May 12, 2011
The financial media has plenty of coverage of the guilty verdict in the trial of billionaire hedge fund operator Raj Rajaratnam. Apparently Rajaratnam's wealth was due at least in part to trading on tips he solicited (and paid for) from a network of associates willing to break the law for bags of cash.
Insider trading occurs when one transacts based on knowledge of material, nonpublic information. Some argue that insider trading should not be illegal. "Who is the victim?" they ask. Prosecutors have correctly portrayed as victims the sellers of shares bought by inside traders. After all, if the sellers also possessed that material nonpublic information, they might not sell or they might demand a higher price. It's true that unwitting sellers could be viewed as victims, but my thought is that the base of victims is much larger - it is every taxpayer.
Long-term saving is the best way to retire comfortably. And long-term returns from investments in the stock market have consistently beaten those from savings accounts and bank CDs. Yet millions of savers do not, will not, invest in stocks. When the elderly lack resources, they vote - and often demand more government largesse - for health care or whatever else. Had they invested wisely they might be better off and not need taxpayer support. But insider trading scandals (there have been many) tend to scare away investors who perceive the markets as rigged in favor of the crooks.
Society benefits from liquid markets and available capital. Insider trading reduces both of those things, and I commend the authorities who prosecute it aggressively.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).