By Marc Jampole
It seems as if the bad idea of the week always shows up on
the opinion pages of The Wall Street
Journal.
This week it’s the idea that insider trading of stocks
should be legal, proffered by Henry Manne, dean emeritus of the George Mason
University School of Law in an article titled “Busting Insider Trading: As Pointless as Prohibition.”
Mann’s reasoning is that as in the case of the prohibition of
drinking alcohol in effect in the United States from 1920-1934, the law against
insider trading doesn’t stop people from doing it. If people are still going to
do it, it might as well be legal.
By Manne’s reasoning, murder, theft, incest, rape and every
other crime might as well be legal, since people are still going to do it.
We all know, however, that if murder, theft or illegal
trading were legal, instead of just a few sociopaths doing it, a large number
of people would. I don’t think Manne would advocate making murder legal.
The difference between Prohibition and these crimes—and
insider trading—is the difference between “who cares” and “it’s wrong.” It’s
not wrong to drink alcohol and is never was except to snoopy moralists. Nor
does drinking alcohol hurt anyone except for the drinker, except when that
drinker does something stupid like drive or give it to minors, which are still
against the law.
But it is wrong and unethical to buy and sell stocks based
on information that the general public doesn’t have yet. It also hurts other
people, especially when the insider is selling a stock that’s about to go into
the tank. Near the end of his article, Manne makes the outrageous claim that
insider trading does no harm and can have significant social and economic
benefits. Of course he never says what
those benefits are. That’s because there are none. Insider trading has been
illegal since 1934 because it is unfair and it allows the insider to profit
unfairly. It is akin to getting an extra out in baseball or starting on third
base. I know that a lot of Wall Street insiders did start on third base and
think they hit a triple, but that sense of privilege often held by the moneyed —so
many of whom are the bankers and executives who obtain the most insider
information—should not and does not legally extend to special treatment as an
investor.
Manne hides the lunacy of his argument behind an extended
simile—the comparison of the FBI tracking bootleggers and other gangsters and
the efforts of Manhattan federal prosecutor Preet Bharara to go after insider
traders such as Stephen A. Cohen’s firm.
He spends a goodly number of words glorifying Elliott Ness, only to
point out that Ness’ gallant activities led nowhere, since prohibition was
repealed. His analogy is bogus not only because insider trading can’t be
compared to drinking alcohol, but because the focal point of the
comparison—Eliott Ness—didn’t really get much done. His reputation is mostly
manufactured by the “untouchable” television series and movies. In real life, he was pretty mediocre, although
he did help gather evidence that put gangster Al Capone away—on charges of tax
evasion!
I suppose there is some consistency in creating a false
comparison in which one of the objects under comparison is also false.
Whenever I see articles like this one, I wonder why a major
newspaper—and specifically the Wall
Street Journal—would publish them. I know that Manne has a big name in
legal circles as an emeritus dean and as a legal theoretician. His big idea—to
use economics to analyze legal problems—certainly fits into the Journal’s bailiwick. But a crackpot idea is a crackpot idea.
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