Circle of Friends Read Free Page B

Slaine’s having that information, trading on it, and making a profit?
    Slaine never forced the person on the other side of the trade to buy or sell his stock. The person on the other side was going to buy or sell the same shares anyway, because the inside information available to Slaine and his circle of friends hadn’t been made public.
    They were in a sense “victims” of their own lousy investment decisions. The only difference is that David Slaine and his cohorts made money.
    Another question to consider: Do average investors really care? Viscerally most would say yes. Anything that gives an unfair advantage to one party over the other should be eradicated from the markets. This gut reaction has been interpreted for decades now by market regulators, and increasingly by federal prosecutors, to mean that the average investor would have less confidence in buying stocks and investing for retirement if they knew the game was rigged by well-connected players making a quick buck based on their exclusive access to market-moving information.
    But that doesn’t mean the market-confidence argument that regulators embrace holds up. Professor Cox, for one, says there’s little in the way of academic research to suggest that insider trading—which has existed as long as there’s been a stock market—actually makes people wary of putting their money into the markets.
    â€œThere’s little in terms of quantitative evidence to prove that investors care” about insider trading when making decisions about whether to buy stocks, Cox says. With that, Cox questions whether insider trading deserves more attention than other white-collar crimes. Higher on his list was mindless risk-taking that brought down the financial system in 2008, causing trillions of dollars in losses or the outright market manipulation where traders collude to push prices lower depending on their need, or Ponzi schemes of the Bernie Madoff variety, where people lost altogether tens of billions of dollars.
    Regulators would say they focus on these crimes as well, but the facts suggest otherwise. Not a single major financial executive faces jail time for crisis-related crimes. Bernie Madoff was caught, but only after he turned himself in and after regulators were warned of his activities. And yet the news of the day is the dramatic rise in cases of insider trading, a practice deemed by a vast and growing federal regulatory apparatus to be something on the scale of terrorism, when in reality it is not, at least when compared to other more damaging market-based frauds.
    Cox explains the difference this way: “When you look around you don’t see many bleeding bodies after insider trading takes place. You do see those bleeding bodies with Ponzi schemes and market manipulation in terms of people losing lots of money and never being able to recover that money.”
    This critical view, as I will show in Circle of Friends , isn’t widely accepted by the federal law enforcement bureaucracy (or most people in the media). People like David Chaves and his team at the FBI, not to mention the entire enforcement staff at the SEC, believe that trading on insider information is tantamount to robbing a bank because it is stolen information that is being used to help a privileged few to profit.
    And nothing good ever comes from stealing.
    Or does it? What makes markets function at their best is the free flow of information (related to what financial academics call the “Efficient Markets Theory).” One could argue that when David Slaine obtained information that was not public (and not his) and traded on it, he helped the public know something: The information is being used to price the stock. Most scholars as well as practitioners who study financial markets believe deeply that markets function best when stock prices (or the prices of bonds, commodities, derivatives, options, mortgages, currencies, interest rates, and the