Circle of Friends Read Free Page A

enforcement authorities will tell you that one of the reasons—and maybe the biggest reason—that they have approached insider trading with such zeal, particularly since the start of Perfect Hedge in 2007, is to make the investing world safe for the average investor.
    They will talk nonstop about the virtues of ridding the investing world of insider trading. To hear it from these folks, getting information that’s not available to the public through a high-level connection or by paying for it—the basic definition of insider trading—perverts the very essence of what a market is all about: a level playing field where everyone, regardless of wealth or status, has access to the same information from which they can make educated choices about buying and selling stocks.
    And they will tell you that the fundamental purpose of the laws governing the markets is to democratize those markets. They will point out, and rightly so, that the Securities and Exchange Commission, the main law enforcement agency in charge of monitoring Wall Street behavior, was created in the aftermath of the stock market crash of 1929, precisely to level the playing field between the sophisticated investor who buys stocks for a living and has the means to buy information not available to the average person, and that very same average Joe, who has a day job and is investing for retirement.
    The two main bodies of law from which most of the rules of investing are derived, the Securities Acts of 1933 and 1934, demand disclosure of information broadly and equally, meaning that the very act of trading on a piece of information that is obtained before it is formally disclosed to the general public is anathema to the notion of fairness that permeates these statutes.
    They will also tell you that when someone trades on an inside tip that isn’t available to the public, that trade is being made often on stolen or “misappropriated” information, and there are plenty of laws against theft.
    These are strong and convincing arguments, which is why insider trading rouses so much anger among average people. The notion that someone has an unfair advantage over someone else seems un-American; after all, our nation is built on fundamental ideas of equality and fairness (indeed, “that all men are created equal”).
    But step back and consider the following: Are markets really supposed to be democratic, and does having better information than the next guy really constitute a fraud that should send someone to jail for almost as long as someone who robs a bank?
    In the course of writing Circle of Friends it was not difficult to find at least a few academics (Duke law professor James Cox among them) who have concluded that it doesn’t constitute such a fraud, at least not to the extent that insider trading should be an obsession of federal law enforcement punishable by many years in jail. This obsession, I might add, has diverted resources from real and direct thefts, such as the Bernie Madoff Ponzi scheme, which regulators at the SEC all but ignored for years, until Madoff turned himself in in December 2008.
    Madoff’s activities cost actual investors real money—nearly $50 billion, depending on how much can be recouped by investigators. Lured by his promises of steady returns, people gave Madoff their life savings; charitable trusts handed him money to fund good causes. They were heartened by the fact that investigators at the SEC had done past inquiries into Madoff and found him to be clear—that is, until reality came calling. And in a flash all the money was gone, since Madoff stole it all right under the noses of investigators, who later conceded they were stretched too thin to conduct a thorough probe.
    As you will see in Circle of Friends , the SEC or the Justice Department never appears stretched too thin to eradicate insider trading. The question is, why? What is the real damage to individuals from David