By Robert
Reich
A few years ago, hedge fund Level Global Investors made $54
million selling Dell Computer stock based on insider information from a Dell
employee.
When charged with illegal insider trading, Global Investors’
co-founder Anthony Chiasson claimed he didn’t know where the tip came from.
Chiasson argued that few traders on Wall Street ever know where
the inside tips they use come from because confidential information is, in his
words, the “coin of the realm in securities markets.”
Last week the United States Court of Appeals for the Second
Circuit, which oversees federal prosecutions of Wall Street,agreed.
It overturned Chiasson’s conviction, citing lack of
evidence Chaisson received the tip directly, or knew insiders were leaking
confidential information in exchange for some personal benefit.
The Securities and Exchange Act of 1934 banned insider trading
but left it up to the Securities and Exchange Commission and the courts to
define it. Which they have – in recent decades so broadly that confidential
information is indeed the coin of the realm.
Major players on Wall Street have been making tons of money not
because they’re particularly clever but because they happen to be in the realm
where a lot of coins come their way.
Last year, the top twenty-five hedge fund managers took home, on
average, almost one billion dollars each. Even run-of-the-mill
portfolio managers at large hedge funds averaged $2.2 million each.
Another person likely to be exonerated by the court’s ruling is
Michael Steinberg, of the hedge fund SAC Capital Advisors, headed by Stephen A.
Cohen.
In recent years several of Cohen’s lieutenants have been
convicted of illegal insider trading. Last year Cohen himself had to pay a
stiff penalty and close down SAC because of the charges, after making many
billions.
SAC managed so much money that it handed over large commissions
to bankers on Wall Street. Those banks possessed lots of inside information of
potential value to SAC Capital. This generated possibilities for lucrative
deals.
According to a Bloomberg Businessweek story from 2003, SAC’s
commissions “grease the super-powerful information machine that Cohen has built
up” and “wins Cohen the clout that often makes him privy to trading and analyst
information ahead of rivals.”
One analyst was quoted as saying “I call Stevie personally when
I have any insight or news tidbit on a company. I know he’ll put the info to
use and actually trade off it.” SAC’s credo, according to one of its former
traders, was always to “get the information before anyone else.”
Insider trading has also become commonplace in corporate suites,
which is one reason CEO pay has skyrocketed.
CEOs and other top executives, whose compensation includes piles
of company stock, routinely use their own inside knowledge of when their
companies will buy back large numbers of shares of stock from the public –
thereby pumping up share prices — in order to time their own personal stock
transactions.
That didn’t used to be legal. Until 1981, the Securities and
Exchange Commission required companies to publicly disclose the amount and
timing of their buybacks. But Ronald Reagan’s SEC removed these restrictions.
Then George W. Bush’s SEC allowed top executives, even though
technically company “insiders” with knowledge of the timing of their company’s
stock buybacks, to quietly cash in their stock options without public
disclosure.
But now it’s normal practice. According to research by ProfessorWilliam Lazonick of
the University of Massachusetts, between 2003 and 2012 the chief executives of
the ten companies that repurchased the most stock (totaling $859 billion)
received 58 percent of their total pay in stock options or stock awards.
In other words, many CEOs are making vast fortunes not because
they’re good at managing their corporations but because they’re good at using
insider information. It’s the coin of their realm, too.
None of this would be a problem if the only goal were economic
efficiency. The faster financial markets adjust to all available information,
confidential or not, the more efficient they become.
But profiting off inside information that’s not available to
average investors strikes many as unfair. The “coin of the realm” on Wall
Street and in corporate boardrooms is contributing to the savage inequalities
of American life.
If Congress and the Securities and Exchange Commission wanted to
reverse this and remove one of the largest privileges of the realm, they could.
But they won’t, because those who utilize those coins also have a great deal of
political power.