How is it that we get a major insider trading scandal every two decades or so? The last big one, which ultimately ensnarled Michael Milken, the legendary junk bond king, happened in the late eighties. The current one, with
a mass of arrests yesterday, threatens the hedge fund industry.
It seems reasonable to assume from the intermittent decades of prosecution that this particular sort of financial larceny is quite a rare bird and when it rears its head the Feds pounce.
And yet, as reasonably, we know the trading of information, the imperative to have such market-moving information, has only grown more fundamental to the financial business since the Milken scandal. So, either:
A.) Traders, in the last two decades, have become more scrupulous in their behavior or more clever in their deceits. Or,
B.) Prosecutors haven’t been too interested in insider trading, which is actually quite a complicated crime to prove.
The first option is both true and not true. Since the late eighties, compliance has become a much more artful practice—lawyers have crafted ever-higher barricades behind which information is exchanged. At the same time, as technology has made more and more information more and more available, more and more
unavailable information was needed. The hedge fund business is, when you get down to it, all about a rarefied financial elite knowing more than the financial hoi polloi.
It's been hard to prosecute this, not only because lawyers got cleverer, but because it is hard to prosecute what everybody accepts—that is, it’s hard to prosecute reality. If you accept hedge funds, you accept insider trading. (There is a reasonable analysis that says that insider trading is not only an inevitable practice, but, from a market-regulation standpoint, a helpful one.) Part of the art of being a good prosecutor is knowing what the public wants you to prosecute.
Even now it is not at all clear that the public wants to bring down the entire hedge fund edifice (actually, the public might want to bring it down, but the political and financial powers remain ambivalent). The current prosecutions are against small fry figures and the amount of money at issue is negligible. (In terms of
hedge-funder Raj Rajaratnam, arrested last month, there are already issues about the nature of insider information and about the motives and veracity of the people who are supplying evidence against him.)
As hedge funders have tested the waters over many years, trying to figure out what they could get away with, prosecutors are now themselves testing the waters about what they can get away with prosecuting.
Insider trading is as much symbol as it is practice. Arguably, some version of insider trading, of knowing more than everybody else, is the singular way people get rich. When we feel in a tolerant mood toward the rich—that is, when we feel we, too, might get rich—we’re happy to turn a blind eye. When that mood changes, however, prosecutors take their cue.
More of Newser founder Michael Wolff's articles and commentary can be found at VanityFair.com, where he writes a regular column. He can be emailed at michael@newser.com. You can also follow him on Twitter: www.twitter.com/NewserColumns.
