May 07, 2007
Insider Trading is HOT!
Posted by Gordon Smith

Hafiz Naseem did the perp walk last week, and now a husband-and-wife team are expected to plead guilty later this week. This is just the beginning:

The Collottas were charged in March for their role in one of the biggest-insider trading cases to hit Wall Street in years. Federal prosecutors and the Securities and Exchange Commission charged 13 individuals, including the Collottas, with insider trading.

Apparently the feds are trying to make an example of some people, and they seem to have plenty of candidates (Bloomberg):

A study by Measuredmarkets Inc. in August showed that insiders may have traded illegally before 41 percent of the largest U.S. acquisitions the previous year. The review examined stocks in deals bigger than $1 billion.         

"As the merger market has heated up in the past year, we have seen an uptick in insider trading that has victimized major investment banks, harmed the average investor, and undermined public confidence," said U.S. Attorney Michael Garcia in New York.         

"We will move quickly against those who steal confidential information and trade on it," Garcia said.

If you want to stay on top of trading activity, you might try the Unusually High Option Volume website. (HT Paul Kedrosky)

The study of insider trading is an academic cottage industry, and a spate of enforcement actions will surely produce a new round of papers on the efficacy of insider trading prohibitions, many of which will conclude that enforcement is biased, ineffective, and/or counterproductive. In the end, however, the public seems unwilling even to entertain the notion that insider trading should be legalized.

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Comments (1)

1. Posted by Kristoffel on October 10, 2007 @ 4:39 | Permalink

Here is the abstract of an article (http://ssrn.com/abstract=1019425) on insider trading on negative information (selling) as opposed to insider trading on positive information:

"Twenty-first century's corporate scandals have put the traditional debate on insider trading in a new perspective. A small number of corporate law scholars have started to distinguish between insider trading on positive information and insider trading on negative information (or non-whistleblower information and whistleblower information, respectively). They essentially argue that cases like Enron would not have happened if insider trading were allowed. Insiders would have started to trade on bad news and thereby disclose information that was concealed. The fact that managers were able to keep negative information secret was due to a prohibition on insider trading which allowed them to agree not to trade on that information. Anyone who did could be reported to the SEC, thereby deterring the distribution of negative information through market mechanisms. The distinction between positive and negative information was long recognized by the Supreme Court of the United States, most prominently in Dirks v. SEC. The article seeks to consolidate the recent reinterpretations of this important case according to economic analysis. It argues that the law distinguishes between positive and negative information and highlights the efficiencies of this distinction. It furthermore shows how the production of information can be separated from the distribution of information, in order to avoid potential distortions."

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