Law dean rationale for making insider trading legal would allow murder, theft & anything else bad people do

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.