On Friday, October 16, some very disturbing news came out. Billionaire hedge fund manager Raj Rajaratnam and several others are being accused of insider trading across several stocks. Phone calls were recorded, incriminating words were said. Its looking pretty ugly. Lots of questions remain unanswered. First, for me is, why would a billionaire who has clearly achieved great success in life and has already done many good things with his money, take such a high degree of risk. To risk even going to prison? We'll never know the answer.
But I also want to raise the question: should insider trading be considered a crime in a free market economy?
One of the stocks he is accused of trading with inside information (specifically, an analyst at Moody's was paid $10,000 to give up information that Raj made $4,000,000 on) was Hilton (HLT). On July 3, 2007, after the market closed, Blackstone announced they were buying Hilton. Raj had known and made a ton of money. Everyone knew at the time there was insider trading involved. I even went on CNBC that very weekend to discuss what had happened.
On July 2, the day before the deal was announced, Hilton shares were at $33.87. On July 3, Hilton shares made one of their biggest moves ever, closing almost 7% higher at $36.05 on double the normal volume before the deal was announced. And, by the way, it was a half day in the markets that day. Then Blackstone offered $47.50 a share for Hilton. It was clear even then that someone big had known something and had acted illegally on that information. In a column for the Financial Times I wrote "Certainly they'll catch one or two criminals here" and they did. Its very hard to track down insider trading and I give the SEC kudos for doing a great job here. Did they catch all the culprits? Probably not, but they certainly made anyone thinking of doing this crime very very scared.
But should insider trading even be illegal? The obvious answer is of course it should be, else the average investor will get taken advantage of. If some players in a market have an advantage, then some have a disadvantage and that's not fair. However, I'm not sure its so black and white. Here are the benefits of making insider trading legal:
I'm simply raising the question. Could legal insider trading lead to a more efficient market that would ultimately benefit investors and allow investigators to probe elsewhere? I'm scared about all the ponzi schemes, the mini-Madoffs, left uncovered. What do you think?
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Jim Luce: In Sri Lanka: Reconciliation and Reconstruction
Sri Lanka is now focused on the "3 R's:" Rehabilitation, Reconstruction, and Reconciliation. European leaders need to stop lecturing and start helping.
By giving me 14 billion dollars everyone will be helped. This will raise the average income, provide jobs, and reduce health care costs and the welfare rolls. Furthermore, we need people like me, who have been given 14 billion dollars to help keep the economy working.
I'm already on welfare so I am prepared to handle the process of cashing, depositing, and spending government checks. This money will ensure that the check-writers and the check-writing system won't fail.
I'm not asking for special treatment. I am just trying to help keep the system from failing.
I'll say "yes" if you can discredit the work of Stiglitz, Akerlof and Spence, who won the Nobel prize in 2001 for their work around asymmetric information and market failure.
If "The Market for Lemons" is any kind of proxy for financial markets, then allowing insider dealing would lead not to more efficient markets, but market failure instead. Not that financial markets are particularly efficient or not failing already, but legalized insider dealing would likely prove that they are.
Whenever you're ready, James.
besides, wasnt 2008 the global repudiation of the pure capitalist system (free market system indeed).