attraction of insider trading, I know something that will cause you to misprice the trade in a way that benefits the insider trader.
+ Consider the person trading in insider information, namely that Cogswell's Cosmic Cogs has agreed to buy Spacely Space Sprockets at $12/share. Someone with stock in Spacely Space Sprockets would likely chose not to sell at the current market rate of $9.25/share if they knew that.
> If the other party had the same information they would have sold or bought at a different price point. (or maybe not at all+) That has to be because that's the attraction of insider trading
This doesn't follow at all. Trades happen all the time between people with the same information. Under your theory, that's impossible.
It's also not particularly relevant to the main point. The idea of banning insider trading isn't to reflect inside knowledge in the price instantly -- that would be accomplished by encouraging insider trading. The idea is to prevent people with inside knowledge from trading. People who sell to someone trading on inside knowledge get a little bit more money (due to higher demand) than they otherwise would have. They miss out on gains that the person with inside knowledge predicted, but that they also miss in the relevant counterfactual (when they sell to someone else with no inside knowledge).
A few end up selling when, in the world without the insider, they wouldn't have. Those people can't be identified and quite plausibly realize the same gain under either scenario, for example, if they have a standing order to sell at X price.
Look at what https://news.ycombinator.com/item?id=10488948 wrote. The laws against insider trading aren't there to protect one market participant from another, they are there to protect a company from its employees.
Stolen phone doesn't look different from a legit one, you need to actively verify its record. I doubt an insider tip can be honestly mistaken for a legit one.
Which makes the plausible deniability even weaker.
You might have a tip about a merger because a PI is watching a corporate parking lot. Just because something is a secret, doesn't mean an insider leak is the only way for it to be known.
This quote is interesting. I know that in some countries (including my own,) dealing in stolen goods is in fact illegal, regardless of whether or not you knew the goods were stolen in the first place. The onus lies on the buyer of the goods to remove doubts of where the goods came from, which often amounts to simply asking the reseller for a receipt. If you're given one which is bogus, you can claim ignorance and whoever you bought it from would be guilty of fraud as well as dealing in stolen goods.
Now, I don't know what the law says about dealing in stolen physical goods in the US, but if it's anything like the above then why should illegally obtained information be any different? Shouldn't it be reasonable then to ask whoever is dealing in this information to ask for a receipt, as it were?