Megan McArdle has a column up at The Atlantic on insider trading by members of Congress, which is quite good. In the course of which, she quotes yours truly at some length:
Stephen Bainbridge, a law professor at UCLA, says, “The most widely used theory by SEC and the courts is that [insider trading] undermines investor confidence in the integrity of the markets.” But Bainbridge argues that this doesn’t necessarily make much sense, especially if you look at the current state of the law. In 1980, the Supreme Court ruled that Vincent Chiarella, a printer who had profited from stock trades he made after deducing the identity of the companies involved in merger prospectuses he was printing, was not guilty of insider trading. It takes more than “material nonpublic information” to make you an insider—you also must have a fiduciary duty to keep the information secret. If you overhear two executives in the ladies’ room chatting about an earnings surprise, they may be in trouble, but you are free to use that information however you wish.
Unless it’s the ladies’ room at your employer. Six years after Chiarella v. United States, R. Foster Winans, who wrote The Wall Street Journal’s Heard on the Street column, was convicted on 59 counts of financial fraud for tipping off brokers about the contents before publication. The case was decided by the U.S. Court of Appeals for the Second Circuit, which ruled that Winans had breached the insider-trading rules even though he had no fiduciary connection to the companies he wrote about. Winans, the Second Circuit ruled, had illegally misappropriated information that belonged to his employer. (Chiarella’s verdict might also have been upheld if he’d been convicted on these grounds, but that argument wasn’t raised at trial.)
Yet Bainbridge notes that in ruling that The Journal had a property right in the contents of its articles, the Second Circuit left open the possibility that The Journal could legally trade on the basis of its own articles. “This is why it’s not a confidence issue,” Bainbridge told me. “Surely if The WSJ were allowed to trade, this would shake investor confidence even more [than if Winans were].”
But if insider trading represents a sort of theft from a client or employer, it raises something of a conundrum: members of Congress don’t really have an employer. The law professor Donna Nagy has argued that they have a fiduciary duty to U.S. citizens, which they violate if they participate in insider trades. Ethically, this seems to be certainly true. But legally, Bainbridge thinks it’s a little more murky. He believes that members of Congress are effectively fiduciaries of no one. “There’s at least a strong argument,” he says, “that congressional insider trading is not illegal under current law.”
For my analysis of that argument, see Insider Trading Inside the Beltway
