Jon Macey's WSJ op-ed on the Galleon insider trading trial is a particularly good read. The subhead gets the piece off with a bang by capturing the essence of what's going on here:
The prosecution of Raj Rajaratnam is part of a war between the SEC and the law as articulated by the Supreme Court.
Macey then explains that:
The prosecution of Mr. Rajaratnam is not an isolated fight but rather part of an ongoing doctrinal war pitting the rather extreme views of the Securities and Exchange Commission against the carefully considered law of insider trading articulated by the Supreme Court. The SEC does not draw a distinction between trading on the basis of legitimate albeit unorthodox research and illegal trading on the basis of improperly acquired proprietary information. But it should.
Despite the court's rejection of the view that all trading on the basis of material nonpublic information is illegal, the SEC persistently litigates this issue. In landmark cases like U.S. v. Chiarella (1980), Dirks v. SEC (1983), and U.S. v. O'Hagan (1997), the court has distinguished trading on the basis of information that was legitimately ferreted out from trading on the basis of information that has been wrongfully obtained through fraud or theft.
The SEC long has contended in litigation and in regulation that trading on the basis of any information advantage, no matter how obtained, is illegal. It takes the view that even if a trader does legitimate research to get information about a company, then that person should have to disclose that information before trading. Such a rule would destroy the incentives of analysts and traders to do research.
Right. (The SEC's refusal to live by the rules laid down by the Supreme Court was a major theme of my article Insider Trading Regulation: The Path Dependent Choice between Property Rights and Securities Fraud, 52 Southern Methodist University Law Review 1589-1651 (1999), which also discusses at some length why the SEC's preferred equal access rule makes no policy sense.)
As for the case at bar, Macey argues that:
Some of the government's accusations in U.S. v. Rajaratnam appear well-grounded in the law. For example, on Feb. 8, 2010, former Intel executive Rajiv Goel pleaded guilty to leaking information to Mr. Rajaratnam about Clearwire that he learned at Intel. The government alleges that Mr. Rajaratnam made about $579,000 trading on this information, and that he "paid" for the tips by placing profitable trades for Mr. Goel's benefit in a private brokerage account. Paying for confidential corporate information is and should be illegal because it is improper to bribe an executive to betray his duty of confidence to his employer.
However, some of the government's other allegations accuse Mr. Rajaratnam of simply talking to people and then trading. But if the information did not come from an insider, or if it was being relayed for a legitimate corporate purpose such as to set the record straight about the company, then it is not illegal.
Which strikes me as being exactly right on both scores.
