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Source link: http://archive.mises.org/16962/is-insider-trading-really-a-crime/

Is Insider Trading Really a Crime?

May 16, 2011 by

The public generally loves the fall of a ruthless and greedy financial titan — this, of course, is what made Oliver Stone’s original Wall Street such a hit. But economists have argued for decades that the practice of “insider trading” can actually be beneficial. In a free society, there would be no such thing as laws against so-called insider trading.

FULL ARTICLE by Robert P. Murphy

{ 117 comments }

Tom DiLorenzo May 16, 2011 at 8:17 am

Critics of capitalism used to argue that, sure, there is an equilibrating process, but markets work much more slowly than the textbook models. In the meantime, diseequilibrium supposedly causes unemployment, “economic instability,” (and cancer, heart disease, measles, chickenpox, the heartbreak of psoraisis, etc., etc.).

The same kind of critic now criticizes capitalism because markets work TOO FAST, thanks to insider trading. It reminds me of a former student who worked for a software company and, like all software company employees, despised Bill Gates and Microsoft. Gates was a greedy pig, he said, because of all his billions. When I mentioned that Gates was planning on giving away almost all of his wealth to charity, the student said it was only a cynical ploy to enhance Microsoft’s corporate image. So a businessman can be condemned for both making money, and giving it away! (Please refrain from accusing me of being a defender of Gates and Microsoft and everything he and they have ever said and done, as seems to be the habit of some on this blog).

J. Murray May 16, 2011 at 9:12 am

“Now this type of activity . . . would probably be criminal even in a purely laissez-faire world.”

It really depends. If a board member of a major corporation violated his NDA and, say, gave some major information to me that led to a stock purchase before that news went public, why would I be the criminal? The only criminal is the individual giving away the information against the agreement, not those using the information as a result of obtaining it. Information isn’t the same thing as a tangible asset, so it’s not the same situation as being the recipient of a stolen PC. I can give back the PC, I can’t give back the knowledge, and that knowledge was in no way impared by any individual in the process. The information is still just as good for its intended use.

From the 14 counts convicted, none of them involved any kind of failure to uphold any kind of agreement on the part of Rajaratnam. Even if bribery is involved, Rajaratnam didn’t violate anything, the individuals that accepted the bribe and provided the information are those who are guilty of violating any agreements that are part of their position. All he’s guilty of is seeking information that was “was confidential, beyond the reach of research, and illegally traded on it.”

So? If there wasn’t a physical break in (hacking into a network or picking locks), what’s it matter? Who isn’t looking for information beyond “research”? It all still required a willing accomplice to do the law breaking, Rajaratnam (as far as I can see) didn’t use any force or fraud on that individual to obtain the information, considering most of his sources handed out information freely on more than one occasion.

Abhilash Nambiar May 16, 2011 at 4:34 pm

@J. Murray
I am curious. By your reasoning Rajat Gupta is guilty of violating some sort of confidentiality clause, but Rajaratnam is not for using it. I agree Rajat Gupta is guilty, but Rajaratnam is not necessarily blameless.

I can see how Rajaratnam is blameless in such instances where he did not encourage Rajat Gupta to break the law, but in cases where there was encouragement, he should share the blame right? Like in your bribery example, there is more happening benefiting from the misdeed of others. There is active encouragement to commit the said misdeed.

That is solicitation to commit a crime. I know the authorities did not look at the case in that way or investigate it from that angle, but if you do..see where I am coming from? What do you think?

Anthony May 16, 2011 at 9:24 pm

I am also curious about this…I think that we can all agree that hiring an assassin to kill someone violates the NAP, but does paying someone to violate a contract?

Daniel May 17, 2011 at 12:01 am

I’d say it’s a dick thing to do, that is, paying someone to breach, but you have no obligation to the holders of the contract, so the fault lies with the person breaching for money.

Rothbard has a good article on this

Abhilash Nambiar May 17, 2011 at 6:26 am

@Daniel
It is not a question of just obligation, it is a question of influence. You are influencing a person specifically towards committing a crime. You are making sure that a crime is being committed. Even from a libertarian perspective, criminal solicitation ought to be more than just ‘a dick thing to don’t you think?

C.J. May 18, 2011 at 8:54 am

If Rajaratnam had a fiduciary relationship with Gupta’s firm then trading on the information received from Gupta would be a crime. Paying Gupta or another board member for information would also be a crime (both as a breach of fiduciary duty and as tampering). If no fiduciary duty existed, Gupta’s firm could allege tampering against Rajaratnam for any bribe paid.

If no fiduciary relationship with Gupta’s firm exists, Rajaratnam would almost be obliged (to his other fiduciaries) to trade on the information for their profit, if he received the information legally. It wouldn’t be a crime not to, but you could envision a situation where his clients later learned that he had pertinent information prior to a major price move but failed to act on it–and they’d take their investment money elsewhere.

augusto May 16, 2011 at 9:18 am

“Now this type of activity — let alone the breaking and entering that Charlie Sheen’s character performed for Gordon Gekko in the movie Wall Street — would probably be criminal even in a purely laissez-faire world. Specifically, when the shareholders of a corporation appointed board members, they would presumably have standard confidentiality clauses in the contracts prohibiting this type of behavior.”

Is professor Murphy equating breach of contract with crime?

pravin May 16, 2011 at 9:20 am

so,why arent the information leakers going to jail? wtf.it seems more like indian origin preet bharara wanted to show his ruthlessness towards his subcontinental victim and earn the kudos of his “white masters”.fairly typical amongst minorities

J. Murray May 16, 2011 at 9:46 am

White masters? Half the insider trading came from another individual of Indian descent.

pravin May 16, 2011 at 11:14 pm

i understand that.just saying that bharara would go up in indian american esteem if he really socked it to the brown guy.and proved his americanness.

Abhilash Nambiar May 17, 2011 at 6:23 am

I do not think that is what is happening here. As far as insider trading laws are concerned, this is an open and shut case. You can judge the law itself, you can judge the way the evidence is obtained, but there is no question of what happened. It is textbook insider trading.

Abhilash Nambiar May 16, 2011 at 2:05 pm

@pravin
The information leaker is Rajat Gupta. He might as well go to jail now that Raj Rajaratnam has no hope of clearing himself off the charge. The best he can hope for is to get off on a technicality.

BoombeeShark May 16, 2011 at 9:44 am

Except… removing insider trading laws would reduce confidence in a “fair” system and many investors will look elsewhere. I have no doubt the effect would be immediate, but maybe not prolonged.

Good question for a poll, but still not sure it would be easy to determine the effect beforehand.

Someone WhoeUnderstandsMarkets May 16, 2011 at 9:54 am

Wow! The amount of misapplied logic in this post is staggering: For example, 1. Enforcing a fair market is hard, so let’s not try, 2. Forbidding people to commit a crime somehow impinges upon free speech, 3. There are indeed losers due to the crime, but they just thinks they don’t count for some reason, 4. If you don’t allow Wall St. firms to commit the crime, they won’t be able to make money.

I hope you buy a used car that’s a lemon and you can tell me how the Lemon Law shouldn’t exist. Fair markets are made when everyone has access to the same information. THAT IS THE DEFINITION OF A FAIR AND WELL FUNCTIONING MARKET!

If you are going to allow insider trades, how about this: Stop anonymous trading. If I know who is on the other side of the trade, maybe I can charge a better price – since I’ll know if that person is likely to have inside information. Ridiculous isn’t it?

Honestly, your post was embarrassing.

J. Murray May 16, 2011 at 10:26 am

1. Define fair.
2. The problem here is that a non-violent, non-fraudulent act is defined as a crime.
3. Who exactly are these losers? What did they lose? Can you identify them each individually and quantify what they lost?
4. See #2

Someone WhoUnderstandsMarkets May 16, 2011 at 12:30 pm

This really isn’t rocket science, it isn’t even based on normative values. The fact that there is any ambiguity over whether this crime is wrong just shows the level of intellectual maturity with which we are dealing.

Whether the crime is non-violent or non-fraudulent has no bearing on the matter. You sound like an argumentative teenager. Define fair? Come on. Read some philosophy of ethics.

For clarity, the losers are the are the people who entered into a trade who did not have the privilege to know the true value of the security at the moment of the transaction. (Duh!) The amount lost is equal to at least the ill-gotten profits gained by the criminal. (Duh!) On a larger scale, you can also add the long-term effect of widened bid/ask spreads when the market no longer functions efficiently.

Once again, the sophist reasoning is so embarrassing to read. Any reasonable unbiased intelligent person can see through this crap.

Before any other person tries to support this ludicrous proposition, would you mind citing a well-respected credentialed economist who shares this view?

J. Murray May 16, 2011 at 12:51 pm

You must be a politician, you said so much and still dodged all the questions.

Define fair for me, don’t try and delegate it off to some philosopher or generic concept. Define the victim, give me the names and the objective losses that this person was a “criminal” against.

The reason I’m asking this of you is because your response to the situation is contradictory. If markets run most effectively if everyone has equal access to information, do you support banning Barron’s for instance because they have premium services to offer information that not everyone has access to? Or creating a public organization whose entire function is to gather and disseminate data on every single market function for the express purpose of providing it to individuals to make stock market decisions? Information also doesn’t disseminate instantly, do you propose also bringing people up on criminal charges because they live on the East Coast and are awake to see the 7 am news announcement while people in Hawaii are still asleep and can’t act on it? Why not ban any market decisions based on information for a full 24 hours from the announcement? It’s not fair that some guy’s timezone gives them a huge advantage in investing.

You have everything backwards. Markets collapse when everyone has access to the exact same information. If everyone knows that ACME Inc is the hot company to buy, what idiot would sell? Markets don’t work without uneven and “unfair” conditions. Frankly, nothing can function if everything is perfectly equal and even. Who would watch a football game if the better players were loaded down with weights to ensure that every game ended in a tie?

The fact is that Rajaratnam stole nothing, he didn’t engage in any fraudulent activity (if you think he did, tell me what agreement he broke, with whom, and produce the evidence of a contract agreeing to not performing that action), didn’t physically harm anyone, he used information that others didn’t have. This isn’t justification to confiscate the man’s asset base, giving it to the State of all organizations, and throwing him in prison.

And this nonsense is far more complex than rocket science. At least in rocket science consistency is king. There’s nothing consistent about insider trading laws. Even the greatest physicist couldn’t figure out what the “Justice” Department may do next week, mainly because it’s arbitrary and not a single one of them can define fair and unfair information on any objective level that stands up to basic scrutiny, especially considering the existing defnition is impossible as not everyone has access to everything that goes on (no one has access to everything for that matter), yet not everyone ends up in prison for making market moves. By that standard, anyone who buys a stock on anything but randomly throwing a dart at a paper should be imprisoned.

Someone WhoUnderstandsMarkets May 16, 2011 at 1:02 pm

By the way, I am a Wharton grad who is embarrassed by Rajaratnam’s actions.

I can’t reason with someone who obviously possesses no knowledge of how markets work.

Since you have no business training, I will offer this one piece of sage learning: Stocks have value only because they pay dividends. If everyone had the same information, everyone could charge a fair price. What is so hard about this concept?

J. Murray May 16, 2011 at 1:11 pm

Stirring argument.

Nice use of the edit function there, no longer a nincompoop am I?

But you went and put in an appeal to authority instead, you’d think Wharton would teach logical fallacies. And teach that few stock these days pay dividends and is reliant on other forms of valuations like future profitability. Google has never paid a dividend yet they have a massive market cap.

At the end of the day, I know that a vernier thruster operates exactly the same way today as it will 10,000 years from now (to use your rocket science analogy). The concept of “market fairness” will change entirely depending on who the SEC hires, who gets elected to Congress, and who gets put into the office of the President. This is not a valid basis to make a law around it and put people into expensive prisons.

Horst Muhlmann May 16, 2011 at 1:46 pm

By the way, I am a Wharton grad

So was Wilson Goode.

augusto May 16, 2011 at 2:00 pm

“By the way, I am a Wharton grad who is embarrassed by Rajaratnam’s actions.”

You should be embarrassed, but probably not for that reason…

“Stocks have value only because they pay dividends. If everyone had the same information, everyone could charge a fair price. What is so hard about this concept?”

You should tell that to the morons who keep trading Berkshire Hathaway stocks.

El Tonno May 16, 2011 at 4:18 pm

“Stocks have value only because they pay dividends.”

You are trading, you say?

Sione May 16, 2011 at 11:46 pm

Well, well, well Mr Wharton grad, here is something interesting for you.

In Maori language “wh” is pronounced as “f”. That means your silly ol’ school house would be referred to as “farton” or if pronounced more deliberately, “fart on”- kinda like what you’ve been doing, farting on and on, surrounded by a warm, malodourous scent of bowels for brains.

What a stunning display of misunderstanding of markets you’ve provided. Oh well. When you mature a little and life knocks a some of that smell out of your hide, then you’ll likely look back at the naif grad you are today with more than a little embarassement.

Hurry! Grow up weenie!

Sione

molecule May 28, 2011 at 11:56 pm

Most company announcements are made after hours when markets are closed. Or, the stock is halted until the news release is disseminated. It gives everyone who cares the time to digest it. And that’s as it should be, “fair”. Fair, as in treated fairly, all traders can start trading with the same public info. If you don’t know what fair is, imagine a team reality show where one team gets more clues to solve the puzzle/problem. Same difference.

Abhilash Nambiar May 29, 2011 at 7:41 am

@molecule
Ok. Let me try to make a case by appealing to your sense of fairness. The person with the insider information took some effort to obtain it (let us assume that the efforts where legal). Would it then be fair that he benefits from that information first? The price of the shares will reflect the value of the information he obtains. The market can adjust to the new information quicker, making it more efficient.

Matthew Swaringen May 16, 2011 at 1:09 pm

“For clarity, the losers are the are the people who entered into a trade who did not have the privilege to know the true value of the security at the moment of the transaction.” – There is no such thing as “true value”, because the value of a security just like anything else bought or sold is subjective.

As for the notion of profiting from a lower price due to lower valuations than might otherwise exist in an alternate universe
1) we have no reasonable method by which to peek into this alternate universe and determine what really happened there
2) people will profit or lose based on their varying interpretations of material. There are different levels of intellect and vastly different analytical skills between different traders.

Your argument establishes a problem only with having knowledge that others don’t have but can provide no refutation of other variations that aren’t “fair.”

Earlier you said that “enforcing a fair market is hard, so lets not try” sarcastically, but in reality enforcing a fair market is completely impossible. It cannot be done.

What you really want is for investment not to be a speculative proposition and for everyone to benefit equally from the rises in the market, but the market wouldn’t be going up as a whole without inflation (of the money supply).

Someone WhoUnderstandsMarkets May 16, 2011 at 1:25 pm

J. Murray:
“Nice use of the edit function there, no longer a nincompoop am I?”

It is precisely due to this statement that I am now convinced that you are indeed a nincompoop:

“But you went and put in an appeal to authority instead, you’d think Wharton would teach logical fallacies. And teach that few stock these days pay dividends and is reliant on other forms of valuations like future profitability. Google has never paid a dividend yet they have a massive market cap.”

Please tell me where you acquired you knowledge of finance? THIS IS FINANCE 101!!! You could learn this from any finance book.

I PRAY that I am on the other side of a trade with you people.

J. Murray May 16, 2011 at 1:47 pm

I’m aware of what the finance book says, I took that class and many more, too. P = A/(1 + r)n (assuming returns are not reinvested to get the theoretical price level as defined by finance calculations) where A is the expected dividend and r is the hypothetical desired rate of return by the market, simplified into P=A/r since it’s an indefinite future return, thus making any period adjustments a pointless exercise as anything past period 30 returns a number near 0.

Here’s Google’s income statement:

http://www.google.com/finance?q=NASDAQ:GOOG&fstype=ii

By your Finance 101 calculation, Google’s present value, thus stock value, should be $0.00 because you’ll notice the line that says “Dividends per Share – Common Stock Primary Issue” is $0. Yet it is trading (as of this immediate second) at $520.67 with a market cap of $167 billion. The market managed to find this price level despite the total lack of any dividend to plug into your Fin101 formula.

And here’s the cash flow statement saying the same thing:

http://www.google.com/finance?q=NASDAQ:GOOG&fstype=ii

Total Cash Dividends Paid – $0

This is the same for companies like Microsoft (hasn’t paid a dividend in years), Apple, and many other companies you can pull up a financial statement for.

Fin101 is an introductary course designed to give you the most basic foundations before jumping off into the more complex world of financial management. Those formulas that we’re browbeaten to memorize have zero functional use out in the business world. It’s merely a sliver of what goes into the decision process of how a company stock is valued, and this is an assumption as there’s little correlation between dividend payments and stock price. For example, GE is valued at $19.85 and paid out a dividend last year of $0.46, leading you to believe that the market at large is only expecting a 2.3% return. But if you use Siemens AG, the market is now at 1.8%. Nokia reflects a discount of 6.6%.

CT May 16, 2011 at 2:36 pm

I hate to enter the debate like this, J. Murray, since I agree with everything else you are saying, but your condescending opponent is correct regarding one thing: the value of a stock is the discounted future dividends. I doesn’t matter that a company has never paid a dividend – investors assume that one day it will. I doesn’t matter that dividend payments are badly correlated with stock price performance. When a company reinvests its cash flows, that creates higher growth in dividends in the future – which investors pay for. It would franky be impossible to correlate stock prices with what investors think future dividends will be.

And you’re using the wrong formula: the value of a stock is d0(1+g)/(k-g). G being growth. G is derived as such: ROE*(1-div yield). So even if a stock pays little to no dividends, a high growth rate will give it a high valuation. If a stock pays $0, investors will assume dividends some time in the future. And yes, investors do use many other ways of valuing stocks (P/E, EV/EBITDA, etc.), but all these methodologies are based on the assumption that one day these cash flows (or earnings if you like) will one day generate dividends.

CT May 16, 2011 at 3:16 pm

And really this makes sense from an Austrian point of view. Who would abstain from present consumption, buy a stock, and never receive the means for partaking in future consumption? Oh … and Microsoft does pay a dividend.

J. Murray May 16, 2011 at 3:19 pm

Thanks for the correction on that. I used the bond valuation formula by accident since that’s typically what I buy for investments because they’re a bit more predictable with the cash flows. I’ve shied away from using all those finance models since I’ve later discovered that they never accurately predict anything, with exception for the various NPV and cash flow formulas, they’re slightly useful for deciding what project to take on limited funds. Still, that’s mostly a textbook answer. Most investors are aware that companies that don’t pay dividends have a long-standing policy to not pay out dividends at all and rely on market fluctuations and future buyers for gains.

And wow, I notice when MSFT started putting out dividend payments. I remember there being a big deal some years back when they did that huge payment but didn’t see them making it a regular thing. Not that $0.52/year on a $25 share is anything to get excited over.

CT May 16, 2011 at 3:43 pm

“Still, that’s mostly a textbook answer. Most investors are aware that companies that don’t pay dividends have a long-standing policy to not pay out dividends at all and rely on market fluctuations and future buyers for gains.”

Of course. But if the returns of a company on their projects is higher than the investor’s cost of equity, then investors will be happy with no dividends. As soon as, however, the returns are lower than cost of equity, investors will begin to demand a dividend because they figure they can get a better return elsewhere. No company has a higher return than its cost forever. Apple will pay a dividend one day or see its stock price fall. My personal opinion with Microsoft is that the dividend is not high enough. They are reinvesting in low return projects which do not cover the cost of capital – hence the stagnant stock price.

Btw, investing in corporate bonds requires the same subjective evaluations as investing in stocks – except there’s less risk associated with bonds.

J. Murray May 16, 2011 at 3:58 pm

True, there’s always risk (if there was no risk, the return would be effectively 0), it’s mainly I don’t like working with a large volume of unknown variables. The engineers and mathematicians here are rubbing off on me in that regard. The decisions of other market actors has a far smaller impact on me when it comes to bonds than stock market transactions. Stock can easily be captured by fad investing by individual buyers and create some wild distortions (Dot.Com) that I think are much less likely to hit the bond market since bonds don’t have that prestige about them. With such a large potential pool of buyers and sellers, all of whom have different expectations of what the future dividend will be and what the growth rate is, plus people who buy and sell without even thinking about the dividend (think individual buyers going through eTrade), I just don’t have the time or desire to engage in that level of research. I’m not making my living off this, after all, and bonds and loans are much more pertinent to what I do since it’s not every day a company sells new stock to generate capital, the expected returns are way too high compared to leveraged financing (for the most part, too much leverage makes it expensive either way). Bonds and loans are my thing.

Still, I like the fact that the biggest worry I have after determining my actual rate of return by a simple dividing the coupon by the market price with the adjustment to par at the back end, looking at the company to see if they can generate the cash flow to pay that off through maturity (basically the biggest risk in the whole transaction – unless it’s an automobile company, then there’s that government confiscation risk), and deciding if I can live with that. I’ll also play around with convertible bonds as a secondary means of gaining a return, sometimes its better to convert and immediately sell to reinvest back into the bond market than to sit on it.

CT May 16, 2011 at 4:23 pm

“I’m not making my living off this”

I am ;) I help manage institutional money in Canada. I used to be a stock picker only. Now I stock pick but time the cycles with ABCT …

J. Murray May 16, 2011 at 6:35 pm

I bet using ABCT has helped out tremendously.

Sione May 16, 2011 at 11:59 pm

“I PRAY that I am on the other side of a trade with you people.”

Funny how clowns like fart-on grad require their successes be defined by someone else failing. Interesting sort of mind to operate like that…

Sione

Gene Callahan May 17, 2011 at 4:53 pm

“2. The problem here is that a non-violent, non-fraudulent act is defined as a crime.”

So what? Driving on the right side of the road is a criminal act as well, even though it’s not fraudulent and not violent so long as the driver keeps dodging other cars. Do you consider it a “problem” that we have a law about what side of the road to drive on?

Having a picnic on someone else lawn is neither violent nor fraudulent. Are laws against trespassing also a “problem”?

Inquisitor May 20, 2011 at 9:51 am

“Do you consider it a “problem” that we have a law about what side of the road to drive on?

Are you kidding?

Jesus, how the mighty fall…

It is a “problem”, yes.

“Having a picnic on someone else lawn is neither violent nor fraudulent. Are laws against trespassing also a “problem”?”

Are you nitpicking for the sake of it? How intellectually immature.

BioTube May 16, 2011 at 11:28 am

Selling a lemon as a car in good condition is kinda fraud.

Someone WhoUnderstandsMarkets May 16, 2011 at 2:45 pm

Do you want to wager that Google never ever pays a dividend? I’ll take the other side of that bet. Come on. After you read the Wikipedia finance article, perhaps you could move on to textbooks.

Any stock that declares that it will NEVER pay a dividend MUST be worthless. This is just logic. Think it through. I can’t be bothered teaching you rudimentary finance.

What school did you go to? Please let me know so I can make sure my daughter doesn’t apply there.

Daniel May 16, 2011 at 3:36 pm

You’re funny because all you have are appeals to authority XD

Dave Albin May 16, 2011 at 4:44 pm

Not true – any stock that holds its value for a long time has value, too (it is not worthless, as you say, if it never pays a dividend). Just have to pick the right ones.

Joe M May 16, 2011 at 10:13 pm

Somehow I have a feeling that your daughter doesn’t have a chance and that you have already planned out her life.

Stephan Kinsella May 16, 2011 at 10:41 am

For some more libertarian take on insider trading, see:

McGee, Robert W. and Walter Block. 2007. “An Ethical Look at Insider Trading” Insider Trading: Perspectives and Cases. Jayshree Bose, ed. Hyderabad, India: The ICFAI University Press
McGee, Robert W. and Walter Block, Information, Privilege, Opportunity, and Insider Trading Northern Illinois University Law Review, December 1989, Vol. 10, No. 1, pp. 1-35

Chris Cresci May 16, 2011 at 11:51 am

I think that you cannot confuse asynchronous information between buyer and seller with asynchronous information in an exchange setting. The idea that certain people have access to information that others do not is also patently false. The fact remains that disclosures to the public are much cheaper due to the number of people who possess it or can obtain it. Insider trading laws simply stop flows of information to those for whom it is the most profitable while simultaneously exculpating firms who employ people who put their own interests ahead of their clients. It would be much better to have insider trading be legal as it would force firms to maintain their own reputations and spend their own money as opposed to having the taxpayer as a very ineffective backstop. Such a system would also ensure that the present system of unconstitutional disclosures and the government persecution of American citizens by the SEC is stopped and a healthy distrust of the financial sector returns.

Walt D. May 16, 2011 at 12:41 pm

Commodity Futures Exchanges have no rules against insider trading. There are “insiders” or hedgers and speculators. Does this mean commodity markets are unfair?
In the Martha Stewart case, she was not convicted of insider trading – she was not an insider. However, the feds got her on trumped up charges of obstruction of justice by lying to a federal investigator. What was most egregious in this case was the judge would not allow the defense to tell the jury that she was not guilty of insider trading, on the grounds that this would influence the jury. In the end, many of the jury voted to convict her because the thought she was guilty of insider trading.
The same for Michael Milken. Ask anyone who remembers why Michael Milken went to jail. Most people will say insider trading. (Actually he was convicted of selling unregistered securities (to sophisticated investors) in the secondary market, and aiding and abetting tax fraud).
Incidentally, when it comes to trading stocks based on insider information, you need look no further than the stock portfolios of US senators – they outperformed the S&P500 by a huge amount. I wonder why?

Someone WhoUnderstandsMarkets May 16, 2011 at 1:17 pm

You need to brush up on your security regulations. Front Running, one form of insider trading, is illegal for commodities, too. Many of the illegal activities that apply to equities have no analogy with commodities and therefore the corresponding rules do not exist.

And take note: SEC rules do not apply only to particular exchanges. They apply to all registered securities.

PERHAPS YOU PEOPLE NEED TO GO TO BUSINESS SCHOOL.

El Tonno May 16, 2011 at 4:26 pm

Maybe you should stop using circular arguments.

Dave Albin May 16, 2011 at 4:50 pm

It’s illegal if caught. No one from the US Senate goes to jail (Walt D’s post above yours). Most traders don’t go to jail. Guess they’re mostly clean…. Hahaha

Walt D. May 16, 2011 at 5:39 pm

“Front Running, one form of insider trading, is illegal for commodities, too.”
Front running, or trading in front of your clients, only applies to commodity firms who are trading clients accounts for commission (FCM’s).
There is nothing wrong with Hormel trading pork belly futures even though have access to information that is not public.
Contrast this with Overstock. They are approached by various retail outlets to bid on surplus inventory. They have advanced knowledge of adverse effects that could affect the financial condition of the companies they do business with. Acting on this information would be considered to be inside information. (BTW “Insider Trading” tends to be a Humpty Dumpty or Judge Potter Stewart definition for the SEC).
Commodities are regulated by another Federal Agency, the Commodity Futures Trading Commission (CFTC). The SEC does have some jurisdiction on commodity contracts where the underlying commodity is a basket of securities, for instance S&P 500 – this is done to halt trading when trading is halted on the NYSE.

Someone WhoUnderstandsMarkets May 17, 2011 at 12:25 pm

I see your point in this case, but the primary difference with commodities is that they are the underlying asset with which the producers are long by definition. Companies are not long their own stock, which represents the ownership of the company rather than the product of the company. So, another way to look at insider commodity trading is to call it “hedging”, an activity deemed perfectly legitimate and in fact was the impetus for the existence of future/forward contracts. Do I think this could be unfair? Yes. I am sure it is abused every day. Why are there no similar “Commodities Insider Trading” rules similar to the those found in the Securities Exchange Act? Well, my understanding is that there is similar, weaker, language found in the Commodity Exchange Act, but I admit that I am much less familiar with that act than the Securities Acts. I suppose the situation is grounded in the fact that commodity trading stems from hedging and there is no stare decisis by the courts to enforce a decision prohibiting the action as is found in the equity markets. Why is nobody complaining? I think many people are. Until something egregiously newsworthy happens and the lawmakers draft their knee-jerk legislation, the market is likely to function unmolested.

And I agree with you regarding your points regarding the misapplication of Insider Trading rules, but this speaks more to the inefficiency of the judicial system as opposed to the intended regulation.

Walt D. May 17, 2011 at 2:45 pm

“the primary difference with commodities is that they are the underlying asset with which the producers are long by definition.”
This depends on the business. Producers are normally short – they are looking to lock in the price at which they sell their product at some time in the future. Southwest Airlines is probably long oil – they are probably looking to hedge against high fuel prices. Sellers usually determine the open interest. This is why statements like “speculators are driving up prices on the commodity exchanges” are stupid. (Even more stupid on exchanges such as ICE where you can not settle by delivering or receiving the underlying commodity.)

Dick Fox May 16, 2011 at 12:54 pm

Laws against insider trading allow companies to defraud. Enron became a greater fraud because the insiders could not talk. Insider trading laws are actually fraud protection laws.

Someone WhoUnderstandsMarkets May 16, 2011 at 1:09 pm

What are you people talking about???!!!! OH MY GOD!

Matthew Swaringen May 16, 2011 at 1:12 pm

With a little logic you might understand his position. How about you try to understand what he’s saying based on what Murphy has written, and then rather than going back to your attempts to appeal to authority of “credentialed economists” why not actually make a coherent logical argument why this is wrong. Good luck.

Someone WhoUnderstandsMarkets May 16, 2011 at 1:18 pm

Yes. Let me listen to some bloggers opinions.

Have fun voting for Sarah Palin for President. She must be your hero.

J. Murray May 16, 2011 at 1:21 pm

Logical fallacy – Ad hominem

Someone WhoUnderstandsMarkets May 16, 2011 at 1:31 pm

Yes, I have to resort to ad hominen when someone purports that somehow Enron was exacerbated due to SEC rules. And that was probably the highest quality supporting comment on this board today.

I truly wish you people had some knowledge on this subject. But you don’t. I am probably a bigger proponent of free markets than anyone on this board, but even I have to admit that allowing insider trading is absolutely ludicrous. Even Freedman would concede this. Oh, wait. He did.

J. Murray May 16, 2011 at 2:00 pm

Sarah Palin was connected to Enron? That’s a news story.

Enron was legitimate fraud. Selling stock in a special purpose entity for the express purpose of bankrupting it through accounting tricks is fraud. Getting information from a member of the board of directors about a new development is not.

Richie May 16, 2011 at 2:24 pm

Freedman who?

Vanmind May 25, 2011 at 11:39 am

“I am probably a bigger proponent of free markets than anyone on this board”

HAHAHAHAHA! This coming from someone who’s entire argument has been about the “necessity” of laws & regulations and how Freedman [sic] was something other than a monetarist stooge.

Dan May 16, 2011 at 1:56 pm

Statist Troll ^^^^ = Ignore

augusto May 16, 2011 at 2:04 pm

It is now pretty obvious that you’re a newcomer to this site – you won’t find many supporters of Palin around here.

Someone WhoUnderstandsMarkets May 16, 2011 at 2:51 pm

Yes. And I didn’t find any sensible libertarians either. You people are too far entrenched in your ideology for common sense.

I am not sure what a statist troll is, but I don’t think I posted any statistics of any kind. Fundamental finance facts, yes. But “statist” is not a word that English speakers use – to my knowledge. And facts seem to irritate most of the people on this libertarian circle jerk.

Richie May 16, 2011 at 2:55 pm
Drigan May 16, 2011 at 3:44 pm

lol! I have trouble believing that someone would post on this site without understanding what a statist is! Amazing! Soon we’ll have people showing up who don’t know what Keynesians and Socialists are.

nate-m May 16, 2011 at 3:53 pm

Yes. And I didn’t find any sensible libertarians either. You people are too far entrenched in your ideology for common sense.

You have so little clue that you accused hardcore libertarians of being a Palin supporter. The amount of ignorance about anything to do with this site this illustrates is mind boggling.

You should learn to open your eyes and learn to listen before you open your mouth. That way you avoid looking like a idiot arguing about things that are way over his head.

as far as the answer to your original question:

What are you people talking about???!!!! OH MY GOD!

What the poster was talking about… which everybody else here understand (whether or not they agree with it)… which you have brashly declared in the above statement that you haven’t the smallest understanding… is that if insider trading was not illegal then the ability for Enron to defraud it’s investors would of probably been massively reduced.

That is: People that are doing something as critical as investing their retirements (or for other important purpose) in other companies would be free to carry out their own investigations and research about a company, query people working at the company, and take advantage of other resources to determine if the the balance sheets Enron was purporting as accurate was really reflecting reality.

Right now that sort of thing is illegal. Your not allowed to do this. If you got caught you would be charged with insider trading. This is why companies like Enron can put of facade of legitimacy and have a much easier time falsifying records.

Dan May 16, 2011 at 4:37 pm

Someone WhoUnderstandsMarkets:

“I am not sure what a statist troll is…”

Someone above was gracious enough to provide you with a link to what this term means. However, considering the nature of your posts I think these links would be more appropriate to someone of your intellectual stature.

http://en.wikipedia.org/wiki/Idiot
http://en.wikipedia.org/wiki/Ignorance

El Tonno May 16, 2011 at 4:56 pm

Maybe he’s fresh in from

http://www.alternet.org/news/150904/7_ways_hedge_funds_lie,_cheat_and_steal

It’s from some alternate bizarro world where you are forced to invest in criminal hedge funds or something and only agents in blue can save us.

Walt D. May 17, 2011 at 3:33 pm

Do you have Sarah Palin mixed up with Martha Stewart?

Gene Callahan May 17, 2011 at 5:11 pm

Are you people aware that an appeal to authority is only a fallacy when the “authority” in question is not really an authority on the topic being addressed? (Meaning Someone is on quite sound footing citing the authorities he does, and the people who keep criticising him for this have no idea what they are talking about.)

Chris Cresci May 16, 2011 at 4:35 pm

Actually, Enron was perfectly legal. It was unethical, but it was a strict “letter of the law” interpretation of the existing accounting laws at the time. The SIVs were held by “friends of enron” and were legitimate entities even though the same people held all of the individual SIVs. The problem was with the law and not with Enron. If Enron took advantage of the existing laws is that the problem of Enron?

Walt D. May 16, 2011 at 5:51 pm

In Enron the fraud occurred after the business had already failed. The fraud was instituted to try and conceal this fact, “until the market recovered and the business model became viable again”.
Idiots, who bring up Enron, look the other way when the same type of fraud is perpetrated by the Fed or some other government agency. This is what is happening with the “too big to fail banks”. Without fraud, QE2 could not have been enacted. Lying and misrepresentation are an integral part of quantitative easing. (Only lying to Congress about steroid use in baseball appears to draw any attention).

jim burgess May 16, 2011 at 1:25 pm

I think what is missing from this article is that anyone investing in firms which are publicly traded should have equal access to information about the company. In this article, it only talks about the “GOOD” of insider trading, but there is an equally “BAD” side as well. When a company is failing, insider trading can allow for people to sell off their failing companies stock while the company drags down investors who aren’t privy to such info. So, there is a loosing side as well!! If we invest in companies, it has to be that the playing field is leveled for us all !!!!

CT May 16, 2011 at 3:26 pm

But Jim, those investors will lose regardless. Insiders selling may give some of them the signal that they should bail out. Furthermore, on top of being able to purchase the stock at a cheaper price, the buyer is better protected since insider selling is hardly ever a well kept secret.

Eric May 16, 2011 at 1:31 pm

Admittedly I haven’t read all the above comments, and my question my have been answered, so here goes anyway:

The argument that stated only the handful who would have bought the day before the good news broke lost a bit of the gain they might have had by the insider pushing up the price a tad with his buy.

HOWEVER… please provide the analysis of the insider who hears BAD news and sells before the news breaks. In this case, he unloads at a higher price and might lower the price a tad causing more buyers to buy and then lose their shirts. I believe this is the argument usually given against insider trading, not the one in the article where the price goes up.

Jake May 16, 2011 at 3:49 pm

“HOWEVER… please provide the analysis of the insider who hears BAD news and sells before the news breaks. In this case, he unloads at a higher price and might lower the price a tad causing more buyers to buy and then lose their shirts. I believe this is the argument usually given against insider trading, not the one in the article where the price goes up.”

He doesn’t have to. It is by no means necessary to prove that all transactions benefit all parties to argue that “insider trading” (what ever is meant by that) should be legal. Purchasing stock implies risk. Those who do not have access to the kind of information needed to rationally purchase stocks should probably steer clear, or at the very least be purchasing for the long term, where the impact of a single quarter’s earnings, or a single piece of news good or bad, is going to be of less importance. This is why we have mutual funds managed by more knowledgeable people.

david janello May 16, 2011 at 2:52 pm

Are insider trading laws bad for society? The market delivers a verdict on this every day. In a certain sense every foreign trade involves an element of regulatory arbitrage where traders reward markets with good rules and punish markets with bad rules. For many years the United States benefited tremendously as a society because our securities laws were better than other nations and US exchanges gained market share at the expense of less efficient and more corrupt overseas markets. The fact that the current oligarchy spent many years and millions of dollars in lobbying and bribes to bring down Glass Steagall and other elements of the old regime suggest that these laws — which include bans on insider trading — were ethically sound and essential to the functioning of free markets.

Tony Fernandez May 16, 2011 at 3:23 pm

Only people who see the stock market as a casino treat insider trading as a crime. When people see it for what it really is they discover how great insider trading really is.

nate-m May 16, 2011 at 3:40 pm

Basically; insider trading laws makes it illegal to know any details about the company your investing it.

It’s insanity.

Jake May 16, 2011 at 3:51 pm

I think that’s a great way to put it, and nicely illustrates how “insider trading” prohibitions ENABLE, rather than discourage, fraud.

Jake May 16, 2011 at 3:28 pm

Too many people here are equating “harm” with “violation of rights”.

This is an absurd position to try to hold consistently. At some level, if one looks hard enough, everything I do or do not do “harms” someone. If I drive to work I am, in some small degree, raising the price of gasoline, automobiles, the congestion of the road, etc. I am “harming” everyone else who wants to drive. If I walk, I am “harming” everyone who wants to buy tennis shoes, use the sidewalk, etc. Any action we take implies imposing increased costs on others. Such is the inescapable reality of living in a world of scarcity. That’s why it’s critical that the relevant criteria to something being legitimate or criminal is NOT “harm” but “trespass” or “violation of property”. If I buy 20 gallons of gas I am “harming” everyone else who wants to buy gas, but I am not violating their property rights. The gas belongs to the seller, I have just as much right to purchase it from him as anyone else.

Same if I buy, or sell, a stock based on some information I know that others do not. While I may well do harm to others, I’ve certainly not violated their rights. If I sell a stock I believe is going to fall in price and am correct I have profited while the buyer has lost. But I did not force him to buy the stock, I did not violate his property. He chose to buy that stock thinking (based on information he has that I may or may not be aware of) that it would go up in value.

What’s truly insidious about insider trader laws is that, applied consistently, they give the government power to shut down effectively ANY transaction. The point has already been made, though maybe not directly, that ALL market transactions are based on differing valuations of the things exchanged. In most cases both parties are correct and both benefit, but we can never know that is the case beforehand. To some extent ALL exchanges are “insider trading” as we all have different (but overlapping) sets of knowledge and we all interpret what we know differently. How can those who claim stock exchanges be “fair” EVER imagine a truly “fair” trade? There is no such thing. One of the reasons exchange is critical to prosperity is precisely because it is through exchange that we find out who had the right information/interpretation and who did not. As Dr. Murphy pointed out, stock values have real meaning about the strength of the company, we discover their proper value (or work towards it) by letting all who want buy and sell as they see fit. Those with the best sense of the company’s value will profit, those with teh worst will lose. If all trades were made with the same information there would be no trades at all.

Donald Rowe May 17, 2011 at 7:29 am

Well said Jake.

I’m not disagreeing with your statement about harm and rights, but I do have a question to ask you, since you have made an unequivocal claim: “At some level, if one looks hard enough, everything I do or do not do “harms” someone.”

No, I am not looking for compensation from you. It is, rather, an answer to a philosophical question that I seek, from you and anyone else with an opinion.

Since you admittedly cause harm, given that you harbor no intent and also given that the actions of all other people do the same, does that absolve you, and them, from responsibility for the harm that is done?

I realize there is no way to determine all the harm you do and upon whom the damage is dispensed, just as there is no way to determine all the good you may concurrently do. And I further realize that there exists no mechanism by which compensation may be appropriately dispensed.

Even though you may look at the question as absurd, as though I am inquiring about the number of angels that can stand on the head of a pin, I assure you it is not.

To paraphrase my question: While we currently ignore the problem of inadvertent harm that we cause in our everyday activities of living and surviving, if there were a way that we could offer compensation would it be a moral requirement?

This is not intended to be a trick question. If the answer is no, there exists no responsibility for compensation, then this exposes a huge hole in our morality. It is, and likely will remain so for the foreseeable future, impossible to fathom the intentions of the actor. That fact provides an impregnable defense for the perp’s, you and me and them, and a mountain of an obstacle for the vic’s, again you and me and them, to overcome if they are to receive just restitution.

If there were to be discovered a mechanism where by this inadvertent harm could be compensated, would that fact change your mind?

Cordially,
Don

The Anti-Gnostic May 16, 2011 at 3:43 pm

“…but your condescending opponent is correct regarding one thing: the value of a stock is the discounted future dividends.”

Sure, if you’re a 19th century heiress with her share certificates from the Great Atlantic & Pacific Tea Company in a vault in the library.

CT May 16, 2011 at 4:27 pm

Uh huh. So interest is not the reward for postponing present consumption for future consumption? Capital gains is simply the market’s reflection that the potential for future dividends has gone up.

Anyway, if you don’t accept this, try and sell a piece of paper asking for money for an investment project which states that no dividends of any kind will ever be paid – see how many investors will purchase it …

The Anti-Gnostic May 16, 2011 at 5:32 pm

That’s great man. You just get out your present value chart and hey presto, Google is worth $500. I bet you’re like, a billionaire.

CT May 17, 2011 at 6:59 am

What’s your point, man? I’ve already indicated that I accept ABCT, that should probably give you some kind of clue as to how my money is invested. Now, answer the question – do you believe that interest is the reward for postponing present consumption for future consumption?

J. Murray May 17, 2011 at 7:31 am

Makes perfect sense to me after you explained it above. It also makes the long-term pricing behavior of stocks from issue a bit easier to understand. New stock tends to rocket up before peaking then dropping down to a point where dividends start being paid out, which usually generates a relatively stable share price. The rocketing up is the market getting an idea of the long-term cash flow prospective of the company via reinvestment, the peak is the point where reinvestments won’t produce much, and the dropping of the price is the time value of money factor playing in as the day the market thinks dividends will be paid out approaches. Then that day hits and the value tends to remain fairly static unless they make some sort of big move that potentially could increase dividend payouts.

CT May 17, 2011 at 10:43 am

You have the right idea. I’ll give you a very concrete example. Apple pays no dividends but has a 35% ROE. Investors are very content with Apple reinvesting 100% of profits with that kind of return because they would be unlikely to be able to reproduce it investing elsewhere. The day ROE starts falling and investors figure out that new projects are not returning an acceptable return they will begin demanding a dividend or sell the stock. The company will be left with 2 choices, watch the stock fall or pay a dividend.

So if you believe that interest is the reward for postponing present consumption for future consumption (as all Austrians do), then the value of a stock HAS to be the sum of discounted dividends. Those who state that the subjective forces of supply and demand explain stock prices are correct but have explained nothing. There is only demand because these investors believe there are future dividends. People behave that way because they value present consumption over future consumption. No one would give up present consumption if no real cash payoff was possible in the future. I find the fact that people argue differently on this site rather astounding.

Someone WhoUnderstandsMarkets May 17, 2011 at 11:19 am

I like that you are trying to reconcile solid financial theory with your own opinions, but you are still incorrect. The daily fluctuations in stock price have nothing to do with its fundamental value, which is based on dividends. The fluctuations you cite above are merely speculators being shaken out. There is no relevant “discovery” during the day of issuance (well, there shouldn’t be if investors do there homework). You see, there is a thing called a “red herring”, i.e. a preliminary prospectus, and an investment road show where there is a lot of Q&A by knowledgeable investors to whom the issuance is marketed. Bankers then help set the issuance share price based on what they think people will pay (and should not deviate too far from the fundamental value) – and, yes, there is some cronyism in pricing allowing the buyers to make a profit. (This is seen a legitimate since stock issuance is a “repeating game”.) Yes. Some the price of some stocks change radically during the issuance day or right after. There are a number of reasons for this, but let’s just stick to the case where other events don’t complicate the issue.

Now the astute student will notice that the share price always drops by the exact amount of the dividend on the ex-dividend date. Wonder why?

As the company goes on and succeeds or fails in its business on a daily basis, information is revealed to all investors. Their expectations about future dividend payments change and thus the share price changes accordingly. Who knows what the future holds? No one and that uncertainty explains much of the movement in price.

See. This is not all conjecture.

The Anti-Gnostic May 20, 2011 at 10:05 am

I do, I just don’t believe stocks are priced by discounting future dividends to present value. I do not deny it can be a component, but it had much more relevance when the railroad mailed out the dividend check to rich old Aunt Polly in Des Moines. Are you an analyst–is it part of your pricing model?

augusto May 17, 2011 at 5:21 pm

By your reasoning, investing in land is not investment. Land ownership doesn’t pay dividends, the only profit to be realized is when you sell it for a higher price.

Vanmind May 25, 2011 at 11:51 am

Also, baseball cards. Don’t ever trade those, no dividends.

Chris Cresci May 16, 2011 at 4:39 pm

How is insider trading different from “Cantillon effects” of the Fed injecting more money into the system?

Jacob Steelman May 16, 2011 at 5:11 pm

For Someone WhoUnderstandMarkets [Does not Understand markets] – stocks have value because like everything else in the marketplace there is supply and demand. Dividends may effect value but stock values are not soley determined on dividends as evidenced by the dot coms in the 1990s, certain ipos, start ups etc.

CT May 17, 2011 at 7:01 am

There is only demand because there is promise of eventual future payoff – just like any other investment. No future dividends = no demand. Dot coms eventually went to zero. They only went to the stratosphere because of the FED’s low interest rate policy. The market eventually realized that no dividends were ever possible and drove them down to their real value.

Vanmind May 25, 2011 at 12:01 pm

That “promise of eventual future payoff” might be a simple as someone figuring that they’ll sell once the market price rises a certain percentage. Dividends do not seem quite so crucial to the subjective valuation which drives the demand for stock investment (helpful, sure). Also, if all dot coms “eventually went to zero,” why do some still exist and why have others been born during the post-bubble 00′s? Are dividends for those ones somehow more possible?

Jacob Steelman May 16, 2011 at 5:26 pm

Most market participants seek information about products in the marketplace particularly if they believe the information will give them some advantage over competitors or over the counterparty to their transaction. The establishment investment industry does not like “insider trading” by the outsiders who are not professionals in the industry since it represents competition to them and may distort valuations in the marketplace if it became widespread. The industry professionals want to maintain insider trading for themselves. So the government goes after the people in the mail room or in this case an immigrant newcomer to the marketplace.

But insider trading by the outsiders pales in comparison to one of the largest insider trading scams of all times – Hank Paulson’s insider trading bailout of his former firm, Goldman Sachs, when the American taxpayer was forced to bailout AIG to ensure that Goldman received a 100% payout of their AIG exposure. Paulson was given the money by the government without disclosing how and for whom it was going to be used. Now this is real insider trading when the government establishes cartels for industries such as the banking industry or provides corporate welfare to companies.

Donald Rowe May 16, 2011 at 5:40 pm

Don dons his walmart greeter’s cap.

Someone WhoUnderstandsMarkets, welcome to Mises.org, aka libertarian central.

Anyone with a serious case of anarchy aversion may expect to experience initial confusion and then consternation upon their first few visits here. Relax, the “head in the mangle” feeling will diminish with time and further thought. This at first seemingly topsy-turvey world is actually more consistent than the “normal” one you are more familiar with.

By all means, feel free to express your doubt as well as your amazement with what you see written here. As you have experienced a poster’s demeanor is often mirrored. You are in control of your behavior here, and you can expect to be treated with all the respect due (like begets like, or something like that).

My explanation of statism is that it is a belief (perhaps unsubstantiated) that government (in any form) is less fallible than are individual humans and therefore the individual is best served by obeying his state, or as an alternative he may choose to obey a different state, if his native state permits. This belief can be (and often is) advocated and exploited by some for their personal benefit. That this escapes many people is not surprising because that same most have no idea there can even be an alternate existence that does not require the state.

Perhaps you now understand a little bit more about an alternative world of thought.

Cordially,
Don

Someone WhoUnderstandsMarkets May 17, 2011 at 10:30 am

I used to think I might be a libertarian. Honestly, I did. I had no idea, however, how ignorant the majority of them are. This is supported by what I see on this board, which is nothing but people foaming at the mouth trying to spew ideology despite the fact that they have absolutely no understanding of the fundamental underpinnings governing the system about which they are so critical. I see a dire gap in the education necessary to weigh seriously on these topics. Allowing all of these ignorant people to yell “ditto” on this blog simply undermines the relevance of the blog. (But then again, the original blog post demonstrated a lack of any understanding of finance or familiarity with the wealth of factual research available on the subject.)

Regarding the fundamental value of a stock and its relationship to dividends, you people need to understand this before you are allowed to mutter another word on the topic of finance. I am not “appealing to authority”. This is a simple logic problem (that is far beyond the reasoning or mathematical capacity of 99% of the people posting on this blog, I know, but I will try anyhow). A stock is not merely a hot potato passed around until it is eventually worthless when the company declares bankruptcy, as all do. A stock has to have the promise of paying a dividend at some point. There has to be some utility, you see. Surely you can understand that. (OK, I am jumping ahead here to some economics theory about utility curves, but it follows from mere application of logic.) No? Then why don’t we just assign dirt a value and start selling it? What is the difference between the two? “Eureka”, said the authority figure Archimedes. After you digest day 1 of finance 101, then maybe you could move onto day 2 and realize that the shareholders are actually the owners of the company who ultimately decide whether the stock is going to pay a dividend. I will break this to you gently: The management works for the shareholders. WHAT? Yes! This is the fundamental premise of public equity markets. Shocking. We will get the fact that secondary equity markets are a zero-sum game much later when we get to economics 101. Be patient. Good things are to come if you stop posting nonsense on blogs and read a real book that has nothing to do with political ideology and deals only with these things called “facts”.

I am sorry to be so condescending, but it’s not my job to teach you finance while you are making fart jokes in the back of the classroom. It is your job to educate yourself before you chime in on a topic. You have failed to do so. But like all ignorant people, you don’t know what you don’t know. (This, too, was proven in some good factual research. You could actually reference the paper if you had any intellectual prowess.)

Until then, I condemn you all to stew in your ignorance. I would tell you all about this guy name Plato and his allegory of the The Cave, but I don’t want to appeal to authority. About my daughter, don’t you people worry about her. My wife and I have a few Ivy League degrees between us, and it looks like we are doing a good job affording our daughter that opportunity, too. Or maybe she’ll forgo the chance in order to educate the people at the Mises (School of Sophism). There’s obviously some work to be done there.

Dan May 17, 2011 at 3:01 pm

Stop waving your alleged ivy-league degree in our faces. You will not get much discussion if you continue to insult people who did not attend your little academic haven. If it really matters to you, I’ll be honest: I don’t thing a piece of paper from a college (any college!) entitles you to some special intellectual realm above other people (I’m attending college, btw). Your posts certainly prove that.

YOU are ignorant, and I will not waste time with someone of your intellectual capacity, time is to precious. If you are some professor, I pity your students. You bring the IQ level down with every inflammatory and accusatory statement you make.

I would say bug of, but in the interests of not running people off who are lacking in the area of common sense, I will say: Please sir, read a book. Educate yourself, read, read and read some more. Only you can lift yourself out of your lowly state.

When you have educated yourself, then posting again on these forums might be prove to be productive and interesting.

Richie May 17, 2011 at 4:52 pm

Yawn.

Donald Rowe May 17, 2011 at 9:14 pm

@ Someone WhoUnderstandsMarkets May 17, 2011 at 10:30 am,

I am sorry to be so condescending, but it’s not my job to teach you finance while you are making fart jokes in the back of the classroom. It is your job to educate yourself before you chime in on a topic. You have failed to do so. But like all ignorant people, you don’t know what you don’t know. (This, too, was proven in some good factual research. You could actually reference the paper if you had any intellectual prowess.)

I don’t make fart jokes, nor do I need any help from you in understanding either economics or manners. You are example prime that our stalwart schools have failed in important ways, much to the detriment of human civilization. Of course I do not know that which I do not know. This is self referential and therefore an illogical statement if its purpose is to communicate a meaningful idea. Perhaps you could point out the “good factual research” that proves the tautology, done with government funding, doubtless.

Until then, I condemn you all to stew in your ignorance. I would tell you all about this guy name Plato and his allegory of the The Cave, but I don’t want to appeal to authority.

Plato is not an authority, he had only ideas about how to make sense of the chaos that is the world. You are free to make of his ideas what you will, or ignore them, or find your own ideas if you prefer. The deeper meaning of the Cave is that no one can ever know for sure whether it is he who is the one chained to the wall.

I’m done with you.

Mashuri May 19, 2011 at 2:26 pm

Never mind Plato, S.W.U.M. needs to brush up on Aristotle. His logical reasoning skills are absolutely abysmal.

Chris Cresci May 18, 2011 at 7:55 am

The Gordon model and CAPM are only an estimations of the value of a company. They must be because value is subjective. I don’t believe Apple has ever offered a dividend and yet its value continues to increase with each new invention it brings to market. The fact is that people pay what they pay based on their own assumptions about future values and risks and information is always asymmetric. The fact that I might know someone involved with a company personally gives me an immense advantage over those who do not, and large institutional investors frequently tour the headquarters of those companies they invest in. These are pieces of information that those whom the insider trading laws are there to protect cannot know and are extremely non public in nature. Given the subjectivity of value, the fact that average investors cannot know some non public information and the fact that insider trading is more about timing than anything else (as we should assume all material information will eventually be disclosed) trading on inside information provides price signals to the existing ownership about whether to buy or sell in advance of the disclosure of the news and, as such, is actually a service to smaller owners and the market in general.

The Anti-Gnostic May 20, 2011 at 10:30 am

An Ivy Leaguer? Good — I get to blame YOU for all the social, financial, geopolitical disasters and outright crimes perpetrated by clueless, corrupt, arrogant Ivy League grads since the 1900′s.

Vanmind May 25, 2011 at 12:08 pm

That’s pretty ignorant. People do sell dirt. People “put a value” on everything they think they might be able to sell, and go bankrupt if no one takes them up on their offer.

Also, managers of a company work for themselves and no one else. I’m getting close to calling you an Ivy League Intellectual Lightweight.

Harley Waybill May 16, 2011 at 10:21 pm

Bah. My only difficulty is deciding if you are absolutely stupid idealists living in some little Ayn Rand dreamworld, or are sociopathic class warriors bent on putting your boot on the necks of as many people as possible. Which is it, I wonder…hm… Either way, be warned the tide’s against you.

Daniel May 17, 2011 at 12:06 am

Awww and you even made a threat

It’s unfortunate you hate human beings cooperating peacefully and it’s hard to take you seriously when you make threats while not even belonging to the class that effects or directly benefits from state violence. You’re a Stokholm syndrome house slave that can’t even enter the house

Richie May 17, 2011 at 6:30 am

Is this the Ayn Rand Institute’s website, or am I missing something?

The Anti-Gnostic May 20, 2011 at 10:18 am

The tide is the other way: against the State and its stupid non-crimes that only provide cover for the real crimes.

Abhilash Nambiar May 17, 2011 at 12:10 pm

The Christian Science Monitor aggregates content from select blogs including the Mises blog.

That is old news

http://blog.mises.org/11684/guest-blogging-on-csm/

but I was pleasantly surprised to see Mr. Murphy’s article in there.

http://www.csmonitor.com/Business/Mises-Economics-Blog/2011/0516/Is-insider-trading-really-a-crime

Patrick Barron May 17, 2011 at 12:55 pm

Thanks, Bob, for another clear, concise essay. I will refer others to your essay.

A few years ago I attended a Rotary meeting where the guest speaker was an technology analyst for one of the big investment firms. He said that he spends most of his time traveling around the world, visiting companies, talking to their executives and researchers in order to gain knowledge about future profitability. Is he engaged in insider trading? Of course not. But I imagine that the government COULD charge him and the companies he visits with some kind of crime, because the law is so vague.

Abhilash Nambiar May 17, 2011 at 2:30 pm

There is an article on the huffington post about “The Victims of Insider Trading” by Jeff Madrick

http://www.huffingtonpost.com/jeff-madrick/the-victims-of-insider-tr_b_863111.html

Jeff Madrick is a senior fellow at the Roosevelt institute. So no surprises.

Sione May 18, 2011 at 2:44 pm

Someonewhodoesntunderstandmarkets

I belittled your alma mater and your “qualification” not with condescension or even with pity, but with deliberate contempt. There is a lesson in it for you. It is this.

The quality and accuracy of the ideas you present and/or live by are not determined by the name of the schoolhouse you attended during the years of your intellectual infancy and development. Think on that carefully.

What you attempted to do on this occasion was pass yourself off as an authority on a subject merely on the basis that the schoolhouse you attended in your infancy was somewhat famous. The trouble with that approach is that it does nothing to support the ideas you present. Worse is that what you do argue and the way you argue is flawed and nonsensical (is that what you learned at that silly school?). It was and remains utter rubbish. Now you can complain and boast of your schoolhouse pedegree as much as you like. It does nothing to validate any of the ideas you assert. Nothing.

Turning now to the ideas you assert and clearly believe in. You have happened upon the website of the Mises Institute. This site is where Austrian Economics is discussed and applied. Much of what you believe is directly opposed by the Austrian analysis. The reasons for that are going to take you some time to discover, consider and understand (I charitably assume you have the personal integrity to actually make honest enquiry). Suffice to say, your ideas have been well analysed by the Austrian School economists and they have been found to be wanting. That is, they have been found to be false and without merit. That what you have been taught at your “esteemed” schoolhouse is myth is going to be difficult for you to take. Nevetheless it is indeed the case, your school teachers lied to you. You have been deceived.

So now you are left with a challenge. Here it is.

Take advantage of the resources available to you free of charge on this site. Learn the Austrian School Economics.

There are some benefits that will accrue to you should you choose to undertake an honest investigation. Once you are familiar with the Austrian approach then you’ll know exactly why your school attendance record accorded you no respect. You’ll also know exactly why the ideas you promoted and believed in were wrong. So the challenge is up to you. Do you want to retreat into the comfort of some deceptive myths? Or would you rather deal with reality?

Sione

Red letter Days July 29, 2011 at 4:52 am

Thanks for the article. Really informative and interesting. I am now subscribed to your RSS.

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