What are they thinking?

[Palantir]

You cannot be serious. If you were on the losing side of his trade, even if Raj didn't know the information you still would have made the trade anyways. Given that the trade would have been made anyway, being on the losing side of Raj's trade makes him deserve 10 years in prison?

 

 

Here is an example of a guy who got 10 years in prison:

http://latimesblogs.latimes.com/lanow/2012/10/professional-clown-gets-10-years-in-prison-for-raping-girl.html

 

 

Is it illegal? Sure...but it is not a significant harm at all. I don't see why "being on the losing side of the trade" should be punished the same as a fricking child rapist.

 

Are you serious? You really don't see what's wrong with going to the casino and it being rigged or not against you even if you don't know and would have played there anyway?

That is such bull****. The other side would have made the trade ANYWAYS. They have not been harmed in any way, yet at the same time you seriously think that it's just as bad as a child rapist? Really?

 

 

I hope you don't have kids!

[Liberty]

That is such bull****. The other side would have made the trade ANYWAYS. They have not been harmed in any way, yet at the same time you seriously think that it's just as bad as a child rapist? Really?

 

 

I hope you don't have kids!

 

:o

 

Edit: usually when people say things like this it's not even worth responding, but for the record:

 

I never commented on sentencing, merely on your assertion that it was some harmless crime that didn't matter (like a rigged casino, right?). And btw, if it had been public knowledge that Buffett was about to invest, the other side of the trade almost certainly wouldn't have made the trade anyways, or at least not at that price. So even that argument doesn't make sense.

[woltac]

You cannot be serious. If you were on the losing side of his trade, even if Raj didn't know the information you still would have made the trade anyways. Given that the trade would have been made anyway, being on the losing side of Raj's trade makes him deserve 10 years in prison?

 

 

Here is an example of a guy who got 10 years in prison:

http://latimesblogs.latimes.com/lanow/2012/10/professional-clown-gets-10-years-in-prison-for-raping-girl.html

 

 

Is it illegal? Sure...but it is not a significant harm at all. I don't see why "being on the losing side of the trade" should be punished the same as a fricking child rapist.

 

Are you serious? You really don't see what's wrong with going to the casino and it being rigged or not against you even if you don't know and would have played there anyway?

That is such bull****. The other side would have made the trade ANYWAYS. They have not been harmed in any way, yet at the same time you seriously think that it's just as bad as a child rapist? Really?

 

 

I hope you don't have kids!

 

Many factors are considered when a person is sentenced for committing a crime.

 

Raj maintained his innocence, put the government (the taxpayers) through a two month trial and has not accepted responsibility for his actions.  The rapist you refer to  plead out to the crime in a negotiated plea that "considered the wishes of the victim."  Victims in violent crimes are put under enormous strain and this works in the defendant's favor at times.  In order to enter into the plea, the defendant was required to admit to his actions and thus save the state and the victim from a trial. 

 

A true comparison between the Raj sentence and the rapist's sentence is very complicated. 

 

Perhaps the rapist sentence was too lenient rather that Raj's sentence being too harsh.

 

[Guest deepValue]

if it had been public knowledge that Buffett was about to invest, the other side of the trade almost certainly wouldn't have made the trade anyways, or at least not at that price.

 

What if Raj hadn't traded on inside information? The people who sold before the announcement still would have sold at a lower price than they could have gotten had they held on a few hours longer. I don't think inserting Raj into the equation really makes a difference.

 

Also, it was my impression that members of this forum are primarily arguing against the length of sentence; I think everyone acknowledges that insider trading is harmful to capital markets.

[Liberty]

What if Raj hadn't traded on inside information? The people who sold before the announcement still would have sold at a lower price than they could have gotten had they held on a few hours longer. I don't think inserting Raj into the equation really makes a difference.

 

That's like saying that if the casino hadn't been rigged people wouldn't have been harmed. Yes, it's a tautology, but it doesn't matter. What we're discussing is the impact of a rigged casino.

 

Also, it was my impression that members of this forum are primarily arguing against the length of sentence; I think everyone acknowledges that insider trading is harmful to capital markets.

 

That's not what I read. Multiple people, including you, seem to say "where's the harm? people would have done the trade anyways?", and I'm saying that there's harm, and I explained why.

 

[Palantir]

I'm not saying there is a total absence of harm, I'm saying the crime is "relatively harmless" compared to a harsh sentence of 10 years, which has been given for far worse crimes like the one I mentioned. To equate the two is bizarre. Punishments have to fit the crime. (Downloading music is harmful to the industry....should we be sent to Guantanamo?)

 

I'm fine with banning him from working in the securities industry again, or even a short prison sentence. But in my opinion, in no way does he deserve what he's gotten.

[Liberty]

I'm not saying there is a total absence of harm, I'm saying the crime is "relatively harmless" compared to a harsh sentence of 10 years, which has been given for far worse crimes like the one I mentioned. To equate the two is bizarre. Punishments have to fit the crime. (Downloading music is harmful to the industry....should we be sent to Guantanamo?)

 

I'm fine with banning him from working in the securities industry again, or even a short prison sentence. But in my opinion, in no way does he deserve what he's gotten.

 

Sentencing is complex and there are many variables that must be taken into account. For example, if someone spies on your country and sells information to another country, but it doesn't end up with anyone being killed in the end, should they just get a slap on the wrist, or something harsher to discourage such things because of the value of the system that is being protected? Why is stealing fruit from an apple cart treated differently from stealing state secrets?

 

I'm not saying I know what I would pick as a sentence if I were a legislator or judge, but I can understand how - because of the importance of public markets for billions of people, even those who don't invest/trade - the sentencing should try to dissuade attacks on that system, especially because that system runs on public trust. Same with counterfeiters; they are attacking a system that requires public trust, and if that trust isn't maintained, the system stops working, so sentencing will be harsher than with attacks on a system that only has very contained/localized ramifications.

 

Lots of insider trading is probably never found out. So if the equation was something like: "don't get caught and make millions, or get caught and find yourself a new job" there would be a lot more of it because for many it would be worth the risk. But if the equation is "don't get caught, make millions, or get caught and go to prison", suddenly that's qualitatively different. It's a bit like insurance math: penalty * chances of being found out = dissuasiveness. (of course this must be counter-balanced by other factors, but that's a whole other discussion).

 

Humans suffer from a cognitive bias called scope insensitivity:

 

http://en.wikipedia.org/wiki/Scope_neglect

 

It might be a lot more emotionally charged and vivid to think about a child being attacked, but some of these white collar crimes harm, and sometimes ruin, the lives of thousands if not millions of people, and they should be punished accordingly. Insider trading might not be as vivid as Enron employees and investors losing their life's savings, but it is a similar kind of fraud, subverting the rules of the game to transfer wealth from people who play by the rules to those who don't (it's a zero sum game), and in the process making the whole system less credible and effective.

 

Maybe if the music industry was a foundational block of the world economy and it ran on trust, you could argue for similar penalties to financial fraud... But it doesn't, and copying a digital file isn't a zero sum event.

[maxprogram]

Here's my problem with insider trading laws:

 

The argument is that markets should be "fair" so that the person "on the other side of the trade" has access to all the same public information that you do.

 

But there are probably 100s of cases where buyers/sellers have information the public can't get access to (or is extremely difficult to access). Most Phil-Fisher-like scuttlebutt would classify -- talking to employees, officers, suppliers, channel checks, etc. The public has none of this. I would personally rather not be on the other side of a trade from someone who has done 6 months of scuttlebutt and has a much better picture of where business is headed. But that's why I'm careful, and I accept that there's a risk of that happening.

 

In terms of legality, are hedge funds co-locating their server farms next to the NYSE to get trades 1/5 of a second faster any different? What about massive insider selling in financial companies leading up to 2008? Yeah, it was all reported and done within legal limits, but in principle it's the same thing. If you were buying Countrywide stock in 2006 you easily could be buying from Angelo Mozilo -- someone who you can safely say has a fair amount of non-public, detrimental information about Countrywide.

 

There is a reason insider trading was legal for all of history up until 1933 -- it wasn't viewed as being unethical! It made markets more efficient. Every investor knew the risks, and they were more careful because of it. It was an informational edge, just as value investors have analytical or psychological edges. Andrew Carnegie, who was an investor in the late 1800s just as Buffett is now, regularly traded on "inside" information. In fact, it was one of the core investment principles he wrote about in his book: Principle 2: "Only invest in companies about which you have insider knowledge".

 

I'm not saying you shouldn't be punished for it now -- it is illegal, and you don't want some people getting away with it while the public expects it to not happen. But not everything that is illegal is immoral.

[Liberty]

Here's my problem with insider trading laws:

 

The argument is that markets should be "fair" so that the person "on the other side of the trade" has access to all the same public information that you do.

 

But there are probably 100s of cases where buyers/sellers have information the public can't get access to (or is extremely difficult to access). Most Phil-Fisher-like scuttlebutt would classify -- talking to employees, officers, suppliers, channel checks, etc. The public has none of this. I would personally rather not be on the other side of a trade from someone who has done 6 months of scuttlebutt and has a much better picture of where business is headed. But that's why I'm careful, and I accept that there's a risk of that happening.

 

I disagree, and I'll illustrate why with an analogy:

 

Suppose you go on a TV gameshow like Jeopardy. There's a big difference between asking questions to which the answers are publicly available and questions to which the answers are simply not available regardless of how much digging you do. Some participants will always be better than others - having read more encyclopedia articles and scientific papers and books and such - and they'll have an edge. Maybe even a big edge. Nobody's saying that everybody's going to be as good, there will be champions and fast losers. But all participants had the opportunity to read these papers/books/etc and work to get better. There's a meritocratic aspect to it. But if there are questions with answers that aren't publicly available, then only those who have access to that private information can win, and that's a qualitatively different game (and if it's advertised as such, some will simply decide not to play).

 

I believe it's a similar thing with markets. Maybe some super-investor is better informed than you, but at least he earned it, and if you work hard, you can potentially get there too.

 

But if some insider knows in advance about some material event that will tank the stock or make it go multi-bagger in a hurry and they trade on that, how are you supposed to even want to play with people like that?

 

In terms of legality, are hedge funds co-locating their server farms next to the NYSE to get trades 1/5 of a second faster any different? What about massive insider selling in financial companies leading up to 2008? Yeah, it was all reported and done within legal limits, but in principle it's the same thing. If you were buying Countrywide stock in 2006 you easily could be buying from Angelo Mozilo -- someone who you can safely say has a fair amount of non-public, detrimental information about Countrywide.

 

Two wrongs don't make a right. And I don't believe that insider selling (and buying) that is publicly reported is the same thing as buying/selling by insiders that isn't reported.

 

Can you imagine how different things would be if one day you learned that over the past 2 years the CEO of one of the companies that you hold has sold all of his stock and nobody ever knew about it?

 

There is a reason insider trading was legal for all of history up until 1933 -- it wasn't viewed as being unethical! It made markets more efficient. Every investor knew the risks, and they were more careful because of it. It was an informational edge, just as value investors have analytical or psychological edges. Andrew Carnegie, who was an investor in the late 1800s just as Buffett is now, regularly traded on "inside" information. In fact, it was one of the core investment principles he wrote about in his book: Principle 2: "Only invest in companies about which you have insider knowledge".

 

Is that the reason why it was legal? Or was it because markets were not very regulated overall and they were mostly run by insiders who benefited from that state of affairs? It's only later that small retail investors joined in and pressure built up for a fairer system, afaik.

 

It's not because something was common in the past and not seen as a bad thing (mostly by those who benefited) that it actually was a good thing. Slavery comes to mind...

 

I'm not saying you shouldn't be punished for it now -- it is illegal, and you don't want some people getting away with it while the public expects it to not happen. But not everything that is illegal is immoral.

 

I think fairness is important in public markets. If there's no minimum level of trust, there's no point in investing your hard-earned money. So either make it clear that it's a free for all and buyer beware, or make it clear that it's illegal to trade on insider information and enforce those rules as much as possible. But the worst way to do things is to pretend that you have the latter when you actually have the former.

 

My 2 cents.

[maxprogram]

I think your Jeopardy example works well, but only because it exists in a very simple, confined environment. With the rules of the game, a contestant can only gain an "edge" through one method: being smarter / knowing more than the others (at least until Roger Craig comes along and figures out a legitimate way around that too). In a simple game like Jeopardy it's easy to create rules that make it completely fair (meaning reliant just on skill). In markets it's much harder to define and more of a gray area.

 

There are some black/white cases like Ivan Boesky trading on mergers, but most insider trading cases aren't that clear cut. If you meet and become acquaintances with the COO of a public company, and from your conversations gleam that sales numbers are doing particularly good that quarter, is that inside information or just good scuttlebutt? The line, at least to me, isn't very clear. And I don't think it would be clear in a courtroom either. Now, Buffett gives the advice not to go near the line and I tend to agree, but that's aside the point of determining if something is actually illegal.

 

It's not because something was common in the past and not seen as a bad thing (mostly by those who benefited) that it actually was a good thing. Slavery comes to mind...

 

Obviously I don't want to imply that *just because it was legal in the past* makes it alright. It's that it didn't really cause problems in the past, i.e. markets functioned fine, and retail investors knew what they were getting themselves into. I'll concede that I don't really know the details on why it was made illegal in the first place. An argument I would agree with is that the perception of fairer markets may help bring in more capital.

 

So either make it clear that it's a free for all and buyer beware, or make it clear that it's illegal to trade on insider information and enforce those rules as much as possible. But the worst way to do things is to pretend that you have the latter when you actually have the former.

 

I completely agree here. Maybe I'm just more pessimistic -- I think it's a free for all even if you ban insider trading. So yes, I think the "public" are fooling themselves if they think markets are fair -- insider trading or not.

 

[Myth465]

10 - 20 times the amount of money stolen in fines, 1-2 years in prison, and barring from the industry and trading for life is what I would give if I was a judge.

[Liberty]

Maxprogram,

 

Absolutely. I'm not naïve enough to think that the current system is perfect. But as with murder, you have to do your best to reduce it and catch those who do it, but it doesn't mean you'll eliminate the crime just by making it illegal. Still, that's probably better than if it wasn't.

 

Most people do their best to play by the rules. That's why human civilization even exists, because if everybody suddenly decided to go smash car windows with crowbars, there wouldn't be much to stop them.

 

Right now, I think that the vast majorities of CEOs wouldn't even come close to doing insider trading, not anymore than they'd do other kinds of fraud. And then there's a marginal group who would like to do it, but they don't feel it's worth the risk of being found out, and so they don't...

 

But if we lived in a world where it was absolutely legal, with no mechanisms to check for it and no penalties if it comes to light, I bet you that almost all of them would do it. Not just the marginal group, but the whole gang. Most people follow rules, and there would be no rule against it, and the potential upside would be big while the downside non-existent. Yeah, I think they would all do it...

 

So those two worlds seem very different to me, and as a non-insider, I'd rather be in world #1 than in #2. I don't know about you...

[Liberty]

Heh, just saw this on Bloomberg:

 

http://www.bloomberg.com/news/2012-10-16/ex-banker-girlfriends-doubled-money-on-insider-trading-fsa-says.html