SEC Declares Educated Guessing Illegal


The SEC has brought an insider trading case that is so trivial, so bone-headed, so absurd that you’d swear it was a piece of satire from The Onion.

That it’s a real case suggests investigators at the SEC have too much time on their hands, and we should just make insider trading legal.

The lawsuit filed against 26-year-old Toby Scammell—his rel name—claims he illegally pocketed a profit of nearly $200,000 trading call options after making a highly-educated guess based on his live-in girlfriend’s comments and emails about her job as an intern at Disney.

As someone who spent nine months in federal prison on a slightly less novel theory of insider trading, I’m a bit of an expert on the murky business of what constitutes fair play in the financial markets.

As far as I can see, there isn’t any fair play and to suggest that there should be makes about as much sense as trying to regulate greed or lust.

Stealing and rape are crimes. Greed and lust are sins.

Being against insider trading is like being against sin, the libertarian Harry Browne once observed. It principally offends those who don’t or can’t indulge.

Like most sins, it shouldn’t be a crime.

According to the SEC suit, Scammell’s girlfriend had given him access to her Blackberry and that helped him figure out that she was working on a “high profile acquisition” by Disney of comic book publisher Marvel. Furthermore, Scammell allegedly figured out the timing of the announcement because his girlfriend told him that her project would be finished in time for them to attend a wedding. The SEC suit suggests he never told his girlfriend what he was up to, and she has not been accused of complicity in or profiting from his trade.

Scammell, the lawsuit says, researched the insider trading law before he bought the call options. The SEC lawsuit implies he was trying to game the system. My interpretation is that he was doing his due diligence, making sure that buying the calls would be legal. If he doesn’t win that argument he hired the wrong lawyer

When the government tries to make pillow talk illegal, it’s time to rethink the law. The problem with insider trading is that most people have no idea what it is or where the boundary lines are. Scammell didn’t, so he had to figure it out on his own.

Furthermore, it’s ridiculous to lump miscreants like Raj Rajaratnam, the Galleon Group hedge fund manager convicted of conspiring to profit on corporate secrets, with the likes of Toby Scammell, who stole nothing from anyone—unless you consider it theft to commit the sin of reading your girlfriend’s emails.

Rajaratnam is a thief who bribed others to obtain intellectual property—corporate secrets that didn’t belong to him—that he then used to enrich himself. That’s not insider trading, it’s just stealing, and that’s exactly what the U.S. Supreme Court decided in my case. In the early 1980s, when I was a stock market columnist at The Wall Street Journal, I stupidly agreed to tell a stockbroker what I was writing about that was scheduled to appear in the next day’s edition. He made more than $700,000, of which I received $31,000, trading in advance of the short-term effect the column had on the prices of stocks mentioned.

When we were caught, then-U.S. Attorney Rudolph Giuliani brought a criminal case that charged us with fraud and with violating the insider trading laws. It was a controversial case at the time and the Justice Department was widely expected to lose. It was so controversial that the Supreme Court couldn’t agree on the insider trading charges, voting a rare 4-4 tie—Justice Lewis Powell had resigned and his replacement had not yet been confirmed.

But on the fraud charges, the Court voted 8-0 to uphold my conviction. In other words, what I did may or may not have been insider trading, but it sure as hell was stealing from The Wall Street Journal it’s corporate secrets—the schedule of articles that were to appear in the paper. While I think my prosecution was a bit like killing a mosquito with a howitzer, I accept the argument that I used something that didn’t belong to me to enrich myself. Giuliani didn’t need an insider trading law to put me behind bars. It was good, old-fashioned, mail and wire fraud.

The SEC should quit pretending it can maintain fairness in the markets by going after the Scammells of the world, especially considering the hypocrisy that many forms of insider trading are routinely tolerated. Alan D. Jagolinzer, an accounting professor at Stanford University, published a research paper in December 2006 showing that officers and directors of publicly held companies systematically sell company stock after positive news and ahead of bad news, generating abnormal returns compared with the market at large.

Another study, published in 2004 by Alan J. Ziobrowski of Georgia State University, found that United States senators on average beat the market by 12 per cent a year. ”The results clearly support the notion that members of the Senate trade with a substantial informational advantage over ordinary investors,” Mr. Ziobrowski told The Financial Times, noting that the law does not prohibit senators from trading stock on the basis of information acquired in the course of their work.

Wall Street brokerages, moreover, have made billions in recent years using complex software to foretell what their large customers, like mutual and pension funds, will be doing before they do it, based on their knowledge of the customers’ past behaviour.

The solution is sinfully simple. Throw out the current insider trading laws and march the Securities and Exchange Commission’s lawyers over to the Justice Department where they can concentrate on real crimes like stealing.