Stop the Insanity and Other Tales of Insider Trading

I've noticed a lot of chatter in the blogs and elsewhere to the effect that maybe we should think about legalizing insider trading, and a recent book (see below), while not going quite that far, suggests that efforts to prosecute insider trading were misguided and distracted from going after the real culprits of the financial crisis.

I'm always willing to listen to arguments for changes in the law, but thus far none has persuaded me.  The classic argument is that allowing it would expedite the flow of information into the marketplace, but I don't see that.  Rather, I can see lots of executives not only trading while in possession of insider trading but also finding reasons to delay disclosure of material information.  (I'm sort of assuming that the advocates of legalization would also do away with reports of insider transactions, but why would you care about them in the brave new world these advocates seem to envision?)  Another justification that recently reared its very ugly head is that despite all the laws and regulations prohibiting insider trading, it still continues.  On that theory, we should also think about legalizing murder and rape and goodness knows what else.  What am I missing?

The only justification that makes any sense to me is that legalization might actually scare off uninformed retail investors, who perhaps shouldn't be in the market in the first place.  If that's the case, however, shouldn't that problem be addressed by more robust disclosure and reminding people of the old line "caveat emptor?"

On the other hand, there's also increasing chatter about the horribles of so-called Rule 10b5-1 plans (or, for the technically persnickety among us, 10b5-1(c) plans).  The Wall Street Journal, presumably in an effort to persuade us that they don't only report the news the way the fat cats see it, has launched something of a campaign against these plans, with a series of articles implying that they are really thinly veiled mechanisms for facilitating insider trading.   Reacting to these articles, The Council of Institutional Investors, among others, has called for making them more restrictive.  So far, the SEC has not taken any action or indicated that it plans to do so.  

While I'm not a big fan of these plans (largely because of the perception problems they create), if they are structured properly and are accompanied by appropriate disclosure, they are generally all right.  And even the Journal has recently reported that companies are tightening up their plans to reduce the likelihood that they can be manipulated so as to get around insider trading concerns.  So my advice is let's leave them alone and get on to more important things.

Lamm's Literary Lyceum

I just finished reading Charles Gasparino's latest book, Circle of Friends.  Rather than go into a fresh rant, I'll just refer you to the review I posted yesterday on Amazon.com, which you can find here.