Raj: the new Gordon Gekko?

Raj: the new Gordon Gekko?

Recently, Mr. Raj Rajaratnam was found guilty of violating insider trading laws, which seek to ensure that all members of the trading public, regardless if they are large or small, rich or poor, receive exactly the same information.   The goal is worthy, but is it realistic?    Whether we like it or not, connected people get better information, just as super connected legacy children get into Harvard.   At the very least, the government should make insider trading rules less ambiguous so as to not make every aggressive trader, like Mr. Rajaratnam, into a potential poster child of the new Gordon Gekko.

Various scholars, including Yale Law School’s Jonathan Macey in Deconstructing the Galleon Insider Trading Case, point out that the Securities Exchange Commission (“SEC”) has a more expansive and ambiguous view of insider trading than the U.S. Supreme Court. On the one hand, the SEC takes the view that everyone in the marketplace should have access to the same information, regardless of the effort they take to obtain it. As a result, non-public information should never be traded upon, regardless of how you get. On the other hand, the Supreme Court says having special access to non-public information is legal so long as you didn’t commit a crime to get it, such as when your lawyer steals your confidential information and trades on it. The SEC’s ambiguous insider trading rules have given it more unfettered discretion as to when to lower the gauntlet, and on whom. This is dangerous. As Mr. Macey points out in his article, much of what companies disclose in their filings is so watered down because of regulatory concerns that they leave you wanting to know the “real story” via other means. Like a good reporter, you may be able to get your hands on the scoop by interviews, or otherwise, whereas others are not. While the efficient market hypothesis posits market prices reflect all available material information, we all know this is not reality. Until that happens, which may be never, the SEC should develop a bright line rule more in accordance with the Court’s rulings so that folks can be aggressive in making good connections for much needed information without ending up in jail.

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