According to recent reports, many big name financial institutions may have been engaging in rampant insider trading. The reports state the federal government is close to bringing charges against a number of well known banks, including Goldman Sachs, Citadel, Wellington, and many others, as a result of a three year investigation of the financial industry.
The biggest question raised by the investigation is whether individuals who work for various industry groups have been sharing information in violation of securities law. The allegations suggest many of the financial institutions have been utilizing information from sources who have advanced knowledge about business mergers, Federal Reserve policy changes, and other valuable data. Armed with this allegedly insider knowledge, it would give anyone the opportunity to make millions or billions of dollars very quickly.
This investigation is important because it has the potential to demonstrates a serious amount of corruption in the stock market. As one report noted, trading on the stock market is a zero-sum game; in order for one person to gain, another person has to lose. The difference between winning and losing is all about what you know, but this knowledge cannot be based upon non-public information.
If you have ever seen the movie Wall Street, it has a very good example of insider knowledge. In one scene, Charlie Sheen’s character, Bud, is talking to Michael Douglas’ character, Gordon, about private union discussions at an airline where Bud’s father works. The information Bud knows is not public and has the potential to be extremely valuable if used correctly. However, when Bud shares information he only knows because his father is involved in private talks, that would be considered insider information and is illegal under securities law.
The reason insider trading is illegal is because we want the financial markets to have the appearance of fairness, we don’t want them to feel rigged to benefit only a select few individuals who have access to information the rest of us don’t. If people don’t feel safe investing in the market, it can undermine the confidence people have in making investments, thereby diminishing the value of current investments and further depressing an already shaky economic recovery.
It’s always difficult for me to understand why these large businesses believe they are exempt from the law. I guess this is the natural consequence of bailing out the financial industry without holding them accountable for their rampant poor judgement over the past 5 years. Why should they believe the law applies to them if every time they screw up, we throw more money at them?