How to be a thief and not break any laws.

[a_unique_person]

http://afr.com/articles/2003/10/23/1066631570519.html



To become famous in this world, you must have a little flair. As an example, consider the associates of Hudson Timber Products Ltd. They've been selling shares in that company at prices that look to have realised nice profits for Hudson Investment Group and someone in a director's family, but haven't managed to generate any publicity for themselves at all.

Capitalism for me is like Democracy, the best thing we have found yet. Not an ideal, but a compromise in reality. Certainly not perfect, or something we will obtain if only people would just do it right.



You will have to read it. Basically, it details how someone in a position of knowledge and power in a company can manipulate the capitalist system to make a fortune at the expense of others, all without being at risk of going to jail. That is, the capitalist system, as we know it, has wide open loopholes that allow those in positions of privelidge to make money at others expense.



Hudson Timber was in pretty ordinary shape at the time. It had finished 2001-02 with a loss of $14 million, but if you count back a future tax benefit the loss blew out to $19 million. It was carrying $52 million debt, was in breach of its covenants with its banker, GE Capital, and the auditor was wondering out loud whether it was a going concern.

So reconstruction was clearly necessary. Part of that involved Hudson Timber selling down 90 per cent of its holding in the Bremer Park industrial estate in Ipswich. HIG's purchase of that 90 per cent for $5 million may have been an excellent deal. The whisper around the Croesus Club is that the estate could be worth considerably more.

The reconstruction also involved reducing Hudson Timber's timber assets to the subsidiaries Australian Hardboards (which produces fibreboard), Hudson Frame and Truss (housing frames) and Australian I-Beams (which had just started).

The prospectus - dated May 28 - described these businesses as strong cash-flow generators. Hudson's focus was to introduce new, higher margin hardboards and for the frame and truss division to restore margins after opening two new plants and expanding another.

Hudson Timber said it expected to achieve strong growth in profitability largely due to several factors, including strong cash flow from hardboard, restoration of the frame and truss margins and new products from Australian I-Beams (which are engineered beams used mainly for residential floor joists).

It forecast earnings per share in calendar 2003 of 3.4¢, putting the 15¢ shares on a price earnings multiple of 4.4 times. Better still, it forecast a 1.35¢ dividend, giving the shares a 9 per cent yield.

The punters must have liked the story, because they injected $5.2 million into Hudson Timber by buying shares at 15¢ each. The market must have liked the story, too, because ever since July Hudson shares have been rising, reaching a peak of 37¢ on October 8.

But, alas, the prospectus forecasts turned out like so many of the prospectus forecasts that Pierpont has quoted over the years in this column. On October 14, less than five months after the prospectus, Hudson Timber announced to the ASX that, um, it wasn't quite going to make the forecasts.

In hindsight the downturn must have begun almost as soon as the company had raked in the money. Directors said the profit for the September quarter had been well down on the forecasts included in the May prospectus. The shortfall was largely due to the poor performance of the frame and truss business and a slower than expected start-up of the I-beams. Indeed, the directors admitted that the projections for I-beams had been overly optimistic and said that division was unlikely to record a profit until early 2004.

The picture is clouded because Hudson Timber has changed its balance date from December to June. However, directors said the after-tax profit for the year to June 2004 was likely to be in the range of $1.5 million to $2 million.

On Pierpont's calculation that equates to between 1.6¢ and 2.2¢ per share, so it will be at least one-third down on the earnings forecast in the prospectus.

The corollary is that the P/E will be higher and the dividend will be skinnier, assuming Hudson Timber can afford to pay one at all.

Hudson Timber shares, which had climbed as high as 37¢ in the belief that prosperity was just around the corner, nearly halved in price as soon as the announcement hit the screens.


The shares are now trading around 18¢.

When the ASX queried the announcement, Hudson Timber said the company had become aware of the September-quarter information only on October 14.

Well, if the board didn't know what was happening to the frames and I-beams all through September, HIG must have enjoyed a real stroke of luck when it decided to sell a few more shares during that period.

Directors' statements lodged with the ASX show that HIG sold a total of 9.6 million shares in July and August. HIG collected $2.3 million on these sales. The average price was around 24¢, which is 6¢ better than the price is as Pierpont quills this column.

On that arithmetic, you could say HIG had made a profit of $576,000. It certainly avoided a loss of those dimensions.

Investment-wise, that's jolly good going. Yet you could throw tennis balls all around Martin Place at lunchtime without hitting anyone who's ever heard of Hudson Investment Group.

There was also a highly fortuitous sale by the Holland family. One of the directors of Hudson Timber is Peter Holland.

On June 30 Peter did a switch. He sold a million Hudson Timber shares in the employee share plan for 15¢. He also bought back a million at 15¢, plus another 700,000 shares at the same price. That gave him a total of 1.7 million shares which had cost $225,000.

On October 13, he sold 643,000 of the shares for $206,000. His director's statement says the sale was on behalf of a related party, Leslie Gail Holland.

On the very next day, Hudson Timber made its revised profit announcement and the shares bombed out. So Leslie's scored a nice coup. She's sold 15¢ shares at an average of 32¢ less than four months after acquisition and the day before they slumped to a low of 16¢.

The Holland average looks pretty good too. They're left holding more than a million shares at an average cost of 2¢.



Hardly anything to do with that unnatainable ideal of the "equal exchange" that benefits both sides.
.............

[shanek]

Originally posted by a_unique_person
You will have to read it. Basically, it details how someone in a position of knowledge and power in a company can manipulate the capitalist system to make a fortune at the expense of others, all without being at risk of going to jail. That is, the capitalist system, as we know it, has wide open loopholes that allow those in positions of privelidge to make money at others expense.

It says no such thing. You and the writer of the article are both suffering from the misconception, which I have corrected you on many times, that the stock market is a zero-sum game. It isn't. One person making money in the stock market does not mean that others are losing that amount of money. And "insider trading" (which is really what this article is talking about) really doesn't harm anyone.

I challenged this forum before to show me ONE PERSON harmed by Martha Stewart's insider trading. Not a single person was able to do so.

[Thanz]

Originally posted by shanek

I challenged this forum before to show me ONE PERSON harmed by Martha Stewart's insider trading. Not a single person was able to do so.
I don't know the specifics of Martha's case, but isn't insider trading basically a form of fraud?

In order for the stock market to work efficiently, you need a certain transparency of knowledge in the market. The easiest example is a company that has been projected to make a profit in a certain quarter. To the surprise of the analysts and anyone following the public statements from the company, when the results become public they actually posted a loss. As a result, the stock price goes down.

Prior to the disclosure, insiders know about the loss. They know that the price for the stock is artificially high, and that when they post the results the price will correct itself. If they sell their shares prior to the disclosure, they are trading on false pretenses, knowingly taking advantage of the lack of information possessed by the other party. And the other party lacks the knowledge because the insider has kept it from them.

On another note, I think you missed the obvious response shanek. In order to be thief without breaking any laws, simply become the government and tax people! Because we all know that taxes are theft, whether the taxes are legal or not! :)

[Michael Redman]

Edited to add: I wrote this before Thanz's post went up. Honest.

If you sell high on inside information, then the first party hurt is the person who bought high not knowing the information. That's pretty obvious. If you fail to disclose material information in order to induce someone into a transaction you know they wouldn't enter into had they known that information, you are violating the law, whether you're selling a stock, a can of soda, or a house. You have a duty to disclose information you know the buyer would want to know, and would have an effect on the buyer's decision to make the deal. Insider trading is dealing without disclosing such information. It's illegal, and it's bad for economic efficiency.

In addition, the unfair deal has an effect, though tiny, on the market price, pushing the price off of what the market would normally set in an ideal world. That hurts the entire market.

A real capitalist wouldn't defend insider trading. For the price to be set properly, the actors must all have the best possible access to the best information. Anything short of this causes inefficiency.

Transactions in which one side has an unfair advantage in their ability to recognize the true value of the commodity are bad for capitalism. They remove the reward for providing the market with what it wants, and shift it to rewarding those who deceive buyers into falsely thinking they're getting what they want.

[shanek]

Originally posted by Thanz
I don't know the specifics of Martha's case, but isn't insider trading basically a form of fraud?

No, because no one is actually making any kind of misrepresentation.

Prior to the disclosure, insiders know about the loss. They know that the price for the stock is artificially high, and that when they post the results the price will correct itself.

That isn't the case. The company is making no misrepresentations as to how the company is doing, so the price is set by the speculations of those taking part in the market. It's hardly the company's fault if they speculated incorrectly, and such speculations are very much a part of the market. They trade stocks knowing full well their expectations might well be dashed to bits at the next quarterly release.

If they sell their shares prior to the disclosure, they are trading on false pretenses, knowingly taking advantage of the lack of information possessed by the other party.

How is that "false pretenses"?

[shanek]

Originally posted by Michael Redman
If you sell high on inside information, then the first party hurt is the person who bought high not knowing the information. That's pretty obvious.

It's only "pretty obvious" if you mistakenly think of stock traders as being in competition with each other. They aren't. It's not like gambling, although many people seem to think that it is.

Are you a competitor of Krispy Kreme when you go in to buy donuts? No, obviously not.

you are violating the law,

So were the ones who helped the slaves escape to Canada. Your point?

You have a duty to disclose information you know the buyer would want to know,

Except that it's actually illegal to disclose profit information before the official report is released. Catch-22, anyone?

You're making a situation where the person would be FORCED to sit on his stocks as the price plummets. That's completely unjustifiable.

It's illegal, and it's bad for economic efficiency.

It's illegal, but it is NOT bad for economic efficiency. If people who are in the know start selling off their stock, that in and of itself is going to cause the price to start to drop, even before the profit report is given. That would spur more people to start selling off their stocks before the price drops even further. And you'd have more of a cushion than you would if you stopped "insider" trading and let the value plummet when the loss was announced. It wouldn't be that much of a surprise to the traders, nor a shock to the market.

In addition, the unfair deal has an effect, though tiny, on the market price, pushing the price off of what the market would normally set in an ideal world. That hurts the entire market.

As I've just illustrated, that is absolutely not the case.

A real capitalist wouldn't defend insider trading.

"No true Scotsman" fallacy.

[Thanz]

Originally posted by shanek

You're making a situation where the person would be FORCED to sit on his stocks as the price plummets. That's completely unjustifiable.
How so? Once the information is public, it is no longer inside information, and no one is being forced to do anything.

It's illegal, but it is NOT bad for economic efficiency. If people who are in the know start selling off their stock, that in and of itself is going to cause the price to start to drop, even before the profit report is given. That would spur more people to start selling off their stocks before the price drops even further. And you'd have more of a cushion than you would if you stopped "insider" trading and let the value plummet when the loss was announced. It wouldn't be that much of a surprise to the traders, nor a shock to the market.
Not so. All that would show up in the market is increased volume of trading, which could be positive or negative. Nobody knows exactly who is selling the stock. Why should the insiders get a benefit (lead trading time) not available to the rest of the market? They are the ones responsible (if anyone) for the downturn in the company. Why are they rewarded for that?

Let's use another example. Let's say a government employee has inside knowledge that company X is about to be awarded a huge government contract. He then goes out and buys a bunch of their stock. The next day, the contract is awarded and the stock jumps 20%. The employee sells his stock, making 20% for doing nothing at all. You see nothing wrong with this?

[shanek]

Originally posted by Thanz
How so? Once the information is public, it is no longer inside information, and no one is being forced to do anything.

But you're forcing them to wait until that happens. Then the value of their stocks will tank along with everyone else's.

Not so. All that would show up in the market is increased volume of trading, which could be positive or negative.

Additionall sellers in the market without a corresponding increase in buyers WILL result in the stock price going down. After all this time and all of the explanations, do you STILL not understand the basic principles of supply and demand?

Nobody knows exactly who is selling the stock.

They don't HAVE to know.

Why should the insiders get a benefit (lead trading time) not available to the rest of the market?

Because that benefit DOES NOT COME AT ANYONE ELSE'S EXPENSE!!!

They are the ones responsible (if anyone) for the downturn in the company. Why are they rewarded for that?

They aren't being "rewarded" by any stretch of the word's definition. They are simply selling something they own to someone else for a price that both of them agree on.

Let's use another example. Let's say a government employee has inside knowledge that company X is about to be awarded a huge government contract. He then goes out and buys a bunch of their stock. The next day, the contract is awarded and the stock jumps 20%. The employee sells his stock, making 20% for doing nothing at all. You see nothing wrong with this?

Other than the fact that it's a completely unrealistic hypothetical, no, I don't. Because NO ONE WAS HARMED BY THE EXCHANGE.

[Thanz]

Originally posted by shanek

But you're forcing them to wait until that happens. Then the value of their stocks will tank along with everyone else's.
Why shouldn't it?

Additionall sellers in the market without a corresponding increase in buyers WILL result in the stock price going down. After all this time and all of the explanations, do you STILL not understand the basic principles of supply and demand?
I understand them just fine. The problem is that the stock market is not like a fruit market. The insiders are not like a new farmer coming into the market with an extra truckload of apples. They can sell their stock without necessarily decreasing the price. For example, they could just fulfill "Buy" orders that are already out their. They could put a "sell" offer out there for a slightly higher price to see if any one bites. It does not have to be a wholesale dump of stock, which would result in a drop in price.

They don't HAVE to know.
Makes a big difference in which way the stock price will go though, don't you think? If people knew that insiders were trading, don't you thikn that would have a much bigger impact on the market?

Because that benefit DOES NOT COME AT ANYONE ELSE'S EXPENSE!!! Sure it does. They have bent over whoever it was that bought the stock.

They aren't being "rewarded" by any stretch of the word's definition. They are simply selling something they own to someone else for a price that both of them agree on.
They are rewarded as only they know the true value of the stock. Everyone else is acting on imperfect information, and the reason the information is imperfect is because the insiders haven't released it! They are committing a fraud on the market! It is like selling a house that you know has a latent defect, while presenting that the house is just fine.

Other than the fact that it's a completely unrealistic hypothetical, no, I don't. Because NO ONE WAS HARMED BY THE EXCHANGE. Do libertarians have no interest in fairness at all?

[shanek]

Originally posted by Thanz
Why shouldn't it?

Because then people really are harmed.

They can sell their stock without necessarily decreasing the price. For example, they could just fulfill "Buy" orders that are already out their. They could put a "sell" offer out there for a slightly higher price to see if any one bites. It does not have to be a wholesale dump of stock, which would result in a drop in price.

[sigh]...no, that isn't even close to how supply and demand works! You can't just "fulfill the buy orders that are already out there" because the number of buy orders relative to the number of sell orders is exactly what sets the price!

Of all the buy orders, those are people willing to pay at least that much for the stock. There are very likely others who would be willing to buy the stock if the price were lower. When the decision is made to sell the stock, that means that there are now more units for sale. If they go chasing after the same number of units wanting to be bought, not everyone is going to end up selling their stock. So what actually happens is the supply curve shifts to the right, sellers are willing to sell an amount of stock for a lower price, and the price of the stock drops as the quantity sold rises.

And yes, it is EXACTLY like selling apples at a market! If a few people are selling apples, and a bunch of people are wanting them, then they'll charge a higher price for apples. But when a new farmer comes in with a truckload of apples, everyone will have to lower the price in order to be able to sell them. It's the EXACT SAME THING.

Makes a big difference in which way the stock price will go though, don't you think?

No, it won't. Simply by virtue of the fact that more people are selling the stock in the market makes the price drop.

Sure it does. They have bent over whoever it was that bought the stock.

No, they haven't! Why do you refuse to understand this???

They are rewarded as only they know the true value of the stock.[/qutoe]

No, they don't know the true value of the stock. No one knows what the value will be until it's all over. No one can predict it AT ALL.

[quote]It is like selling a house that you know has a latent defect, while presenting that the house is just fine.

Except that there is no defect in the stock, not by any stretch of the imagination. The people who buy it know that the announcement is coming. And they know the announcement could very well end up being a shortfall. They know EXACTLY the risks of what they're getting into.

Do libertarians have no interest in fairness at all?

Not when the consequences of correcting the perceived unfairness results in a greater level of unfairness, and hurts more people.

[Suddenly]

Originally posted by Thanz



Let's use another example. Let's say a government employee has inside knowledge that company X is about to be awarded a huge government contract. He then goes out and buys a bunch of their stock. The next day, the contract is awarded and the stock jumps 20%. The employee sells his stock, making 20% for doing nothing at all. You see nothing wrong with this?



Depending on how the information is recieved, this may not be insider trading. Not all asymmetrical information makes a trade illegal.

Regardless of Shanek's protestations, there is harm in these types of situations.

First and foremost is the harm to the market. Substitute CEO of company X for the government employee and this seems mighty unfair to the person who sells his shares to the CEO. These types of trades erode confidence and scares off investors. Nobody wants to be a sucker.

Second, there is such a thing as investment for profit. The market values assets. The best way to profit is to have asymmetrical information, or that I know something you don't. There is nothing illegal per se about asymmetrical information. It can be as simple of having a better understanding about market forces. Maybe you have done more research than anyone else. Whatever, the fact is that one person knows something the other does not. I've done my homework, and you didn't, so I sell you IBM at $100 when it is going down, you buy it because you think (due to your lack of homework) that it will go up. You lose money, I make money.

There is nothing wrong with this. No harm.

So, savvy investors strain for assymetrical information. They stay up nights, read the WSJ, make charts, and spot trends. This information is useless if everyone knew it, so it isn't enough to be informed, you have to be better informed than other people. If you aren't it is your own fault for not working harder and studying more.

That is if the information you lacked was something you could have possibly known about. This isn't true if the other party is a corporate insider with access to information you cannot obtain. Thus, you are at a disadvantage no fault your own. You will lose money in that if you had that information you would have acted differently. The harm is the lack of information that caused you to place a poor price on an asset.

For asymmetrical information to be illegal to use in trading it must come from a corporate insider at some point and be such that it is not publicly available. Martha wasn't a corporate insider, but the gist of the complaint is that she knew that the information she acted upon came from an insider.

If I owned a house, and noticed that there was a serious problem with the foundation and concealed that problem so that no reasonable inspection would find the serious problem, I am committing fraud against a buyer. They are going to pay more for the house than they would without that information.

Shanek apperantly thinks that since the buyer still wanted to pay the amount she did, and that the transaction was voluntary, that she is not harmed.

[shanek]

Originally posted by Suddenly
Regardless of Shanek's protestations, there is harm in these types of situations.

Then I reiterate my challenge: Find me ONE PERSON harmed by Martha Stewart. ONE. And show the direct, tangible harm they suffered.

[shanek]

Here's an excellent article on the subject:

http://www.harrybrowne.org/articles/MarthaStewart.htm

If you buy a stock at $30 and sell it to me at $42, and I later sell it to someone else at $51, which of us is the winner and which is the loser?

The answer is self-evident. We each have made a profit, and we each unintentionally helped the other as each of us pursued his own goals. It's just like any other free market transaction.

But what if I had "inside" information? By competing on a tilted playing field, did I hurt you?

Let's suppose I bought the stock from you at $42 because I had some very special information about something that would occur a week later. The expected event occurred on schedule, the price jumped to $51, I sold, and took my profit.

The fairness buff sees this example and concludes that I made my profit at your expense. But that assumes, even if it's not recognized, that you sold only because I wanted to buy.

In fact, you sold for your own reasons. If you hadn't sold to me, you'd have sold to someone else. And if my presence in the market had any effect on you, it must be that you got a higher price for your stock than you would have if I hadn't been bidding for it.

No, says the fairness buff, you don't understand; I should have made my information public before I bought the stock.

But if I had to make my information public, I wouldn't buy the stock at all — since revealing the information would have caused the price to rise before I'm allowed to buy. And if I can't buy the stock without revealing the information, I won't bother to reveal the information. So you still would have sold your stock at $42.

My trading hasn't cost you anything. So how would a level playing field make you any better off? (Even if you sold at a loss, the principle would be the same. You'd have the same result as though I had stayed out of the market.)

Wait a minute — we're forgetting someone. What about Mr. Latecomer — the poor guy who bought the stock from me at $51, at the very top?

I didn't make the stock rise to $51. Nor did I create the event that caused the price to rise. I merely profited from the rise. The stock would have gone up in any case — and Mr. Latecomer would have to pay $51 in any case.

[Jaggy Bunnet]

Are there no blackouts / close periods prior to announcements which would prevent this from happening?

I know the US and UK have these and assumed they would be fairly widespread.

[shanek]

Originally posted by Jaggy Bunnet
Are there no blackouts / close periods prior to announcements which would prevent this from happening?

Sure, but that isn't the point. The point is that the politicians and pundits take advantage of peoples' lack of understanding of how the market works, play the "unfair" card, and gain more power and wealth for themselves.

[Suddenly]

Originally posted by shanek


Then I reiterate my challenge: Find me ONE PERSON harmed by Martha Stewart. ONE. And show the direct, tangible harm they suffered.

I did. I'll ignore the direct harm to the seller as you seem to be fixated on an odd concept of "defective."

I'll try again. Maybe a different approach.

Use of asymmetrical information is in general neither illegal nor harmful, except when that asymmetrical information is gotten through ill means. Neither your nor Browne's hypo contemplates this distinction. They deal only with general asymmetric information, with the "insider part" as an afterthought. The "insider" aspect is not central to those hypotheticals, and is not really addressed.

A corporate insider has a duty to the shareholders, a fiduciary duty, which is a duty to the shareholders to act in utmost good faith and with the utmost loyalty. The information obtained during the carrying out of official duties by right is for the benefit of the shareholders, not the officer. By using that information in a transaction before such information is released to the shareholders he is committing a fundamental breach of his duty to the shareholders by placing a benefit on some and not others. His duty is to maximize shareholder profit, and by denying that to some shareholders he harms them with his breach.

Anyone that makes a transaction in possession of such information, knowing it being kept from the rightful owners is an accomplice and in criminal law just as culpable as the actual insider.

That is the harm, the theft of information, and breach of a closely held duty for personal gain. Also, the act of selling the stick by the insiders increases supply, which lowers the price at that time. That is harm to other stockholders. Also, it changes those wanting the stock into owners, thus decreasing what demand there will be when the information becomes public.

Then there is the larger public policy interest. If insider trading is allowed, non-connected shareholders will be at a disadvantage in that "connected" people will have sold off stock, lowering the price before the non-connected people have any reason to believe something is wrong. Profitable investment thus becomes more a matter of being sure you have an information source than the quality of the company. It also invites more creative fraud.

I'm the CEO of X. I know that since I'm the CEO people watch my acts like a hawk, assuming if I sell or buy my own stock I must know something. I have inside information that we just struck gold in a bunch of mines. I own 25% of the company, but I want more. So, knowing they are watching me I immediately start selling. Outsiders view this as a bad sign. They sell, word gets out and the price collapses. However, I am through an agent also buying shares like crazy at rock bottom prices. I just tripled my stake for a fraction of market costs.

This kind of crap would deter innocent investment, which is not a good thing for the economy.

[shanek]

Two things, Suddenly:

1) This sort of thing has NEVER deterred investment in the past; and

2) If you'll reread your argument objectively I think you'll find your reasoning is quite circular.

[Suddenly]

Originally posted by shanek
Two things, Suddenly:

1) This sort of thing has NEVER deterred investment in the past; and
Any basis for that? Are you suggesting threatened fraud has never kept anyone from investing in the stock market?
2) If you'll reread your argument objectively I think you'll find your reasoning is quite circular.

Why don't you explain why so I can respond. Perhaps I was unclear, or maybe I'm wrong.

[shanek]

Originally posted by Suddenly
Any basis for that? Are you suggesting threatened fraud has never kept anyone from investing in the stock market?

No, I'm saying insider trading—which is NOT fraud—has never stopped anyone from investing in the stock market.

Why don't you explain why so I can respond.

Okay...here we go:

Use of asymmetrical information is in general neither illegal nor harmful, except when that asymmetrical information is gotten through ill means.

Begs the conclusion. With insider trading there are only "ill means" because the law has made it illegal; hence that cannot be used to justify the existance of the law. That is circular.

Truly ill means would be, say, a banker going through his bank records looking for private information on people investing with his bank and using that information to trade with. That is fraud, and that is betraying a trust. And you have a very large leap of logic to overcome if you want to equate that with someone in a company knowing what the upcoming profit report is going to say.

A corporate insider has a duty to the shareholders, a fiduciary duty, which is a duty to the shareholders to act in utmost good faith and with the utmost loyalty.

This is just complete blithering crap. A corporate "insider" is just another stockholder who happens to have a certain piece of information. That gives him no more fudiciary duty than he had before and no more of an expectation to operate in "good faith." Those are just weasel words, thrown in to make it seem like the trader is more than what he is. And Browne's article most certainly deals with that.

The information obtained during the carrying out of official duties by right is for the benefit of the shareholders, not the officer.

This is equally fallacious. In fact, if he were to tell others of this information before the official announcement, that would be a breach of trust and he would likely be in much more legal hot water than with inside trading, not to mention out of a job.

So once again, we're back to you wanting to FORCE him to sit on his stock while it goes down the tubes.

By using that information in a transaction before such information is released to the shareholders he is committing a fundamental breach of his duty to the shareholders by placing a benefit on some and not others.

Again, this is begging the conclusion.

His duty is to maximize shareholder profit, and by denying that to some shareholders he harms them with his breach.

It's amazing how much you seem to know about what one person's duties are...yet you don't provide any sources for this information at all. How was Martha Stewart, for example, in any such position with any such duty?

That is the harm, the theft of information, and breach of a closely held duty for personal gain.

And yet you still cannot point to one single person directly harmed by the action. All you can do is look at the profit and scream, "unfair!"

Also, the act of selling the stick by the insiders increases supply, which lowers the price at that time. That is harm to other stockholders.

No, it isn't. The stock is going down anyway. It actualy does more harm to stop the insider trading and have it crash, than it does to let it slide a bit at first, giving others fair warning of some kind of trouble, and when the bad news does come it doesn't crash as hard. I explained this above.

Also, it changes those wanting the stock into owners,

Duh, that's what buying the stock does! But those people are looking to buy anyway.

thus decreasing what demand there will be when the information becomes public.

Show how some people buying early, who want to buy early anyway, decreases demand for later. What about when the stock plummets? You don't think that will decrease demand?

If insider trading is allowed, non-connected shareholders will be at a disadvantage in that "connected" people will have sold off stock, lowering the price before the non-connected people have any reason to believe something is wrong.

Boo-hoo. Cry me a river. EVERYONE goes into trading with different information. No one is in precisely the same position. And people who are not connected are no worse off with insider trading than without.

I'm the CEO of X. I know that since I'm the CEO people watch my acts like a hawk, assuming if I sell or buy my own stock I must know something. I have inside information that we just struck gold in a bunch of mines. I own 25% of the company, but I want more. So, knowing they are watching me I immediately start selling. Outsiders view this as a bad sign. They sell, word gets out and the price collapses. However, I am through an agent also buying shares like crazy at rock bottom prices. I just tripled my stake for a fraction of market costs.

This one paragraph displays a profound ignorance in the workings of a stock market. CEOs sell their company stock when it's strong all the time. It could mean trouble, or it could mean the CEO's daughter needs an operation, he has gambling debts to pay, or any number of things. The market does not just panic simply because one person starts selling, no matter who he is. The only effect it will have is that the introduction of the additional stock for sale increases the supply side, lowering the price of the stock but increasing the quantity traded.

Give me ONE EXAMPLE of such a thing occuring as a result of insider trading. ONE example.

[Suddenly]

Originally posted by shanek


No, I'm saying insider trading—which is NOT fraud—has never stopped anyone from investing in the stock market. No one? Zero? You sure? My mother lied to me about that?



Okay...here we go:



Begs the conclusion. With insider trading there are only "ill means" because the law has made it illegal; hence that cannot be used to justify the existance of the law. That is circular.

Truly ill means would be, say, a banker going through his bank records looking for private information on people investing with his bank and using that information to trade with. That is fraud, and that is betraying a trust. And you have a very large leap of logic to overcome if you want to equate that with someone in a company knowing what the upcoming profit report is going to say. OK. I see your point in the first paragraph, but it doesn't go to the heart of the matter. I should have said "Only certain types of asymmetrical information are harmful."

As to the second paragraph the hypothetical regarding the bank records is more or less exactly the same. In both cases the person in the company is given custody over information that is restricted by a duty, in that information is for a purpose. The bank has the information to serve the customer. The company has the profit/loss statement to inform stockholders. In both situations that information is usurped for the benefit of the person owing a duty to someone else, be it one confidentiality in the bank of fiduciary duty with the company.. Also, in both cases the offense is not knowing the information, as the banker may know from rote the information he wants to use. Rather it is using the information to the person's advantage. Classic conflict of interest in either circumstance.

I don't see how it is such a leap. Actually it is basic corporate law w/r/t the officers and directors, and basic law of agency w/r/t the employees.



This is just complete blithering crap. A corporate "insider" is just another stockholder who happens to have a certain piece of information. That gives him no more fudiciary duty than he had before and no more of an expectation to operate in "good faith." Those are just weasel words, thrown in to make it seem like the trader is more than what he is. And Browne's article most certainly deals with that. Your definition is incorrect. A certain stockolder that happens to have a piece of information is not an insider trader by definition. I'm almost shocked at your lack of understanding of the legal basis for insider trading, namely the Securites Exchange Act of 1934 and SEC rule 10b-5.



This is equally fallacious. In fact, if he were to tell others of this information before the official announcement, that would be a breach of trust and he would likely be in much more legal hot water than with inside trading, not to mention out of a job.
I'm confused. I said it is wrong for him to give the benefit of the information to some shareholders and not others. He is a shareholder. If he acts on the information then he is allowing the benefit of the information to one shareholder and no others. You do understand the legal difference between "John Smith" as a CEO and "John Smith" as a stockholder, right? If Mr. Smith as CEO has to benefit all stockholders equally, then his as a stockholder acting on information breaches the duty.
So once again, we're back to you wanting to FORCE him to sit on his stock while it goes down the tubes. Nope. He will have the very same chance to sell his stock as every other stockholder. He will simply be passing on an advantage to avoid breach of a fiduciary duty.



Again, this is begging the conclusion. No, it is a statement of fact. Basic corporate law. An officer that gives a benefit to some shareholders and not others violates his fiduciary duty to those shareholders not benefitied. Plus, if the officer benefits from that it is a straight up conflict of interest. Part of the duty of loyalty.



It's amazing how much you seem to know about what one person's duties are...yet you don't provide any sources for this information at all. How was Martha Stewart, for example, in any such position with any such duty? The reason I know about the duty may have something to do with the fact that I taught Business Law. The textbook I used is _West's Business Law_, eighth edition. It is amazing what you can find out when you actually look things up. Chapter 35 deals with the duties of Corporate Directors, Officers, and Shareholders. Chapter 37 deals with securities regulation, with an emphesis on the legal basis for insider trading, which is, as I pointed out above, The Securities Exchange act of 1934 and SEC Rule 10b-5. There are a few cases as well.

I thought you were informed as to these matters, the different layers of authority in a corporation, the duties and powers of each level, since you speak so forcefully and are free with scornful insult. I doubt you have any idea what insider trading really is. I'm beginning to think you believe it has to do with just happening to have insider information. Have you ever even read SEC rule 10b-5? Why do you speak with such arrogance about matters the details of which you have not mastered? Are you hoping to conceal your ignorance by force of language?

As far as Martha goes, since you like sources, this is from page 702 of the above mentioned text, dealing with liability from a tipper/tippee relationship.


The key to liability under this theory is that the inside information be obtained as a result of someone's breach of fiduciary duty to the corporation whose shares are involved in the trading. Unless there is a breach of a duty not to disclose inside information, the disclosure is made in exchange for personal benefit, and the tippee knows of this breach (or should know of it) and benefits from it, there is no liability under this theory.

Like I said, accomplice liablity. There is another theory of liability that is parallel to the concept of "recipt of stolen property" in that liability extends because the tippee knew the information was obtained due to the breach of fiduciary duty. I should also point out that the above is civil liability. It becomes criminal when "scienter" is shown, which is more or less intent to defraud.


And yet you still cannot point to one single person directly harmed by the action. All you can do is look at the profit and scream, "unfair!" No, I can point to a mess of shareholders that suffered a breach of a fiduciary duty, and who were disadvantaged as a result.



No, it isn't. The stock is going down anyway. It actualy does more harm to stop the insider trading and have it crash, than it does to let it slide a bit at first, giving others fair warning of some kind of trouble, and when the bad news does come it doesn't crash as hard. I explained this above. You asserted that above. The point is, when the Officer breaching his fiduciary duty sells off shares, that will result in a lowering of the stock price. That in and of itself is harm.



Duh, that's what buying the stock does! But those people are looking to buy anyway. Were you following this? The point is that the demand has been lowered. One person that wanted to buy wants to buy no more, or buy less. Not a big point.



Show how some people buying early, who want to buy early anyway, decreases demand for later. What about when the stock plummets? You don't think that will decrease demand? Common sense. Demand may not be exactly measurable, but it is not infinite. When someone buys, absent external creation of demand, demand goes down. When the stock plummetts the demand will likely decrease, yes, to a point where bargain hunting sets in. Also, supply may increase as people may want to liquidate while they can. This is obvious. It doesn't change the fact that the decrease came from a lower initial level due to the earlier sale by the officer.



Boo-hoo. Cry me a river. EVERYONE goes into trading with different information. No one is in precisely the same position. And people who are not connected are no worse off with insider trading than without. I pointed out that asymmetrical information is perfectly accepted for the most part, but there are some versions that are harmful because they involve a breach of a duty to shareholders. You now act as if this is some kind of point. Sorry that the complexity of this eludes you, but not all harm is easily identifyable.



This one paragraph displays a profound ignorance in the workings of a stock market. CEOs sell their company stock when it's strong all the time. It could mean trouble, or it could mean the CEO's daughter needs an operation, he has gambling debts to pay, or any number of things. The market does not just panic simply because one person starts selling, no matter who he is. The only effect it will have is that the introduction of the additional stock for sale increases the supply side, lowering the price of the stock but increasing the quantity traded. It is a hypothetical example under the lack of regulation that you suggest. To say it is invalid because you are unaware of parallels in a system governed by different rules is not exactly effective rebuttal. It is very ironic that you suggest that there are not those that base their trading on the acts of certain influential others. Not with CEO's these days, as that sort of reliance would assume the CEO would gladly run afoul of regulations. One example took place in the 80's when Donald Trump was kicking around the idea of buying Holiday Inn. Word got out (likely fanned by Holiday Inn as a takeover defense measure) and people started buying, mainly because of what Donald was doing. He eventually sold his shares at a nice profit. The price dropped once people found out there was to be no takeover.

Give me ONE EXAMPLE of such a thing occuring as a result of insider trading. ONE example.

Like I said. Insider trading is illegal and trades are regulated and monitored. Such an example is not feasible under current regulations. That is the point.

It is as if I am saying if there were no gravity my car would float, and you are demanding that I produce a floating car to prove it. Do you see the problem there?

[EvilYeti]

Originally posted by shanek

I challenged this forum before to show me ONE PERSON harmed by Martha Stewart's insider trading. Not a single person was able to do so.

I have a hard time believing that, as its a trivial position to prove.

Let's first examine the LP position on fraud:


3. Consumer Protection
We support strong and effective laws against fraud and misrepresentation.


That's right from the National Platform of the Libertarian Party.

Now lets look at what Martha did.


- Early December, 2001: ImClone executives continue to hear that their application is faulty and it will undergo increased scrutiny. The likelihood of rejection is deemed higher than normal due to the poor application.

- Dec. 27, 2001 : Stewart sells almost 4,000 shares of ImClone, the same day that Aliza Waksal, the daughter of then-CEO Waksal, unloads her stock.

- Dec. 28, 2001: The Food and Drug Administration ( news - web sites) announces it has rejected ImClone's application for Erbitux, a promising cancer drug. The announcement subsequently sends ImClone's shares plummeting.


When Ms. Stewart sold her stock, it didn't just vanish into the ether. Someone else bought it.

Someone else whom DID NOT KNOW that this stock was VERY LIKELY to soon be worth MUCH less.

Let's now examine what the word "fraud" means:


Main Entry: fraud
Pronunciation: 'frod
Function: noun
Etymology: Middle English fraude, from Middle French, from Latin fraud-, fraus
Date: 14th century
1 a : DECEIT, TRICKERY; specifically : intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right b : an act of deceiving or misrepresenting : TRICK
2 a : a person who is not what he or she pretends to be : IMPOSTOR; also : one who defrauds : CHEAT b : one that is not what it seems or is represented to be


It's very clear that in this context Ms. Stewart engaged in an intentional perversion of truth in order to induce another to part with something of value, i.e. money for her soon to be devalued stock.

Does anyone (besides shanek the freedom hater) disagree?

[a_unique_person]

It's fraud. Just like selling someone a car which you say has no problems, but you've just filled the gearbox with banana skins.

[mummymonkey]

This is an interesting article (from an Australian source) and seems to have a wide range of viewpoints.

Insider trading is a practice that the market can do without. The overwhelming view of the participants in the study was that insider trading is not only harmful, but that it brings no benefits. Insider trading harms the market in a number of ways. It is said to erode confidence; to inhibit the capital raising process and to damage the efficiency of the market. It also of course directly harms investors who lose money to those who are engaged in insider trading. The view of insider trading as a victimless crime ignores the fact that in an insider trading transaction there is a party who loses value from the securities involved or is forced to take a loss. Perhaps it might be more accurate to say that insider trading is a crime with an unknowing victim.


Link to article (http://www.aic.gov.au/publications/lcj/casino/ch6.html)

[shanek]

Originally posted by EvilYeti
When Ms. Stewart sold her stock, it didn't just vanish into the ether. Someone else bought it.

Someone else whom DID NOT KNOW that this stock was VERY LIKELY to soon be worth MUCH less.

And someone else who was GOING TO BUY THE STOCK ANYWAY. Amazing how people keep forgetting that...

You people also ignore that selling a stock is NOT like selling a car in that you don't convince someone to buy the stock; you just put in the sell order and then people buy or they don't buy. There's no pitch, no direct representation, or anything else. Most people don't even have any idea whom they've sold the stock to.

[shanek]

Originally posted by mummymonkey
The view of insider trading as a victimless crime ignores the fact that in an insider trading transaction there is a party who loses value from the securities involved or is forced to take a loss.

It "ignores" this fact because it ISN'T TRUE. No one is losing value who would not have already lost it anyway. Remember, that party was going to buy no matter what. And maybe, just maybe, with insider trading enough people in the know will be selling and drive down the price of the stock a bit, giving others an indication of trouble ahead.

Either way, the loss is coming. Why is it more justified to FORCE people to hold onto a stock they know almost certainly is going to be devalued?

[Skeptic]

The company is making no misrepresentations as to how the company is doing, so the price is set by the speculations of those taking part in the market

Hiding pertinent information about goods you sell is often, legally and morally, just as bad as making false claims about them. To use the previous example, if I hide from prospective buyers that a house's foundations are rotten, this is just as bad as openly claiming that they are in good shape.

As for those who are hurt by insiders' trading, it is the buyers who bought the overpriced stocks sold by the insider traders who dumped them, who lose a lot of money when the stock price finally takes the dive the insider traders knew it will.

They are in the same situation as those who bought a house assuming the foundations are in good shape, when it collapses over them the next year.

[Skeptic]

Either way, the loss is coming. Why is it more justified to FORCE people to hold onto a stock they know almost certainly is going to be devalued?

Using this logic, we should allow a butcher to sell spoiled meat as new one, or we should allow car salesman to sell a car with a defective engine as a new one.

Either way, SOMEBODY is going to lose money: either them, or the sucker who buys the defective goods when they realize they've been had. So why FORCE them to be the losers instead of the sucker?

(Well, the real reason is simple: because in all three cases, the seller is committing fraud. )

[shanek]

Originally posted by Skeptic
Hiding pertinent information about goods you sell is often, legally and morally, just as bad as making false claims about them.

Nothing is being hidden, either, except for private information that the seller might actually be legally forbidden from revealing.

To use the previous example, if I hide from prospective buyers that a house's foundations are rotten, this is just as bad as openly claiming that they are in good shape.

But again, in the stock market people make no sales pitches at all. They make no claims or representations of any kind. They just buy and sell.

As for those who are hurt by insiders' trading, it is the buyers who bought the overpriced stocks sold by the insider traders who dumped them,

WHO WOULD HAVE BOUGHT THEM ANYWAY!!!! HOW MANY TIMES TO I HAVE TO SAY THAT?????

[shanek]

Originally posted by Skeptic
Using this logic, we should allow a butcher to sell spoiled meat as new one, or we should allow car salesman to sell a car with a defective engine as a new one.

This is NO KIND OF LOGIC AT ALL! Someone who doesn't want spoiled meat can get the exact same (but unspoiled) meat from another supplier. Someone can get a new car of the exact same make and model from another dealer.

IT DOESN'T MATTER whether or not the person buys the stock in XYZ Corporation from someone with insider information or not. What happens to the price is still what happens to the price!

NO ONE is committing fraud, those situations are not in any way comparable, and insisting that they are not only shows your ignorance of how the market works, but also ignoring these very points that have been already brought up shows your bias and your unwillingness to consider the validity of your position.

[Suddenly]

Originally posted by shanek


But again, in the stock market people make no sales pitches at all. They make no claims or representations of any kind. They just buy and sell.


Most people (maybe not you) research a company before buying, and rely on the company's representation that all information material to the company's financial situation has been disclosed. That is the representation that is harmed.

Again, understand that insider trading requires some breach of fiduciary duty and is at heart a crime of theft of information that in and of itself has value.

[Suddenly]

Also, where Harry seems to run afoul of reality

(from above Harry Browne article)
But if I had to make my information public, I wouldn't buy the stock at all — since revealing the information would have caused the price to rise before I'm allowed to buy. And if I can't buy the stock without revealing the information, I won't bother to reveal the information. So you still would have sold your stock at $42. (emphesis added)

Harry completely ignores the duty. For an act to be illegal under the insider trading laws, the use or disclosure of information in question must be in violation of a fiduciary duty. Thus, that person has a duty to disclose information to stockholders. To not do so would be a willful breach of his agreement with the stockholders to represent their best interests, and he would be guilty of some sort of fraud if he accepts compensation for his services.

He completely ignores this aspect. I strongly suspect he is talking out of his arse and has never fully researched the legal factors present in insider trading.

[WildCat]

Shanek, if you think insider trading is ok then you don't believe in open markets, plain and simple. Martha Stewart and a select few other owners (stockholders) were given information w/ grave implications as to the future value of the stock. They sell, while other owners didn't because they didn't have information that a few other owners had, which caused the value of their stock to fall. These other owners were harmed. Now, maybe you'll say that they weren't because they wouldn't have sold their shares anyway but the fact remains that the owners of a publicly traded company have equal rights to know the financial condition of said company.

It doesn't seem like a very libertarian view to be against open markets, and there are loads of ways insiders could abuse their position tremendously if there weren't laws against it. This would erode trust in the market and ultimately do great harm to it, making the stock market something akin to a rigged carnival game.

[WildCat]

Here's another way to think about it, shanek. You're in business w/ one partner. Your company makes widgets for MegaCorp and a few other companies, but MegaCorp accounts for 75% of sales.

One day your partner gets a phone call from MegaCorps purchasing dept., they've decided to cancel the contract and buy their widgets from someone else. Your partner doesn't tell you this, rather he suddenly informs you of his desire to retire and wants to sell you his share of the company. You've been wanting him out of the way anyway so you buy him out. After the buyout is signed and the $$ transferred he says, "Oh, BTW, MegaCorp is no longer a client of ours. Have a nice day sucker!".

Now, you wanted to buy him out anyway, so you weren't really harmed, right?

[evildave]

My favorite is the repeated dot-com drama.

Promise employees stocks and cheap options that will "mature" in three years. Build up hype for your non-existant product and dubious (if not retarded or even downright deceitful) business plan.

One and a half years later, when everything's at its peak, the CEO's stocks (as well as a few other founding members' stock options) mature. They oversell the stocks to the public, so they sell their stocks to the company at the going (obscenely inflated) price to cash them out to make sure the employees have their shares available.

At three years, the company is all but finished. I knew a lot of "millionairs" on paper whose options never quite came up in time. The few who were not laid off have options worth less than the "cheap" buy-in price. The big wheels are long gone with cash in their pockets. A few of the little people are left to sell the assets off and lock the doors.

Never mind all the investors who were left holding the bag, either by purchasing these stocks, or having their retirement funds purchase them.

Times thousands of these businesses, and you wonder why the economy tanked? How many of these jerks went to jail? Not enough to matter.

It wasn't just the dot commies that screwed us. Enron is another fine example of the common investor scam. Buy up companies as fast as you can to dump debt into them, to fuel more buying, and make your own stocks look like pure gold and show wild growth. Naturally all of the relatively solid-seeming companies that were purchased for looting (with these "pure gold" stocks) are put out of business, too. Naturally the people who had the stock options of the purchased companies - the stocks were only good for the PREVIOUS identities' stocks. Not the buyer's stocks. Only the big wheels get those.

Even though Enron got caught, how many of even them will see jail time? Maybe two or three. And not hard jail time, or even long jail time. A slap on the wrists, and a fine that can not easily reach assets that are easy to conceal and protect.

It's fine to loot retirement funds. Steal all you want from people's life's savings. They weren't going to have the sort of good and early retirement you have planned, anyway.

All you need is a business plan and a real plan, and the sense not to risk any of your own seed capital to live off and wait for when the next "boom" hits after the economy covers and the heat is off again. It is important to appear to lose as much as anyone else. Just make sure there is enough left over.

[EvilYeti]

Originally posted by shanek

And someone else who was GOING TO BUY THE STOCK ANYWAY. Amazing how people keep forgetting that...


They would NOT HAVE BOUGHT THE STOCK at the current price if they HAD KNOWN it was going to VERY SHORTLY lose most of its VALUE. Notice how the very next day the stock tanked on the news. It's fraud, pure and simple.

Amazing how you are completely unable to understand that.

[corplinx]

libertarian economist walter e williams on insider trading (http://www.gmu.edu/departments/economics/wew/articles/03/insider.html)


Try reading it as a thought experiment and not as a lecture and you might come away with something even though you don't necessarily agree.

[EvilYeti]

Originally posted by corplinx

Try reading it as a thought experiment and not as a lecture and you might come away with something even though you don't necessarily agree.

I absolutely do not have a problem with his position. Its his personal opinion.

What does bother me is the hypocrisy of a Libertarian Party that claims to oppose fraud, yet turns around and endorses fraudulent acts. Why type of "fraud" do they actually oppose anyway? I've yet to see a concrete example.

[Solitaire]

Originally posted by shanek
It says no such thing. You and the writer of the article are both
suffering from the misconception, which I have corrected you on
many times, that the stock market is a zero-sum game. It isn't.
One person making money in the stock market does not mean
that others are losing that amount of money.

And yet you have the gall to suggest that
others need to get an education in economics.

The stock market is the ultimate zero sum game.
The nature of the trading makes it unavoidable so.
At the end of the day the number of shares traided
from buyers subtracted for the number of shares sold
equals zero. Likewise that amount of money spent
from buyers subtracted from the amount of money
received by sellers equals zero.

A halmark of a zero sum game is that the number of units
on one side of an exchange equals the number of units on
the other side of an exchange. A nonzero sum game such
as baseball where one tream scores a run the other team
does not have its runs reduced. The number of runs is not,
as we say, conserved.

P.S. I'll skip the lecture on determining the
value of a company using Quantum Economics. :D

[EvilYeti]

Originally posted by Synchronicity

The stock market is the ultimate zero sum game.
The nature of the trading makes it unavoidable so.
At the end of the day the number of shares traided
from buyers subtracted for the number of shares sold
equals zero. Likewise that amount of money spent
from buyers subtracted from the amount of money
received by sellers equals zero.


I don't think either of you are right. Some transactions are zero-sum in the short term, but in the long run the overal market is a postive-sum game on average. It has to be, otherwise new companies could not IPO and established ones could not issue new shares. But on the level of day to day trading, as Synchronicity described, it does appear to be zero-sum.

Could someone with a strong economics background comment?

[specious_reasons]

Originally posted by shanek

Then I reiterate my challenge: Find me ONE PERSON harmed by Martha Stewart. ONE. And show the direct, tangible harm they suffered.


I can think of a party that gets hurt by insider trading:

The Libertarian Party.

People in the US don't like seeing people gain advantage by unfair means, especially by abusing privilege. It hurts the support for Libertarians when they condone such activities.

And, Shane, you are condoning those types of activities. That's how it reads to everyone who's arguing against you here.

BTW, this type of activities do, in fact, make people stop trading. My elderly relatives have pulled out of any stock holdings. Tell me that that's good for the economy.

[Suddenly]

Originally posted by corplinx
libertarian economist walter e williams on insider trading (http://www.gmu.edu/departments/economics/wew/articles/03/insider.html)


Try reading it as a thought experiment and not as a lecture and you might come away with something even though you don't necessarily agree.

I'll just mention in passing that he avoids and slightly mistates the question w/r/t the company insider violating his/her fiduciary duty to the shareholders by misappropriating information. I've driven that into the ground.

The other problem is that this article, just like the Harry Browne article, is about asymmetrical information, and really doesn't note the fundamental difference between the types of information.

We accept that in a transaction if you know more than I do I'm going to not get the value that I would if I knew as much as you. The author's oil example for instance. You have a degree in geology, you have tested available information, and you are pretty sure there is oil there. I have no idea. You then negotiate a price that is below market price for land containing oil. Nothing wrong with that. One can look at it as either me not doing my homework or you benefiting from your knowledge, whatever. This is fine.

However, insider trading differs from above in that in a publicly traded company, financial disclosures constitute a representation of a company's situation in good faith to not only shareholders but potential buyers. Also, in the oil situation I have access to the same information you have. In an insider trading example the information in your possession is not publicly available, or else it wouldn't be insider information. There is no way for me avoid the disadvantage by (legal) investigation or analysis.


The thing about "information getting to the market" is just silly. It would get to the market a heck of a lot quicker with a press release than by slowly selling off shares.

I love this one: Take the Enron and WorldCom cases. Long before their collapse there were insiders who knew about the accounting fraud and other management sharp practices that inflated the worth of the companies. Had just a few of Enron's and WorldCom's many insiders, who knew of these practices, sold their shares or gave out well-placed tips, shareholders would have learned much earlier about the true value of the companies and might have been better able to protect themselves.
... and if they called the cops like they should have instead of selling to people with no idea maybe those new buyers could have avoided being totally defrauded as well.

The larger problem of the article is hinted at in the last paragraph. If markets are regulated for the purpose of allowing the general public to compete in the stock market on a level playing ground w/r/t information then insider trading has to be illegal, as it is contrary to the larger purpose regulation is supposed to serve, to encourage investors by letting them have some confidence that they will not be simply getting ripped off by people that know more than they do.

However, if we allow the market to be caveat emptor, then there is much less of a problem with insider trading, although insider trading still would likely be a violation of fiduciary duty. Actually, if the company created a pattern of conduct where it repeatedly voiced a representation that it would disclose all material information, then we would be back to fraudville.

[EvilYeti]

Originally posted by specious_reasons

People in the US don't like seeing people gain advantage by unfair means, especially by abusing privilege. It hurts the support for Libertarians when they condone such activities.


Can anyone think of a type of fraud the LP doesn't condone? This is a serious question.

[Suddenly]

Originally posted by EvilYeti


I don't think either of you are right. Some transactions are zero-sum in the short term, but in the long run the overal market is a postive-sum game on average. It has to be, otherwise new companies could not IPO and established ones could not issue new shares. But on the level of day to day trading, as Synchronicity described, it does appear to be zero-sum.

Could someone with a strong economics background comment?

How 'bout a strong gambling background?

A zero sum game is like a weekend poker game. Six guys put in fifty bucks each, and no matter how long you play, if no one re-buys or rat-holes (takes money off the table) there will be three hundred dollars. If one guy wins, another must lose.



A negative sum game is the above game with a $.25 per hand house rake. The amount of money in play decreases. The players losses must exceed players winnings, and it is possible for everyone to lose.

A positive sum game would be where the house adds that quarter to the pot. Winnings would exceed losings, and it is possible for everyone to win.

There is a negative sum aspect in that the market requires money to run. All investors incur a cost of trading, be it brokerage fees or buying a pencil to write down orders. However, for the sake of argument lets ignore that right now, as it can be relegated to being ouside the game, so to speak.


Where does the money gome from to make the stock market a positive sum game? Prices go up over time, but that is because of extra investors. This is like rebuying to the poker game. There is more money all around, but the relationship of loss to gain is the same, as for every dollar lost there is a dollar won.

The reason It may appear to be a positive sum game is that it never ends, and in our expanding economy more money is coming in all the time in the form of new players.

However, every dollar of profit recognized by the purchase and sale of a stock is money that comes from another investor in some form. They may still come out ahead by later selling to an even newer investor, but at the end, in a capital gains sense, it is a zero sum game, even though it appears under current conditions to be a positive sum game.

Now, dividends are where it can get a bit weird. Investors are getting money independent of the buying and selling of stock, so at first blush this would seem to make this a positive sum game. However, this money is seperate from the buying and selling of shares in the same way brokerage fees are. Plus, dividends are not required, as some companies never pay them, and they are not guaranteed.

So, depending on your point of view and current conditions it seems it could be any of the three.

If you just look at the capital gain aspects, the buying low and selling high, it is a zero sum game that can appear to be a positive sum game in an expanding market, and a negative sum game in a contracting one.

If you add in semi-external factors of dividends and market costs, it all depends on the level of dividends w/r/t the level of costs of investment. If more money is taken out of the market by costs of the market, such as broker fees, than is being returned by dividends, it is a negative sum game. If vice-versa, positive sum. It would depend on current conditions.

[Cinorjer]

Then I reiterate my challenge: Find me ONE PERSON harmed by Martha Stewart. ONE. And show the direct, tangible harm they suffered.

You seem to be fixated on this argument, and it's entirely irrelivent. You could ask the same question about someone robbing a bank! Who was harmed? Not the bank, they were insured. Not the depositors of the bank, their money is still in their accounts. Even the insurance companies have already figured in a certain amount of theft causing a payout and it's already included in their price. So, because it's hard to pinpoint "one person" harmed, then robbing a bank is OK? You could (and people do) make the same "it's not hurting anyone" argument for other crimes like shoplifting. How does me taking a CD without paying for it hurting anyone, for instance?

It's cheating and leads to manipulating the market, that's what is wrong with insider trading. It's breaking the rules of the game. If enough people break enough rules, then people simply will begin to refuse to play the game, or also begin breaking the rules because everyone else is doing it.

[shanek]

Originally posted by Suddenly
Most people (maybe not you) research a company before buying, and rely on the company's representation that all information material to the company's financial situation has been disclosed. That is the representation that is harmed.

But NOTHING is being hidden here! They KNOW when the reports are going to be released, and they know that speculating on what those reports will say before hand is chancey!

Again, understand that insider trading requires some breach of fiduciary duty and is at heart a crime of theft of information that in and of itself has value.

You keep repeating this claim, but have yet to support it.

[shanek]

Originally posted by WildCat
One day your partner gets a phone call from MegaCorps purchasing dept., they've decided to cancel the contract and buy their widgets from someone else. Your partner doesn't tell you this,

Oh, come on—there is all the difference in the world between this and insider trading! Obviously if one partner keeps this information from another partner that's a serious breach, but that's not what we're talking about!

[shanek]

Originally posted by Synchronicity
The stock market is the ultimate zero sum game. The nature of the trading makes it unavoidable so. At the end of the day the number of shares traided
from buyers subtracted for the number of shares sold equals zero.

That deals with the number of shares sold, not their value, which will fluctuate as the day's trading goes on.

Let's say that I buy 100 shares of XYZ stock at $25 a share at the beginning of the day's trading. 100 shares went from someone else to me and the $2500 went back the other way. Now, over the course of the day's trading, the price of the stock goes up to $35 a share. The stock that I paid $2500 is now worth $3500. So, whom did I take that extra $1000 from? Clearly no one. It came about because the increased demand for the stock drew the price up. But these arguments against "insider trading" assume that I took the $1000 from the person who sold it to me because he could have kept the stock and been $1000 richer at the end of the day, a clear absurdity.

The amount of money at the end of the day is NOT the same.

[shanek]

Originally posted by Cinorjer
You seem to be fixated on this argument, and it's entirely irrelivent.

It's irrelevant that no one is harmed to the question of whether an activity is illegal? Are you SERIOUS?

You could ask the same question about someone robbing a bank!

No, you couldn't.

Who was harmed?

The bank, obviously. And the teller and any other people there who feared for their lives while the heist was taking place.

Not the bank, they were insured.

That has GOT to be the lamest argument in the history of this forum! IU was hit by a drunk driver in 1998. Just because I was insured doesn't mean I was harmed.

If nothing else, the bank will have to face the expense of making the claim, informing and cooperating with the police, etc. They may even face higher insurance premiums as a result.

I can point you to A LOT of people directly harmed by a bank heist. So try again.

[shanek]

All right, people, let's try it this way:

The definition of "insider trading" is "the practice by which a manager or other insider uses material information not yet disclosed to other shareholders or the outside world to make profits by trading in the firm's stock."

So, let's say I have my 100 shares of stock in XYZ Corporation and I also have inside information that they operated at a loss this quarter and will announce this plus the closing of one of their manufacturing plants, an announcement almost sure to drive the stock price downward.

Now, let's assume for the sake of the argument that all of you are right: That dumping my stock at this time without disclosing the information would constitute direct harm to whomever bought the stock. Let's also say that I'm directly prohibited in some fashion (either by a NDA or just the threat of losing my job) if I leak the information early. And let's say that I'm not someone people would believe about this anyway, because otherwise we would be in the ridiculous position of assuming that mere rumor (which is all my statement would be) would be enough to start massive buying or selling of stocks.

But nonetheless, I want to get rid of my 100 shares before the price drops. Whom do you people recommend that I give this information to, and how?

[Frank Newgent]

Originally posted by shanek
Whom do you people recommend that I give this information to, and how?
Why not fax it to Molly Ivins? (http://www.sacbee.com/content/opinion/national/ivins/story/3509421p-4535583c.html)

See if you can follow this bouncing ball: In 1989, Harken masked it losses when it sold 80 percent of a subsidiary, Aloha Petroleum, to a partnership of Harken insiders called International Marketing & Resources for $12 million. Of that sum, $11 million came from a note held by Harken. In January 1990, IMR in turn sold its stake in Aloha to a privately held company called Advance Petroleum Marketing, and the Harken loan was effectively transferred to Advance. In other words, they borrowed money from their own company to buy a subsidiary at an inflated price, thus covering up the company's losses. The SEC later ruled the transaction fake and forced the company to restate its earnings.

[EvilYeti]

Originally posted by shanek

But nonetheless, I want to get rid of my 100 shares before the price drops. Whom do you people recommend that I give this information to, and how?

The only correct thing to do from a legal standpoint is to keep your mouth shut and hold onto the stock. You could go ahead and sell it of course, for such a small transaction the SEC wouldn't bother investigating. This happens constantly, I would be surprised if even 1% of all insider trading was prosecuted. The whistleblower option wouldn't work as you could still be charged with insider trading. Since you aren't considered a trusted source, but are operating on knowledge obtained from a trusted source, you would still have an advantage.

In Martha Stewarts case, she sold ALL of her stock a day before a very dramatic revelation that drove the price way down. It's activities like this that wave a red flag at the SEC. They have computers that look for odd sales like this (big sell-offs before a sudden dive) so its pretty easy to catch. Proving it is usually much more difficult. Martha's getting hit pretty hard because the SEC want's to make an example of her. They are showing that if she can go to jail, anyone can.

I once asked the same question you did, regarding what an individual should do when faced with such inside knowledge, when a FOAF was investigated for dumping a few million dollars worth of Lucent stock a couple weeks before a big negative earnings report.

The official answer was he shouldn't have made any trades based on insider knowledge, the unoffical answer was he should have been smarter about it. For example, unloading less of it and in smaller chunks over a more extended period.

[Suddenly]

Originally posted by shanek


But NOTHING is being hidden here! They KNOW when the reports are going to be released, and they know that speculating on what those reports will say before hand is chancey!

The company makes a representation to the public that all material information will be disclosed. A company insider then makes a trade based on material information that has not been discosed. The second act makes the earlier representation false. Your original assertion was that no representation was made w/r/t the stock. That assertion was in error.

You keep repeating this claim, but have yet to support it.

Which part? That a corporate insider has a fiduciary duty to stockholders? Or that insider trading is largely seen as a theft of information? Or that information has value?

I have supported all three in the post above where I quote from the textbook I used when I tought Business Law. This is supported in the chapters I cited.

Oh, and as to the 100 shares you legally you must wait until the information is announced to sell. This puts you into a situation equal to the other shareholders. However, EvilYeti is right about the legal reality of the situation, that usually only bold and stupid moves get picked up by the SEC.

[Cinorjer]

That has GOT to be the lamest argument in the history of this forum! IU was hit by a drunk driver in 1998. Just because I was insured doesn't mean I was harmed.

What in the world does a car accident have to do with our discussion? Are you really that desperate in flailing around for a response?

If nothing else, the bank will have to face the expense of making the claim, informing and cooperating with the police, etc. They may even face higher insurance premiums as a result.

And that's exactly the situation the companies/people involved in securities fraud like insider trading are faced with. Do you think a company with managers and employees caught doing this aren't faced with fines, expensive court costs, damage to their business? Or that otherwise innocent people don't end up losing their jobs or having their reputation damaged? Or that the people who do this are not selfish, greedy people who don't care that they're damaging a company and system that other people count on for their own living?

I can point you to A LOT of people directly harmed by a bank heist. So try again.

No, I don't consider your answer to be worthy of further discussion. You still haven't countered my point, only blustered about how you could if you wanted to. Give it up.

[Suddenly]

Originally posted by shanek


Oh, come on—there is all the difference in the world between this and insider trading! Obviously if one partner keeps this information from another partner that's a serious breach, but that's not what we're talking about!

What? That is exactly what we are talking about. The legal duty between partners is the same duty owed by a corporate officer to the shareholders. In both cases it is a fiduciary duty.

O.K. Remember West's Business Law I mentioned above?

On page 626: "Partners stand in a fiduciary realtionship to one another, just as principles and agents do. It is a relationship of extraordinary trust and loyalty."

On page 660: "Directors and officers are deemed fiduciaries of the corporation, because their relationship with the corporation and its shareholders is one of trust and confidence."

Plus, the original hypo can be a corporation, where you own 50% of the shares, the other person 50%. You are the only officers of the corporation. He gets the information in his officer status w/r/t the bad news, and sells out to you without disclosing.

Are you suggesting the different business form changes the answer somehow?

[Suddenly]

(I'm going to break this up a little for better clarity)

Originally posted by shanek


That deals with the number of shares sold, not their value, which will fluctuate as the day's trading goes on.

Let's say that I buy 100 shares of XYZ stock at $25 a share at the beginning of the day's trading. 100 shares went from someone else to me and the $2500 went back the other way. Now, over the course of the day's trading, the price of the stock goes up to $35 a share. The stock that I paid $2500 is now worth $3500. So, whom did I take that extra $1000 from? Clearly no one.

You haven't made the $1000. The market suggests that if you sold the stock you would realize $1000. But you have not made the money yet It came about because the increased demand for the stock drew the price up. The money does not magically appear, another investor must actually pay you money, which will become a potential loss if the stock becomes worthless. Thus, if a stock is purchased at an inital par value, say $10, the corporation gains $10 in capital. The person has a potential loss of $10 if the stock is worthless. If he sells it for $20 he shows a gain of $10. That next person sells it to me for $50, gaining $30. At this point, everybody is ahead. However, note that my potential loss, $50, is equal to the total profit shown on all previous sales ($10 to the corp + $10 to the first buyer + $30 to the second buyer). Thus, it is a zero sum game. This fact is obscured by the infinite nature of trading. However, when the stock becomes worthless via bankruptcy or the world ending, losses will equal gains. Dividends potentially make this a positive sum game, but as far as capital gains from buying and selling of stock go, it is a zero sum game, just a complex one.

But these arguments against "insider trading" assume that I took the $1000 from the person who sold it to me because he could have kept the stock and been $1000 richer at the end of the day, a clear absurdity. How is that absurd unless you assume a large market? It could be you are the only buyer interested in the stock. Just because a stock is publicly traded doesn't mean it is listed on an exchange or has a particular volume.

The amount of money at the end of the day is NOT the same. The market cap is not the same. However, much of that is potential gain, not realized gain. If I buy a million shares of XYZ at $50 and then someone later in the day buys 100 shares for $51 causing the stock to "close" at $51 the amount of cash has not increased. The potential value only has increased. If you call that "making" a million dollars, you also have to say you "lost" 1 million dollars if the stock ticks back to 50 upon opening. Thus, there is a extra potential loss to offset the paper gain.

The definition of a zero sum game is where losses = gains. Once the stock market "ends" all gains and losses will equal out. Thus, absent considerations of dividends, broker fees, and the like, it is a zero sum game.

[shanek]

Originally posted by Frank Newgent

Why not fax it to Molly Ivins? (http://www.sacbee.com/content/opinion/national/ivins/story/3509421p-4535583c.html)

Again, that's not the kind of thing we're talking about. Funny book-making, Enron-style fraud and corruption, all of that is clearly fraud and should be restricted.

My question contained every aspect of what I was talking about. Why are you people changing the subject? Why are you afraid to answer this simple question? Why are you afraid to do ANYTHING to back up your point of view?

[shanek]

Originally posted by EvilYeti
The only correct thing to do from a legal standpoint is to keep your mouth shut and hold onto the stock.

In other words, I should be FORCED to sit on my stock and suffer the loss. Well, at least you're honest, apparently the only honest one here...

Now, next question (actually, the question I've been asking all along): Why is it more justified to FORCE people to hold onto a stock they know almost certainly is going to be devalued, especially considering that it won't actually save anyone else from losing out?

[shanek]

Originally posted by Suddenly
Oh, and as to the 100 shares you legally you must wait until the information is announced to sell.

Well, thank you for admitting it, finally. You could have just said so earlier and we could have saved a lot of headaches.

Now, will you please answer the question, the one I just reiterated to EY?

This puts you into a situation equal to the other shareholders.

No, it doesn't. It puts me at a disadvantage. The other shareholders could decide to sell for whatever reason and get lucky because of the timing. There wouldn't be that chance with me. I HAVE to sit on the stock, no matter what, according to you.

[shanek]

Originally posted by Cinorjer
What in the world does a car accident have to do with our discussion? Are you really that desperate in flailing around for a response?

You said that a bank wasn't harmed by a bank robber because they're insured. I responded with the same logic: If I'm in a car accident, I'm not harmed because I'm insured. Don't go whining back at me just because I blew your logic out of the water.

I notice you didn't mention anything about the tellers and customers who were in fear for their lives, either...

And that's exactly the situation the companies/people involved in securities fraud like insider trading are faced with. Do you think a company with managers and employees caught doing this aren't faced with fines, expensive court costs, damage to their business?

That is completely irrelevant to the question of what harm TO OTHERS that company has done. The bank didn't ask to be robbed, and yet they have to undergo these burdens.

Your comparison is more like the bank robber having to go to jail. It's a question of punishment, and punishing the bank robber is justified because he has caused DIRECT HARM to others.

Besides, the harm caused by the consequences of legal action for a crime can hardly be justification for the existance of that crime in the first place.

No, I don't consider your answer to be worthy of further discussion. You still haven't countered my point, only blustered about how you could if you wanted to. Give it up.

No, I pointed to several people who were directly harmed by the bank robber's actions—NOT the harm caused by the police chasing him down, prosecuting, and imprisoning, but the direct harm caused by the robber himself—as well as how the bank itself suffered. You still cannot point to ONE PERSON directly harmed by the company's actions without going into how they'll be harmed by prosecution or the company trying to avoid prosecution.

[shanek]

Originally posted by Suddenly
You haven't made the $1000. The market suggests that if you sold the stock you would realize $1000. But you have not made the money yet

Well, then, by that token, people purchasing the stock before the price plummets haven't really lost any money because they haven't turned around and sold the stock, so there goes your entire justification down the tubes.

[EvilYeti]

Originally posted by shanek

In other words, I should be FORCED to sit on my stock and suffer the loss. Well, at least you're honest, apparently the only honest one here...

It's not a question of honesty, I'm just stating what the law is. You aren't forced to do anything, as I said you could just go ahead and sell the stock and hope the SEC doesn't feel prosecuting you is worth the trouble.

Part of engaging in transactions on the public markets is that you are legally bound to abide by their rules. In fact, the reason our regulated securities markets are so popular, much more popular than the unregulated European ones, is precisely because of rules against illegal insider trading. It boosts consumer confidence and people then become more willing to invest money.

We should take care to differentiate between legal and illegal insider trading. Any trading of company stock done by employees, management, etc. is considered insider trading and is closely regulated by the SEC. As long as there is no breach of fiduciary duty and the buyer/seller is not in possession of non-public information its perfectly legal. Its illegal to make transactions based on insider information, or to pass on that information to family, friends, etc outside the company.

Now, next question (actually, the question I've been asking all along): Why is it more justified to FORCE people to hold onto a stock they know almost certainly is going to be devalued, especially considering that it won't actually save anyone else from losing out?

Because we've tried unregulated sercurites exchange before and it blew up in the countries collective face. The market pre-SEC was rife with fraud with led directly to the crash of 1929 and exacerbated an already depressed economy. Even today crooks engage in "pump and dump" style market scams with the SEC is tasked with unconvering and prosecuting. Fraud is fraud, whether the party responsible is Tony Soprano or Martha Stewart.

Please don't reply the Gummint caused the 1929 crash. I don't want to be held responsible for derailing another thread.

[a_unique_person]

Originally posted by EvilYeti


Please don't reply the Gummint caused the 1929 crash. I don't want to be held responsible for derailing another thread.

Feel free. The only things that have ever gone wrong in the world were due to government, according to Shane.

[Suddenly]

Originally posted by shanek


Well, thank you for admitting it, finally. You could have just said so earlier and we could have saved a lot of headaches.

Sorry, thought it was obvious.



No, it doesn't. It puts me at a disadvantage. The other shareholders could decide to sell for whatever reason and get lucky because of the timing. There wouldn't be that chance with me. I HAVE to sit on the stock, no matter what, according to you.

Not really. Let me clarify. To be held liable it has to be proven that you sold the stock due to for the unlawful reason. In a court of law your motivation can be inferred from the circumstances surrounding your actions. Thus, you could show evidence that your sale was for a reason other than the "illegal" information. You could show you had a tuition payment coming up for your kid, or some other factor other than the illegal information.

The whole time it has been somewhat assumed that the new knowledge was the reason for the sale. That will not always be the case.

[69dodge]

Originally posted by shanek
Now, next question (actually, the question I've been asking all along): Why is it more justified to FORCE people to hold onto a stock they know almost certainly is going to be devalued, especially considering that it won't actually save anyone else from losing out?Of course it will save someone else from losing out. If you have some shares, no one else has those shares.

You say, the buyer knows the announcement will be made tomorrow and is nevertheless willing to take the risk of buying stock today before hearing it, so you should be allowed to sell to him.

I could just as easily say, you knew about the illegality of insider trading and were nevertheless willing to buy the stock initially, so now you have to hold on to it.

If everyone knows the rules and everyone follows the rules, no one can complain about fraud or coercion after they lose money, whether the rules are that insider trading is legal or that it's illegal. That doesn't help us decide what the rules should be.

Apparently people prefer the rules where insider trading is illegal. The reason, I gather, is that more people will be willing to participate in the stock market under those rules. This, presumably, is a good thing.

The person to whom you want to sell your stock may well be one of those people who is only willing to buy because he assumes that no one is trading with inside information. If insider trading is illegal, should he not be able to make that assumption? Are you not guilty of misrepresentation if you use inside information in spite of that reasonable assumption?

[Suddenly]

Originally posted by shanek


Well, then, by that token, people purchasing the stock before the price plummets haven't really lost any money because they haven't turned around and sold the stock, so there goes your entire justification down the tubes.

Nice shifting of the argument. I was discussing the concept of income, and rebutting your argument that the stock market is a zero sum game, as you were confusing the concept of potential and actual gains and losses.


I see you must conceed my point as to the buying and selling being a zero sum game since you took my statement, and used it not only out of context of the argument, but incorrectly anyway.

The law recognizes market value as a measure of damages w/r/t some sort of wrong. If a contractor is negligent and I can show my house has decreased in value, that is harm and I am rewarded the cost of fixing the problem or the loss of market value, whichever is less.

It is not my problem you cannot see the obvious distinction between the two contexts.

"A foolish consistancy is the hobgoblin of small minds" - Emerson

[shanek]

Originally posted by Suddenly
Sorry, thought it was obvious.

Then why won't you answer the question?

In a court of law your motivation can be inferred from the circumstances surrounding your actions. Thus, you could show evidence that your sale was for a reason other than the "illegal" information. You could show you had a tuition payment coming up for your kid, or some other factor other than the illegal information.

Don't you realize that's basically "guilty until proven innocent"? Why should I have to do ANYTHING to prove my innocence? If the only "evidence" they have is the timing and magnitude of my sale, I shouldn't even be bothered by them! And it's none of their f*cking business what I have going on in my life that I might need the money for!

Why don't you realize that this is EXACTLY the same type of justifications that are always used to support intrusive measures the government has no business being in?

[shanek]

Originally posted by 69dodge
Of course it will save someone else from losing out. If you have some shares, no one else has those shares.

The people who would be the ones purchasing my shares are people who are looking to buy the stock, which they will purchase regardless of whether or not I sell mine. If I don't, they'll just get them from somewhere else, and since there would be fewer shares on the market, if anything they'd pay a higher price for them.

You say, the buyer knows the announcement will be made tomorrow and is nevertheless willing to take the risk of buying stock today before hearing it, so you should be allowed to sell to him.

I could just as easily say, you knew about the illegality of insider trading and were nevertheless willing to buy the stock initially, so now you have to hold on to it.

And we go back to the circular argument. You can't use the existance of laws against insider trading to justify the existance of laws against insider trading! I'm trying to examine a situation where there are NO SUCH LAWS and trying to get you people to tell me who has been harmed by the trade! So you CAN'T use the fact that insider trading is illegal!

[shanek]

Originally posted by Suddenly
Nice shifting of the argument. I was discussing the concept of income, and rebutting your argument that the stock market is a zero sum game, as you were confusing the concept of potential and actual gains and losses.

Okay, people let's review:

Synchronicity said:
The stock market is the ultimate zero sum game. The nature of the trading makes it unavoidable so. At the end of the day the number of shares traided from buyers subtracted for the number of shares sold equals zero.

And I said:
That deals with the number of shares sold, not their value, which will fluctuate as the day's trading goes on.

That's when you chimed in. I'm rebutting the claim that the stock market is a zero-sum game because the number of shares of stock traded is always equal. This is clearly not the case, because the VALUE of those stocks is not the same...and it's NOT the case that if one stock goes up another stock must necessarily go down.

THE STOCK MARKET IS NOT A ZERO SUM GAME.

[shanek]

By the way, everyone: Nice job avoiding answering the question... :rolleyes:

[DavidJames]

This tread, more than any other, has crystallized in my mind the difference between shanek's Libertarian view and the way our society and laws have evolved. It is epitomized by the signature line which shanek used to have, mine mine mine mine... There exists a chasm in thought that will never be closed. Suddenly, EvilYeti and others of the same mind are arguing in favor of the current laws and how they attempt to provide a level and fair playing field for investors. Shenek, in this case, as in most, doesn't care about the laws and fairness. It's simply, mine mine mine. The stock owner has his shares and should be allowed to do anything he wants with them, period. Never mind that he has information which will give him an advantage. mine mine mine. No one can tell me what to do with my stuff. Caveat emptor, let the buyer beware. You are own your own. What's mine is mine. And if I can trick you (without force, or course), what's yours will be mine as well.

Libertarians, whether by design or not, don't care about fair, they only care about mine mine mine. The others can take care of themselves, if they can't, tough. It's a very simply philosophy, mine mine mine and in some sense one consistent with the survival of the fittest concept we see in nature, only applied to humans. The smart and cunning among us will use whatever means possible (without force of course) to acquire as much stuff as possible. From where? From the less cunning, gullible and naive. Those who can't compete will wither and die. I understand the lure of such a simple philosophy. It's black and white, fairness, on the other hand, is complex and full of grey. Like I said, this is a philosophical chasm that I don't think will ever be bridged. Arguing the law and the reason for the law is fruitless, in the Libertarian's view, mine mine mine trumps fairness.

[69dodge]

Originally posted by shanek
The people who would be the ones purchasing my shares are people who are looking to buy the stock, which they will purchase regardless of whether or not I sell mine. If I don't, they'll just get them from somewhere else, and since there would be fewer shares on the market, if anything they'd pay a higher price for them.They might not buy the stock if they have to pay a higher price. If they do buy it, whoever sells it no longer has it. Clearly, if you have some shares of the stock, there are fewer shares for everyone else. If you've sold the shares, someone out there has them who wouldn't otherwise have them, and when the price drops, he's the one who loses money.

You might ask why you should lose money instead of someone else, but I don't see how you can argue that no one else will lose money if you sell your shares.And we go back to the circular argument. You can't use the existance of laws against insider trading to justify the existance of laws against insider trading! I'm trying to examine a situation where there are NO SUCH LAWS and trying to get you people to tell me who has been harmed by the trade! So you CAN'T use the fact that insider trading is illegal! According to you, no one is harmed who knew what he was getting into. So the existence of insider trading laws doesn't harm anyone either, because those prevented from conducting insider trades also knew what they were getting into. So to decide whether insider trading should be legal or illegal, we need some criteria other than whether anyone is "harmed."

You need to look at the big picture. What will happen if insider trading is legal? What will happen if it's illegal? Which scenario is preferable?

If we want to encourage people to invest in companies, outlawing insider trading seems like a good idea, because otherwise people will be reluctant to buy stock. Doesn't that make sense?

[Suddenly]

Originally posted by shanek


Then why won't you answer the question? Didn't ralize you were asking. I thought you were being rhetorical. I didn't believe the answer was in doubt.



Don't you realize that's basically "guilty until proven innocent"? Why should I have to do ANYTHING to prove my innocence? If the only "evidence" they have is the timing and magnitude of my sale, I shouldn't even be bothered by them! And it's none of their f*cking business what I have going on in my life that I might need the money for!

First of all, there are two types of liablity for insider trading, both civil and criminal. Criminal liablity requires both a higher burden than a civil case (Beyond a reasonable doubt rather than a preponderance of the evidence) and also an additional element, scienter, which I described in an earlier post. Your "guilty until proven innocent" is just not true.

I'm going to discuss this in criminal terms. The civil action is slightly different, different terms, burdens, etc. You seemed to be fixated on the criminal area, so I'll deal with that.

The state has the burden to show beyond a reasonalbe doubt that you have committed a crime. Just showing a big sale by you and a sudden drop in stock price won't cut it. They have to establish that you had access to the information, and that information drove your actions. In every crime the mental state of the defendant is at issue, and it is a well settled point of law that this is proven by circumstances. If they can show a sale and access to the information along with circumstances that seem to show the sale was a result of the information, that is enough evidence where a jury can find you guilty. Once the state rests you have the option of presenting evidence to contradict the states evidence. You don't have to, as you can just argue that the state cannot prove its burden.

There is no guilty until proven innocent.

In a civil action the burden is lesser, and there is no 5th amendment rights, so you can be made to testify.

Why don't you realize that this is EXACTLY the same type of justifications that are always used to support intrusive measures the government has no business being in?

Your statement assumes I agree with the government has no buisness regulating the trade of securities. I do not. If you are referring to the innocent until proven guilty thing, well, since you are arguing with your own distorted view of the legal system, I really can't address your feelings and have no idea what you are seeking to establish with this sentence, besides emphesize your inablity to relate to points of view other than your own.

I'm not trying to be insulting about this, but you need to calm down and try considering that other people know as much as if not more than you do about certain things. I'm not saying you shouldn't have an opinion, but perhaps consider being a bit more civil and open, especially about topics you have no expertise in.

[Suddenly]

Originally posted by shanek


That's when you chimed in. I'm rebutting the claim that the stock market is a zero-sum game because the number of shares of stock traded is always equal. This is clearly not the case, because the VALUE of those stocks is not the same...and it's NOT the case that if one stock goes up another stock must necessarily go down.

THE STOCK MARKET IS NOT A ZERO SUM GAME.

Can you define a zero sum game? Lets try Economist.com:
http://www.economist.com/research/Economics/alphabetic.cfm?TERM=ZERO-SUM%20GAME

ZERO-SUM GAME

When the gains made by winners in an economic transaction equal the losses suffered by the losers.

When the stock market "game" is over, and no more trades can be made, losses will equal gains. I illustrated this with a simple example. Your "one must go up doesn't mean one must come down" has nothing to do with zero sum. The relevant inquiry is whether, when the game is over, if losses will equal gains. A better phrase is "what goes up will will eventually go down." In other words, due to changing conditions, or the sun going nova or whatever, at some point in the future shares of microsoft will be worth zero, and at that point all capital gains taken by investors at that point will equal all losses. My earlier example illustrated this.

This does not imply that on any one day the gains and losses will be equal. Rather, that at the end of the market, when it finally collapses, losses and gains from buying and selling will equal out. Thus, it is a zero sum game, that due to the constant infusion of capitial into the market appears to be a positive sum game as at present gains outnumber losses. However, in a shrinking market it will appear a negative sum game.

Your use of all caps fails as persuasion.

[Suddenly]

Originally posted by shanek
By the way, everyone: Nice job avoiding answering the question... :rolleyes:

And a nice job to you for debating openly and honestly and not assuming ill motives on the part of those that discuss the issue with you.

I've tried to answer your questions. Unfortunately, my answers conflict with your central dogma that you are right about everthing, so I don't expect you to acknowledge them for the good faith efforts that they are.

Are you capable of discussing an issue without buster? Repeatedly you respond with all caps, insults, claims that people are just jerking you around.

I feel the same way about you, but I am able to control my frustration, so I attempt to forge some sort of understanding. You seem to give into frustration and just insult and accuse me of some sort of underhanded act (without substantiation).

[shanek]

Originally posted by DavidJames
It is epitomized by the signature line which shanek used to have, mine mine mine mine...

Geez, quote a freakin' Pixar character to match your avatar and it gives the same old, biased people another reason to dismiss your arguments...

IT WAS A F*CKING QUOTE FROM A F*CKING CARTOON CHARACTER, PEOPLE! GET THE F*CK OVER IT AND GROW UP!!!!

Suddenly, EvilYeti and others of the same mind are arguing in favor of the current laws and how they attempt to provide a level and fair playing field for investors.

Which, as I have demonstrated, actually makes it more unfair, and places harmdul limitations on others while protecting no one.

This post is nothing more than just another immature rambling of yours that, once again, adds nothing to the discussion.

[shanek]

Originally posted by 69dodge
They might not buy the stock if they have to pay a higher price.

No, they'll pay the same amount, they just won't buy as many shares. But they'll have exactly as much to lose should the stock tank.

Clearly, if you have some shares of the stock, there are fewer shares for everyone else.

Only if you don't have a clue how the stock market works. As far as the stock market is concerned, there is virtually no difference between 100 shares at $20/share and 80 shares at $25/share. You have the same value.

Why won't anyone just answer the question?

[Suddenly]

Originally posted by shanek



Why won't anyone just answer the question?

Which one?

[shanek]

Originally posted by Suddenly
Didn't ralize you were asking. I thought you were being rhetorical.

http://smiley.onegreatguy.net/banghead.gif

I have directly asked the question several times, and made several pleas for people to answer it. No one could mistake it for being rhetorical.

And you still haven't answered it.

There is no guilty until proven innocent.

So, did you misspeak when you said all the state had to do was infer my guilt from the circumstances surrounding my action, and that it was up to me to show that I had another reason for getting the money?

[shanek]

Originally posted by Suddenly
When the stock market "game" is over, and no more trades can be made, losses will equal gains.

That is just so totally and completely untrue that it is laughable. In fact, it regularly happens that a particular stock exchange, in toto, has a greater or lesser value at the end of the day's trading than it did at the beginning. Losses DO NOT equal gains. You only arrive at this absurd conclusion because you consider someone selling a stock where the value subsequently rose to be a loss and someone selling a stock where the value subsequently falls to be a gain.

Everything about the way the market works indicates that just because I sell stock with the knowledge that the price will likely fall, even if others are not equipped with that same knowledge, does NOT mean that other people are out the amount that I avoided losing when they wouldn't have been otherwise.

Now, ANSWER THE QUESTION!!!!

[Suddenly]

Originally posted by shanek


Geez, quote a freakin' Pixar character to match your avatar and it gives the same old, biased people another reason to dismiss your arguments...

IT WAS A F*CKING QUOTE FROM A F*CKING CARTOON CHARACTER, PEOPLE! GET THE F*CK OVER IT AND GROW UP!!!!


Nice composure.

Heck, I had the impression that the "mine mine" thing was you making a statement w/r/t politics, your strong belief in property rights. I didn't think then nor do I think now that it reflects negatively on libertarianism per se. I thought it was clever.

Libertarians often take unconventional positions to gain attention to make a point about personal propety rights. I though that it was in that vein. I think you could make a strong reasoned argument that "mine mine" is hardly an insult to Libertarianism, rather an example of how the false virtue of "fairness" is harmful, etc.

Or you could just go all caps and swear words and make youself look like a lunatic.

[Suddenly]

Originally posted by shanek


http://smiley.onegreatguy.net/banghead.gif

I have directly asked the question several times, and made several pleas for people to answer it. No one could mistake it for being rhetorical.

And you still haven't answered it.



So, did you misspeak when you said all the state had to do was infer my guilt from the circumstances surrounding my action, and that it was up to me to show that I had another reason for getting the money?

If that is what you took from it, I mispoke in that I assumed a whole bunch of context. I assumed that you were aware the differences between civil and criminal actions, and how a crime is proven, that the state must prove beyond a reasonable doubt their case. The tricky part of proving the crime is proving the mental state, and that was what I meant could be inferred by circumstances. Once they meet their burden you can rebut the states evidence. Legally, you don't have too, but if the state's case is strong it for all purposes up to you to rebut it.

[shanek]

Originally posted by Suddenly
Nice composure.

I'm sorry, but I lose it when people like DJ consistently use a quote from a cartoon character in my sig as a slight against me, particularly after I've pointed it out many, many, many times. The levels of bias and pigheadedness here just really, really get to me.

Heck, I had the impression that the "mine mine" thing was you making a statement w/r/t politics, your strong belief in property rights.

Then maybe you should look inside yourself and seek out whatever biases led you to that conclusion. Belief in property rights is not about greed or going "mine, mine, mine." It's about freedom for everyone. A "mine, mine, mine" philosophy would advocate me taking your land, which is something I absolutely do not have the right to do unless you give or sell it to me willingly.

Besides, ever since I first started on this forum I have used a fictional character as an avatar and the first line in my sig has always been an italicized quote from that character. So why all of a sudden would the seuence be different in that one case?

Again, if you associated that in any way with my political philosophy then you should look inside yourself for bias instead of calling me a "lunatic" for expressing indignation at those whose biases are so severe they don't even recognize the quote for what it was after being told several times.

[shanek]

Originally posted by Suddenly
The tricky part of proving the crime is proving the mental state, and that was what I meant could be inferred by circumstances.

But in order to prove intent you have to do a lot more than just show lucky timing. Unfortunately, good timing in the past has been all that is needed for anyone to go jumping all over people for "insider trading." And even if they're cleared, the damage to their reputation is so severe they find themselves greatly harmed by the invalid accusation. This is the case with all victimless crimes. They solve nothing, they protect no one, and they destroy lives. Insider trading "protections" might not be as severe as the War on Drugs, but the same concept still applies.

[EvilYeti]

Originally posted by shanek

And we go back to the circular argument. You can't use the existance of laws against insider trading to justify the existance of laws against insider trading! I'm trying to examine a situation where there are NO SUCH LAWS and trying to get you people to tell me who has been harmed by the trade! So you CAN'T use the fact that insider trading is illegal!
http://www.stockpickssystem.com/images/graphic_chart_crash29.gif

Examine the above chart of the DJIA from 1925-55. See the huge drop (a straight line btw, haha) in 1929? That's what you get from rampant, unregulated insider trading. The SEC was created shortly thereafter and it took the market 25 years to recover.

Or do you think no one was harmed by the Great Depression?

[Suddenly]

Originally posted by shanek


That is just so totally and completely untrue that it is laughable. In fact, it regularly happens that a particular stock exchange, in toto, has a greater or lesser value at the end of the day's trading than it did at the beginning. Losses DO NOT equal gains. You only arrive at this absurd conclusion because you consider someone selling a stock where the value subsequently rose to be a loss and someone selling a stock where the value subsequently falls to be a gain.

Did you skip the part where I said that a zero sum game does not require that the losses and gains equal out for a single day? This point is absolutely irrelevent to the question of whether something is a zero sum game.

I arrived at my conclusion through the analysis I posted above that starts with the poker games and moves into a discussion of stock market. I was just answering a question I found interesting.


Everything about the way the market works indicates that just because I sell stock with the knowledge that the price will likely fall, even if others are not equipped with that same knowledge, does NOT mean that other people are out the amount that I avoided losing when they wouldn't have been otherwise.

Pretty aware of that being your claim. I fail to see why it is significant. Losses due to insider trading are not an A wins B loses scenerio. It is complex.

Look at it this way, if you wind up putting cash in your pocket due to an insider trading action, that cash came from somewhere, it did not magically appear. The actual cash in the market is put there by people buying and selling stock. No cash is created by the buying and selling in the market, every last penny comes from the pocket of an investor at some point. When you put cash in your pocket from the sale, it came from other investors. It is possible that even absent your action the other person innvolved in your sale would be in the same position had you not made your sale. However, absent your action you would have less cash, and someone, somewhere else has more.

The only way this is not true is if cash is somehow created in this process.

You are confusing "value" with "cash gains and cash losses." When my stock goes up in market price, my holdings increase in value, but I have not made a cash gain. The cash gain is realized when I sell. Likewise, if the price falls, I lose value, but I do not have an actual cash loss until I sell.


The market price is nothing more than a tool to estimate value, it does not represent actual cash gain by investors.

[69dodge]

Originally posted by shanek
Why won't anyone just answer the question?I assume the question is, "who is harmed if you sell stock today that you know will drop in price tomorrow?". The answer is, "whoever owns more shares of that stock tomorrow than he would own had you kept your shares." As the total number of shares doesn't change between today and tomorrow, there must be such a person.

[Suddenly]

Originally posted by shanek




Besides, ever since I first started on this forum I have used a fictional character as an avatar and the first line in my sig has always been an italicized quote from that character. So why all of a sudden would the seuence be different in that one case?



Again, if you associated that in any way with my political philosophy then you should look inside yourself for bias instead of calling me a "lunatic" for expressing indignation at those whose biases are so severe they don't even recognize the quote for what it was after being told several times.

I didn't call you a lunatic, rather just noted that your off the handle response, in any context, does not relfect well on you (i.e. "look like a lunatic").

I don't recall your earlier avitar, thus the pattern is a miss. I also don't recall your earlier explaination. I miss threads and posts here and there.

The "mine mine" philosophy would only be a decent reflection if you assume the object of the "mine mine" was already yours. I was engaging in a practice that may be foreign to you, I was assuming you were rational and took the comment in a light favorable to you, that is all.

My bias is an odd factor to all this. When I came to this forum I was a dedicated libertarian. Through critical analysis of those beliefs I am abandoning them in most part.

I have doubts that bias is the reason beyond the conversion or my current philosophy. If anything my personal bias is towards general libertarian principles, as I have been a proponent of them for over a decade. Arguing with you is tricky in an emotional way in that when I am convinced you are wrong, I am admitting that I was wrong for a very long time, and that can be difficult. However, I refuse to allow emotion to override reason, so I accept what seems clear to me from these discussions.

[Suddenly]

Originally posted by shanek


But in order to prove intent you have to do a lot more than just show lucky timing. There has to be evidence of the information to convict.

Unfortunately, good timing in the past has been all that is needed for anyone to go jumping all over people for "insider trading." Go after is different from convict, especially considering there is a civil action as well. I'd say that a huge sale by an insider where the stock later dropped due to an obviously negative dislosure is pretty solid probable cause to start a proceeding.

And even if they're cleared, the damage to their reputation is so severe they find themselves greatly harmed by the invalid accusation. This is true for every person who has been acquitted of a crime. Not unique to trading issues This is the case with all victimless crimes. They solve nothing, they protect no one, and they destroy lives. Insider trading "protections" might not be as severe as the War on Drugs, but the same concept still applies.

I'd disagree, for reasons otherwise stated in this thread.

[Suddenly]

Originally posted by EvilYeti

http://www.stockpickssystem.com/images/graphic_chart_crash29.gif

Examine the above chart of the DJIA from 1925-55. See the huge drop (a straight line btw, haha) in 1929? That's what you get from rampant, unregulated insider trading. The SEC was created shortly thereafter and it took the market 25 years to recover.

Or do you think no one was harmed by the Great Depression?

I suspect the answer is that 1) insider trading did not cause the great depression and 2) The market would have recovered much more quickly without the government interference.

Except he would have used MORE F*CK*NG CAPS.

[shanek]

Originally posted by EvilYeti
Examine the above chart of the DJIA from 1925-55. See the huge drop (a straight line btw, haha) in 1929? That's what you get from rampant, unregulated insider trading.

No, that's what you get from the Fed hitting the brakes on the money supply two months previously.

Perhaps you'd like to explain the previous crashes of 1907 and 1921, which had nothing to do with insider trading and didn't leave to anything even resembling the GD even though they were both greater in severity than the 1929 crash?

[Cecil]

Originally posted by shanek
THE STOCK MARKET IS NOT A ZERO SUM GAME. Shares in a company have no promised value. They are simply pieces of paper that other people are willing to buy and sell.

Here's an example. A company has an IPO, selling 1000 pieces of paper for a dollar each to an investor, X. X gives $1000 to the company. This is a zero-sum transaction. Now, X sells the paper to Y for $2000, and the "value" of the shares has appreciated to $2. The "value" now depreciates to $0.50 based due to bad business decisions by the company, so Y sells his shares to Z for $500 in an attempt to cut his losses.

Now, the company is up $1000, X is up $1000, Y is down $1500, and Z is down $500. The sum is 0. If the stock market now crashes, it is a zero-sum game. If Z sells his stock to someone else, that's fine. The total amount of cash put into the market and the total amount of cash taken out is equal.

Your mistake lies in assuming that shares have cash value in and of themselves. The stock market, in this sense, is no different than a fruit market.

[shanek]

Originally posted by 69dodge
I assume the question is, "who is harmed if you sell stock today that you know will drop in price tomorrow?". The answer is, "whoever owns more shares of that stock tomorrow than he would own had you kept your shares." As the total number of shares doesn't change between today and tomorrow, there must be such a person.

Where? Point to them. Point to ONE PERSON put in such a position by Martha Stewart's actions.

[shanek]

Once again, the question no one wants to answer:

Why is it more justified to FORCE people to hold onto a stock they know almost certainly is going to be devalued, especially considering that it won't actually save anyone else from losing out?

[Cecil]

Originally posted by shanek
Once again, the question no one wants to answer:

Why is it more justified to FORCE people to hold onto a stock they know almost certainly is going to be devalued, especially considering that it won't actually save anyone else from losing out? There is a fruit market, and all the apples have gone bad. However, none of the buyers or sellers know that.

Is it ok to take your apples (which you know are bad) to the market and sell them to people who think they are good? You're saying this is ok because people could buy the apples from someone else if you weren't there, but you are increasing the supply of bad apples.

You seem to be saying this action is justified because buyers should be aware of the possibility that the apples might be bad.

[Suddenly]

Originally posted by shanek
Once again, the question no one wants to answer:

Why is it more justified to FORCE people to hold onto a stock they know almost certainly is going to be devalued, especially considering that it won't actually save anyone else from losing out?

1) It puts them in the same position as others in the market.

2) Your second statement is not true, no matter how many times you claim the question hasn't been answered. It has, and you ignored it.

The question is where did the money you make when you sell the shares come from?

Your claim seems to be this:

That if the insider sells on inside information or if he waits for the information to be announced every one else will be in the same or better position .

If that isn't your position, the people whose position changed for the worse are the people harmed.

If that is your position, here is why it doesn't work.

In the event you sell before the fall, you will have X dollars.
If you sell after the announcement, during the fall you will have Y dollars
In the first event, where does the money equal to X-Y come from?

Here is where:

After the crash, there is the same amount of shares outstanding as before the crash. Every person who owns shares has some basis, that is the cash price they paid for the shares. The total basis for all shares outstanding in the first circumstance where you sell prefall is going to be (X-Y) more than the circumstance where you sell later.

This may be a different purchaser, or the effect by action of the market may actually be spread across the shareholders, but as a class they wound up paying (X-Y) dollars more for the stock. The ones that pay more in the second circumstance are harmed by your action, as this will increase the loss or decrease the gain they will have later, when they sell the stock for whatever price.

If this isn't true, money had to be created. If that is possible than insider information creates money somehow, and either 1) will cause inflation if abused or 2) Creates wealth and we are all can be rich simply by engaging in the practice.

[EvilYeti]

Originally posted by shanek

No, that's what you get from the Fed hitting the brakes on the money supply two months previously.


Sigh.

Are you claiming that fraudulent trading had nothing to do with the 1929 crash?

[shanek]

Originally posted by Cecil
There is a fruit market, and all the apples have gone bad. However, none of the buyers or sellers know that.

I have debunked this comparison twice already in this thread.

[shanek]

Originally posted by Suddenly
1) It puts them in the same position as others in the market.

No, it doesn't, as I have already explained.

2) Your second statement is not true,

I have explained why it is, and no one has successfully refuted it with anything approaching a realistic assessment of how the market works.

no matter how many times you claim the question hasn't been answered. It has, and you ignored it.

I never ignored them. I responded to every single one of them. Stop lying.

If that isn't your position, the people whose position changed for the worse are the people harmed.

And that person is the one the insider trading laws are being used against.

In the event you sell before the fall, you will have X dollars.
If you sell after the announcement, during the fall you will have Y dollars
In the first event, where does the money equal to X-Y come from?

It doesn't have to come from anywhere, because in that scenario it never existed! That is exactly the fallacy I've been calling you out on!

The money came because the stock had value. After the fall, there is the same amount of stock, it just has a different value. The money "comes" from the fact that the value of the stock has changed.

When you start out, that X isn't really money. You only get it as money when you sell the stock. If you wait for the price to drop to Y, you still have exactly what you had before; it just isn't worth as much so when you sell it you don't get as much money for it.

As for the people "harmed" by insider trading, the same thing happens to them. They purchase $X worth of stock which then plummets to $Y. It doesn't make the first difference whether or not the insider trader's stock happened to be among those shares purchased.

If this isn't true, money had to be created.

NOT true. VALUE is what had to have been created. And it was, because of the value of the stocks. In a way, stocks are much like currency in that they are a representation of value, and like currency can be exchanged for currency like dollars at a fluctuating rate. If you loosely define money to be a representation of value, then the only thing that really happened is that some people have currency that isn't worth as much as it was before, that can't be exchanged for as many dollars. Same principle, except whereas money is backed up either by commodities or by government fiat, stocks are backed up by the worth of a particular company.

[shanek]

Here's some good info on the causes of the stock market crash in 1929:

http://www.few.eur.nl/few/people/smant/m-economics/crash1929.htm

Note what the text says about the periods before and after the crash:

Thus, apart from the direct cause of the panic selling on a few days in October 1929, and perhaps the magnitude of those single-day price declines, there is nothing particularly strange in the behavior of stock prices before or after October 1929.

The causes?

The stock market peaked September 3, 1929. On September 5, 1929 Roger Babson addressed the National Business Conference and predicted that a sharp recession was in the offering. We now know that the index of industrial production actually peaked in June 1929. Restrictive monetary policy by the Federal Reserve was a major cause of the recession. Some of the tightening was attributed to anti-speculative reasons, but most of the Fed’s emphasis with respect to the stock market was on moral suasion and direct pressure on banks and brokers.

More important for the monetary policy tightening was the gold outflow, mainly from the United States to France. The Fed raised the discount rate during January-July 1928 from 3.5% to 5% and in August 1929 to 6%. Because prices were falling, real interest rates were much higher than nominal interest rates. Additional bad news was the failure of the business and financial empire of Clarency Hatry in Britain in September 1929. In October 1929 regulators denied the utility company Boston Edison a request for a stock split, fearing further price speculation on a price considered already higher than justified, and accusing the company of earning monopoly profits. On October 28, 1929 the Smooth-Hawley tariff was enacted. However, although surely bad news and although frequently mentioned as a major cause of the stock market crash and subsequent economic depression, the decision on the tariff came actually after the peak and the first panic in the stock market. US exports were also only 7% of GNP, and no evidence exists that import-export companies suffered more than other companies during the crash.

Conclusion. There is nothing particularly strange in the mechanics of the October 1929 stock market crash(es). Calculations with respect to a 'rational' fundamental value for the stock market in 1929 show that the market was not definitely overvalued at the time, given ex ante expectations of a hypothetical rational investor. In the following years the stock market simply followed the decline in economic activity and the general price level. Blame for the Great Depression cannot be found in the stockmarket, but rests with a failure of monetary policy.

[a_unique_person]

Originally posted by shanek




Except that it's actually illegal to disclose profit information before the official report is released. Catch-22, anyone?



A company can ask for it's shares to be suspended from trading in such circumstances.



--------------------------------------------------------------------------------
A real capitalist wouldn't defend insider trading.
--------------------------------------------------------------------------------

"No true Scotsman" fallacy.

No, he is talking about those who actually believe that capitalism rests upon both sides benefitting from a fair and equal exchange involving no fraud.

The Libertarian form of capitalism, which until know I didn't realise is in favour of insider trading, is truly horrifying. It is as corrupt and idealistic as the Russian form of Communism. If you read the ideals of Communism, everyone gets to vote for their government, has a share in the decision making process of the institutions in their lives and their place of work. In practice, it turned out to be a form of totalitarianism that kept all these mechanisms in place but ran as a brutal, undemocratic state.

Libertarianism contains all the hallmarks of Communism, great ideals, but the clear insinuation that it is founded on ideals that will be disregarded by those in positions of power.

[Suddenly]

Originally posted by shanek


NOT true. VALUE is what had to have been created. And it was, because of the value of the stocks. In a way, stocks are much like currency in that they are a representation of value, and like currency can be exchanged for currency like dollars at a fluctuating rate. If you loosely define money to be a representation of value, then the only thing that really happened is that some people have currency that isn't worth as much as it was before, that can't be exchanged for as many dollars. Same principle, except whereas money is backed up either by commodities or by government fiat, stocks are backed up by the worth of a particular company. (emphesis added)

Forgive me for my ignorance, but the above sounds an awful lot like harm. I'll just assume I don't understand, so I think some simplification is in order.

OK, lets see if you will agree to the following. Let me know where I've got it wrong. Others are welcome to chime in.

1) When you sell stock, the money you get in exchange comes from an investor who then owns the stock.

2) There is (absent splits, and new issues and such which are irrelevant to this subject) a finite and fixed number of shares for a particular stock.

3) A basis is the value of consideration exchanged for a share of stock, and is the number subtracted from the eventual sale to determine capital gain or loss.

4) Having a higher basis means that when you sell stock for a certain price, your gain will be less than if the basis were lower.

5) If you sell a stock for $100 the person buying the stock will have a basis of $100, if you sell for $50 he will have a basis of $50.

6) At any time we can, if we tried, calculate the basis in every share of outstanding stock, by adding up the purchase price of every share of stock.

7) If you sell a stock for $100 instead of $50 the total basis of remaining shareholders will be $50 higher.

8) If the total basis of remaining shareholders is higher, there must be at least one investor whose individual basis is higher.

9) An individual whose basis is higher because of an event is harmed by that event in that his eventual profit will be lower as there will be a bigger number to subtract from the sale price to determine gain.

[Kimpatsu]

...Easy. Steal a maiden's heart. :cool:

[shanek]

Originally posted by a_unique_person
A company can ask for it's shares to be suspended from trading in such circumstances.

A company can. An individual can't. And we're talking about the individual here.

[myriad of pointless insults deleted]

[shanek]

Originally posted by Suddenly
Forgive me for my ignorance, but the above sounds an awful lot like harm.

If it is, then it is a harm that is going to befall the stockholders regardless of the actions of our hypothetical trader. Him holding onto his stock will not protect anyone else from suffering that fate.

The point that all of your numeric examination danced around while never actually considering is that there are a certain number of dollars among the pool of buyers for a particular stock. Those people are going to spend that amount of money for the stock because they feel that the ownership of the stock is worth that amount. The number of shares does not really enter into their decision other than simple division. That amount of money is going to be chasing however many shares are up for sale.

Now, here's where supply and demand kick in. If you have fewer shares being chased by the money, then the price of the stock will rise. If you have more shares being chased by the money, then the price of the stock will fall. Either way, the stock will be traded at the new amount. Since the buyers are figuring at buying the stock at a certain price, the price they end up paying per share will rarely if ever vary that far from what it originally was. In fact, it's usually the case that you don't even know what the price ends up being until after the buyers and sellers actually finish the transactions, which actually happens not by the buyers and sellers themselves, but by traders on the floor, who either work for or are contracted by the brokerage firm that the buyers and sellers went through to make the exchange for them. (Incidentally, this adds much complexity to the question of whom the seller is supposed to notify of the inside information, since not only will the seller never meet the buyer it's practically impossible for the seller to determine who it was that actually purchased their stock. The brokers probably can't even tell that. This also adds one more problem to the comparison to a fruit market, car salesman, etc. It just ain't the same thing.) So, once it's all over the sellers have sold the amount they want to sell and the buyers have bought the amount they want to buy.

Now, how is the insider selling or not selling his shares going to change any of that? It won't. The only realistic effect one could expect is a lower price after all of the transactions have been made...which is just the function of the supply/demand balance I detailed above.

(BTW - LOVE the new avatar!)

[EvilYeti]

Originally posted by shanek

If it is, then it is a harm that is going to befall the stockholders regardless of the actions of our hypothetical trader. Him holding onto his stock will not protect anyone else from suffering that fate.


You are making the false assumption that there are an infinite amount of shares available for purchase. That simply isn't true. If the hypothetical inside trader holds onto his shares, as he is morally and legally obliged to, then clearly no one else could buy THOSE SHARES. If no one else is selling then by witholding his transaction he is very definately protecting anyone else from losing money.

Before you go harping on why should our poor hypothetical trader take the hit, remember as an insider he paid only a fraction (or possibly nothing) of the face value of the stock. To top it off, he now also has insider knowledge of it's future performance. These are HUGE advantages which are only moderately offset by the penalties imposed through regulated insider trading.

You can of course claim that my example is unrealisitic and that there will always be sellers. I'll counter by pointing out that your hypothetical situation is unrealistic. Such a small transaction, while technically illegal and certainly immoral, would not be prosecuted.

The folks that do get investigated are the ones making the big money transactions. The individual I knew of sold seventeen million dollars worth of stock in one day. He's the one getting looked at, not the little guy selling a hundred shares. And he ended up getting away with it, anyways. Most of them do. And its these big transactions that end up hurting people, as the usual buyer would be a broker for a mutual fund. You may not think cheating a few dollars from a few hundred thousand retired folks is "harming" anyone, but I would beg to differ. Its still fraud and its still, for good reason, illegal.

[69dodge]

Originally posted by shanek
Where? Point to them. Point to ONE PERSON put in such a position by Martha Stewart's actions.I don't know who the person is, but I believe I've shown there must be such a person.

Surely it's possible for someone to be harmed without me knowing who. Of what significance is the fact that I can't point to anyone?

[corplinx]

Originally posted by a_unique_person

The Libertarian form of capitalism, which until know I didn't realise is in favour of insider trading, is truly horrifying.

Why is that? Is it just programming? Is your mind in a box "inside trade is bad!".

There is a big difference between fraud and trading with asymmetric information. When those two actions coincide however, it shows a degree of maliciousness that should be prosecuted more throroughly than simple fraud.

Trading with inside knowledge does not implicitly mean fraud is taking place.

Years ago I saw that JetBlue was going to be a good stock. I studied the business model thoroughly and it confirmed my suspicions that this would be successful company. Now, my neighbor did not research JetBlue and did not buy the stock and now will have to buy it a higher price.

The nature of the market is that someone will always have more/less info that someone else. The only time we discriminate is when a person works at the company they are trading shares of. However, this companies' business partners and supply chain will know very intimate details of this company. These people aren't forbidden even though they may have information or a pulse that Joe Stock buyer doesn't have.

The idea that asymmetric information is inherently bad is fallacious. I think most people are just trapped with in-the-box thinking.

[corplinx]

Here is something. I worked in high-tech in 1998 and sold my stocks because I saw the that venture capital house of cards wasn't self-sustaining.

Joe Stock Analyst who knew zilch about technology didn't have the keen insights into the industry and when the 1999 tech crash came around most people were caught unawares.

Should I penalized for selling people my overvalued stocks that I knew were overvalued by over 10x ? Should I have alerted the media that these stocks' pricing was basically a sham?

Now, here is the kicker. Does it matter if some of the shares I sold were for a company that I worked for?

The inside trading laws are based on subjective notions of fairness. Inside trading should only be against the law if it is part of a fraudulent behavior.

[a_unique_person]

Originally posted by 69dodge
I don't know who the person is, but I believe I've shown there must be such a person.

Surely it's possible for someone to be harmed without me knowing who. Of what significance is the fact that I can't point to anyone?

I read a description of it not being a victimless crime, but one in which the victim is not known.

[shanek]

Originally posted by EvilYeti
You are making the false assumption that there are an infinite amount of shares available for purchase.

No, I'm not. Read the post again.

[shanek]

Originally posted by 69dodge
I don't know who the person is, but I believe I've shown there must be such a person.

You're talking wild speculation. I've shown why your hypothetical person is in no worse position than he would have been had he simply bought the shares from somebody else.

With a murder, you can point to a murder victim. With rape, you can point to a rape victim. Where are all the insider trading victims in the world?

Surely it's possible for someone to be harmed without me knowing who.

But unless you know who, then you can hardly have a crime. "Oh, he raped someone, your honor, we just can't figure out who it was!"

[Jaggy Bunnet]

Originally posted by 69dodge
I assume the question is, "who is harmed if you sell stock today that you know will drop in price tomorrow?". The answer is, "whoever owns more shares of that stock tomorrow than he would own had you kept your shares." As the total number of shares doesn't change between today and tomorrow, there must be such a person.

Perhaps it helps to look at it from the point of view of the purchaser, not the insider.

The purchaser was willing to acquire the shares at the traded price on the basis of the information known to them at the time, which would include the fact that an announcement was due.

They would have no idea who the seller was and no reason to care.

If the insider didn't sell their shares, then either the order would be matched with another vendor, or if there were no other vendors willing to sell at that price, the purchaser would either acquire the shares at the higher price or decide not to buy at all.

If the insider does sell their shares, the purchaser buys shares they want to buy, at a price they want to pay.

However, it may be harmful to ALL investors if there is a perception that insiders are able to use non-public information to their advantage. If this has the effect of deterring potential investors it reduces demand for shares and therefore prices.

[69dodge]

Originally posted by shanek
You're talking wild speculation. I've shown why your hypothetical person is in no worse position than he would have been had he simply bought the shares from somebody else.There must be someone who wouldn't have bought the shares from anyone else, because without your shares up for sale, there are simply fewer shares available that possibly could be bought.But unless you know who, then you can hardly have a crime. "Oh, he raped someone, your honor, we just can't figure out who it was!"It might be difficult, as a practical matter, to convict someone of rape if we don't know who the victim is. So what? The victim was still harmed, was she not?

[Skeptic]

Promise employees stocks and cheap options that will "mature" in three years.

Ah, yes. The ol' "work for lottery tickets" scam... of course, we are ALL going to be millionaires, "just like" the guys who started Yahoo!, etc...

[Skeptic]

Oh, come on—there is all the difference in the world between this and insider trading! Obviously if one partner keeps this information from another partner that's a serious breach, but that's not what we're talking about!

Yes, we're only talking about screwing the CUSTOMERS, not the OWNERS! Since when do the suckers have any rights???

Shanek, for the zillionth time: insider trading is fraud. It is fraud because it is the witholding of relevant financial information from buyers who have the right to know it, for the same reason buyers of a house have a right to know the conditions of the house's foundation, or a meat buyer that the meat is not spoiled.

"They were going to buy anyway" is a pathetic excuse. If they were "going to buy anyway", why NOT tell them all the information about the company's real situation? After all, if you tell prospective buyers that a house's foundations are damaged and they waved the objection aside, saying that it doesn't matter, you have done no wrong.

No, the REAL reason insider-traders hide the bad news is because they know, quite well, that people will NOT "buy the stock anyway" if they tell them all the information--at least not at that price; they know the stock price will (justifiably) take a dive, and they want the suckers who don't know all the facts to take the loss instead of them.

"They would have bought it anyway" is blaming the victim, pure and simple. It's the con man's eternal excuse: "well, if the suckers weren't so GREEDY and STUPID, they wouldn't have fell for my 'free energy' machine scam! It's all THEIR fault!".

(Whoever said that you "can't scam an honest man", by the way, was obviously a con man himself, trying to make himself look better by blaming the victims: in fact, it is PRECISELY honest people who tend to trust others to be honest as well... or a corporation not to engage in insider's trading.)

You are not a libertarian; libertarians believe in fairness. You are, really, a pseudo-nietschzian, who believes that ethics, fairness, and telling the truth are the excuses of the losers, and that "real men" (like the multi-millionaires who run multi-billion corporations) are above such "loser's ethics". The only difference is that you do not define the "ubermensch" by race or creed, but by bank account.

[Suddenly]

Originally posted by shanek


If it is, then it is a harm that is going to befall the stockholders regardless of the actions of our hypothetical trader. Him holding onto his stock will not protect anyone else from suffering that fate.

The point that all of your numeric examination danced around while never actually considering is that there are a certain number of dollars among the pool of buyers for a particular stock. Those people are going to spend that amount of money for the stock because they feel that the ownership of the stock is worth that amount. The number of shares does not really enter into their decision other than simple division. That amount of money is going to be chasing however many shares are up for sale.

Now, here's where supply and demand kick in. If you have fewer shares being chased by the money, then the price of the stock will rise. If you have more shares being chased by the money, then the price of the stock will fall. Either way, the stock will be traded at the new amount. Since the buyers are figuring at buying the stock at a certain price, the price they end up paying per share will rarely if ever vary that far from what it originally was. In fact, it's usually the case that you don't even know what the price ends up being until after the buyers and sellers actually finish the transactions, which actually happens not by the buyers and sellers themselves, but by traders on the floor, who either work for or are contracted by the brokerage firm that the buyers and sellers went through to make the exchange for them. (Incidentally, this adds much complexity to the question of whom the seller is supposed to notify of the inside information, since not only will the seller never meet the buyer it's practically impossible for the seller to determine who it was that actually purchased their stock. The brokers probably can't even tell that. This also adds one more problem to the comparison to a fruit market, car salesman, etc. It just ain't the same thing.) So, once it's all over the sellers have sold the amount they want to sell and the buyers have bought the amount they want to buy.

Now, how is the insider selling or not selling his shares going to change any of that? It won't. The only realistic effect one could expect is a lower price after all of the transactions have been made...which is just the function of the supply/demand balance I detailed above.

(BTW - LOVE the new avatar!)

I do understand what you are saying. I just have a problem with the simple math of the situation. I think the complexity of the situation forces a step back, as in essence we are asking a "what if" question, not entirely unlike "What if the south won the Civil War." We are asking "What if the insider held on to his shares and sold them after the announcement." The one difference we can spot between our two scenerios is that the insider winds up with less cash in pocket.

I would readily conceed in the vast majority of cases, the person who actually buys the stock in an insider deal is not the person who has suffered harm in that but for the indsider trade, the person purchasing the stock would be in the same position anyway. Indeed, it is possible in theory that that particular person will purchase at a lower price due to the insider trade as supply is increased.

I am taking your position to be that insider trading changes the position of no one besides the insider trader, that is but for the insider trade, everyone else will wind up the same. I don't see how that is the case.

Consider the two otherwise indentical situations, one where you sell pre-announcement for $100 and one where you sell post announcement for $10. Looking at a point after the transactions, you recieved $90 more in the first. This means that the present stockholders as a class either wound up spending $90 more, or $90 in actual money, not value, actual money, was somehow summoned into creation. I'm hoping you agree with the former.

Thus, since as a class the stockholders paid more, we must conclude that at least one stockholder in the first situation paid more than he did in the second. In fact, it could be that several paid less, and several paid more, but in the end once you total everything up, the buyers in the insider trade situation put together paid $90 more than in the second, non-insider trade situation. Perhaps that $90 is spread over 20,000 people, but it is a cost incurred, and that, however small it is, is harm.

Since having two identical situations like above is impossible, we will never be able to know who exactly was harmed, but the cold hard math shows that we can identify a body of investors that suffered an identifyable harm. It is just practically impossible to apportion.

So, no, I can't point to any one person with certainty and say "this person suffered financial harm" from Martha Stewart. I can point and say one or more of this class of people were put in a worse financial position because of Martha Stewart's actions. There is harm, to be sure, but not to any identifyable person.

From what you are saying above, you object to this because you are saying the amount of money is fixed, so that in the end the shareholders will spend the same amount of money. In that case we wind up with the same problem if we look from the side of those that sell the stock:

In both situations shareholders spend X amount of money to buy shares of stock from stockholders who want to sell. In the insider situation, X-100 will go to the stockholders who want to sell upon hearing the bad news. In the non-insider situation, the stockholders wanting to sell will get X-10. Thus the harm can be identified to be one or more stockholders looking to sell after the announcement.

Or, you could argue that the missing money in the first situation(X-90) perhaps didn't result in some stockholder selling for less, rather that was made up by some stockholder refusing to sell. That can be identified as harm as "but for" the insider trading that seller could have recieved an acceptable price for the stock, but now cannot and is forced to hold on to it.

Or for extra points, you can combine the three above things. The fact is in the end that that $90 has to come from somewhere.

[Suddenly]

Originally posted by corplinx


Why is that? Is it just programming? Is your mind in a box "inside trade is bad!".

There is a big difference between fraud and trading with asymmetric information. When those two actions coincide however, it shows a degree of maliciousness that should be prosecuted more throroughly than simple fraud.

Trading with inside knowledge does not implicitly mean fraud is taking place.

Years ago I saw that JetBlue was going to be a good stock. I studied the business model thoroughly and it confirmed my suspicions that this would be successful company. Now, my neighbor did not research JetBlue and did not buy the stock and now will have to buy it a higher price.

The nature of the market is that someone will always have more/less info that someone else. The only time we discriminate is when a person works at the company they are trading shares of. However, this companies' business partners and supply chain will know very intimate details of this company. These people aren't forbidden even though they may have information or a pulse that Joe Stock buyer doesn't have.

The idea that asymmetric information is inherently bad is fallacious. I think most people are just trapped with in-the-box thinking.

I completely agree that asymmetrical information is not by definition harmful. There is nothing wrong with it, only when the information is come about by a fraudulant practice, such as the violation of a fiduciary duty.

The "business partners" and "supply chain" people, under certain circumstances can also run afoul of insider trading laws, depending on the information and where they get it. I touched on this kind of thing above somewhere in this bloated awful thread...

There is a huge difference between industrious investigation and analysis and simply swiping information presented you for a purpose other than your personal use.

It's like the difference between someone losing at poker because they are up against an expert, and losing because they are up against a cheat. We don't really consider the first loss to be as harmful as the second, although in reality the person was going to lose either way.

[Jaggy Bunnet]

Originally posted by Skeptic

It is fraud because it is the witholding of relevant financial information from buyers who have the right to know it, for the same reason buyers of a house have a right to know the conditions of the house's foundation, or a meat buyer that the meat is not spoiled.

Except that there is legislation in place PREVENTING disclosure of the information in the case of insider trading which is not the case with the other examples given.

The purchaser does not meet up with the insider and decide to buy on the basis of what the insider tells him, he acts on the basis of public information and decides to buy shares on the market at the market price. He has no knowledge of who he is buying from. Would you say he is "harmed" if he buys from a non-insider? If not, what harm is done (directly) by the inside trading as the purchaser is in the same position whether they buy from an insider or a non-insider?

I think the harm of insider trading is to the efficient operation of the market as a whole, but I think it is very difficult to say there is direct harm to an individual, even if they happen to have bought shares from an insider.

[Thanz]

Holy thread explosion, Batman!

shanek - Couple of points and responses to things that you have said in various posts.

First, preventing the insider from trading on inside information simply puts him in the same situation as the other owners of the company, who should have access to the same information as the insider. Until they do, it is fair to prevent the insiders from benefitting at the expense of the other owners of the corporation.

Second - the fact that there is a defence to charges of insider trading that allows the trader to explain that the trade was made for reasons other than the insider information is by no means "guilty until proven innocent". It is simply an affirmative defence - like self defence for murder. The cops run into a house and see you standing over a dead guy with the smoking gun in your hand. Is it ""guilty until proven innocent" to require you to prove (or at least to the point of instilling reasonable doubt) that you acted in self defence?

Lastly, how is insider trading any different than the partner example? You have simply asserted that it is completely different without any explanation.

[Michael Redman]

I don't know why I didn't think of this until I read Wildcat's early post. There is someone else clearly harmed in the transaction:

You and I own all the stock of Randicorp. 50 shares each. It's worth $10 per share.

Tomorrow, Randicorp is going to announce that is has lost the contract it was seeking, and is going to declare bankruptcy. Consider these two scenarios:

1) Neither of us know. When the news comes out, the price begins a rapid drop, and we both sell at a loss.

Or,

2) A Randicorp employee has illegally informed me of the pending announcement, and I sell all my stock today at $10. This sale increases the supply of stock, so lowers the price. Tomorrow, when the news comes out, the stock doesn't drop from $10, but from a lower point, and you have to sell considerably lower than if I hadn't put my stock on the market the day before.

Those who held the same stock Martha held, but didn't have the insider information telling them to get out while the getting was good, were harmed because the price they ended up selling for was less than what they would have got had she not dumped her stock ahead of time, but had sold off with the rest of them.

[Jaggy Bunnet]

Originally posted by Michael Redman
Tomorrow, when the news comes out, the stock doesn't drop from $10, but from a lower point, and you have to sell considerably lower than if I hadn't put my stock on the market the day before.

Doesn't matter what the price paid yesterday was, all that matters is the supply and demand on the day after the announcement.

[Michael Redman]

Yes, but there'll be less demand due to yesterday's increase in supply.

[Jaggy Bunnet]

Originally posted by Michael Redman
Yes, but there'll be less demand due to yesterday's increase in supply.

And less supply for the same reason.

Even if whoever bought from you chooses to sell, the overall effect of their purchase/sale is to increased both supply and demand by the same amount.

[tamiO]

bump

[shanek]

Originally posted by 69dodge
There must be someone who wouldn't have bought the shares from anyone else, because without your shares up for sale, there are simply fewer shares available that possibly could be bought.

No, no, no! You're ignoring supply and demand again! Fewer shares available that could possibly be bought would cause the price of those shares to rise.

It might be difficult, as a practical matter, to convict someone of rape if we don't know who the victim is. So what? The victim was still harmed, was she not?

But how would you know there even was a victim?

[shanek]

Originally posted by Skeptic
Promise employees stocks and cheap options that will "mature" in three years.

Stocks don't mature. Bonds do.

[shanek]

Originally posted by Skeptic
[Big snip]

Skeptic, I have addressed EACH AND EVERY ONE OF THESE POINTS already and refuted them. Try actually reading for once before you spout off your mouth yet again.

[shanek]

Originally posted by Suddenly
I do understand what you are saying. I just have a problem with the simple math of the situation. I think the complexity of the situation forces a step back, as in essence we are asking a "what if" question, not entirely unlike "What if the south won the Civil War." We are asking "What if the insider held on to his shares and sold them after the announcement." The one difference we can spot between our two scenerios is that the insider winds up with less cash in pocket.

Then would you not also agree that the benefit of this uncertainty should go towards the presumption of innocence of the insider?

Consider the two otherwise indentical situations, one where you sell pre-announcement for $100 and one where you sell post announcement for $10. Looking at a point after the transactions, you recieved $90 more in the first. This means that the present stockholders as a class either wound up spending $90 more, or $90 in actual money, not value, actual money, was somehow summoned into creation.

But the "present" stockholders in this scenario include the ones who bought the stock after the price dropped, people who aren't included in the original assessment. If you include all the ones that bought the stock at $10 as well as the ones who bought the stock at $100, then it might well even out. But that wasn't what we were considering. We were considering what, if any, harm came to those who bought the stock at $100.

[EvilYeti]

Originally posted by corplinx

The inside trading laws are based on subjective notions of fairness. Inside trading should only be against the law if it is part of a fraudulent behavior.

Which is exactly how the law works. All trading of corporate stock by employees of the same corporation is considered insider trading and is NOT illegal by default. It only becomes "illegal" insider trading when stock trades are based on very specific insider knowledge. As I've said before, it's rarely prosecuted successfully. Mostly because the crooks can afford grade-A attorneys with all their ill-gotten gains.

In your case (mine as well, I dumped all my tech stock before the bubble burst), while you were obviouslly smarter about your finances than Joe day-trader, you still based your opinion on public knowledge. As did I, anyone could look at the business models, P2E, etc. and see that the stocks were over-valued. Of course we had an edge working in the tech trade, but there were numerous other investors who saw what was coming and bailed out. This wasn't rocket science. Contrast with fellow I knew whom had very specific inside knowledge of this companies financial situation and unloaded 17 million dollars worth of stock prior to a damning earnings report.

I think a good analogy would be the difference between antique dealers who scour pawn shops, garage sales, the internet, etc. looking for undervalued antiques and crooks selling forgeries. Both are using assymetric information to their advantage, however only of them is engaging in fraudulent behavior.

[specious_reasons]

Minor correction:
Originally posted by shanek


Stocks don't mature. Bonds do.

The original staement was from evildave:

Promise employees stocks and cheap options that will "mature" in three years. Build up hype for your non-existant product and dubious (if not retarded or even downright deceitful) business plan.

One and a half years later, when everything's at its peak, the CEO's stocks (as well as a few other founding members' stock options) mature. They oversell the stocks to the public, so they sell their stocks to the company at the going (obscenely inflated) price to cash them out to make sure the employees have their shares available.

Stock options do mature.

Also, IIRC, some "dotcom" employees were given actual stock in companies that had not yet gone public, as part of their compensation package. The stock could not be sold until the company went IPO.

[EvilYeti]

Originally posted by shanek

Then would you not also agree that the benefit of this uncertainty should go towards the presumption of innocence of the insider?


But that is exactly how the law works! If the SEC feels a crime has been committed, they can't just lock up inside traders willy-nilly!

They go to trial, just like anyone else and are presumed innocent until proven guilty. The burden of proof is on the prosecutor, just like any other case. Most of the time the SEC doesn't even go past the investigation phase and it never goes to trial. Considering the huge advantage insider trading grants an investor I feel the added regulation is a small price to pay.

[Suddenly]

Originally posted by shanek


Then would you not also agree that the benefit of this uncertainty should go towards the presumption of innocence of the insider? Not as such. Presumption of innocence refers to questions of fact. We are debating what is really a question of what law should be, and "presumption of innocence" really doesn't apply except in the sense of "whatever is not illegal is legal" sort of way. I'm not sure there is uncertainty in that harm occurs, just uncertainty in to whom exactly.

Anytime we consider "harm" we are largely making a "what if" question. Consider a beating. We measure the "harm" as the difference between the person after the beating and the person as if the beating never took place. For all we know the if the beating never took place the victim would have been run over by a truck and killed. Or he may have won the lottery. Both unlikely, but who knows. This uncertainty doesn't make us conclude that battery is not harmful.



But the "present" stockholders in this scenario include the ones who bought the stock after the price dropped, people who aren't included in the original assessment. If you include all the ones that bought the stock at $10 as well as the ones who bought the stock at $100, then it might well even out. But that wasn't what we were considering. We were considering what, if any, harm came to those who bought the stock at $100.

Like I said, we really can never know. You are starting to get the weird concept I am floating here, that there is financial harm, but it is next to impossible to figure out the exact identity (or more likely identities) of the harmed party(s).

The person who actually buys from the insider trader is most likely not harmed, and in fact, oddly enough may be benefited as the insider's decision to sell increases demand at that point. Some of the people buying at around $100 before the announcement may be harmed, maybe not.

Yes, it could be that some of the persons buying the stock after the price drop are those harmed, although we can't be sure.

Remember, we are talking about two identical situations, in both situations the announcement is still made, and the stock still drops. There are in both situations people buying after the drop.

All we are sure of is that our insider has $90 more more than he would have had he sold post announcement. That $90 came from what is later the class of investors, or possibly from the other sellers of stock in the form of lower sales. The $90 did not just appear magically.

[shanek]

Originally posted by Suddenly
The person who actually buys from the insider trader is most likely not harmed, and in fact, oddly enough may be benefited as the insider's decision to sell increases demand at that point. Some of the people buying at around $100 before the announcement may be harmed, maybe not.

But what is the real difference between the two? Of all the people buying shares of stock at that time, it is almost impossible to trace each individual share and tell who got which shares. In fact, since most of it is done virtually nowadays anyway, the question might even be meaningless. You poured a cup of water into a swimming pool; who is actually using that water?

Yes, it could be that some of the persons buying the stock after the price drop are those harmed, although we can't be sure.

Well, I don't see how they would be harmed, but that wasn't the point anyway. The point is that you were comparing two different quantities of money since at the end of it all there would have been additional buyers and sellers.

All we are sure of is that our insider has $90 more more than he would have had he sold post announcement. That $90 came from what is later the class of investors, or possibly from the other sellers of stock in the form of lower sales. The $90 did not just appear magically.

So you're saying the trading harms others selling the stock at the same time? How can that be, when the price will have obviously not dropped beneath the limits they set to their broker? They're still selling the stock at a price they voluntarily accept.

[Suddenly]

Towards the end of the post it occured to me a possible communication gap w/r/t the word harm. In this context I am using the word harm as meaning "negative impact" and not necessarily having any "moral" meaning.


Originally posted by shanek


But what is the real difference between the two? Of all the people buying shares of stock at that time, it is almost impossible to trace each individual share and tell who got which shares. In fact, since most of it is done virtually nowadays anyway, the question might even be meaningless. You poured a cup of water into a swimming pool; who is actually using that water? Close to what I am getting at. We dump a cup of water into a pool. We then pass out cups of water to people until the pool is empty. Who gets your cup of water? We don't know. Someone did. Maybe a combination of people did. But they did get the water. Again, I agree we will never really be certain of who exactly suffers exactly how much financial harm. We can show that in general a specific amount of harm was suffered by one or more people involved somewhere in the market during the span of relevant time.



Well, I don't see how they would be harmed, but that wasn't the point anyway. The point is that you were comparing two different quantities of money since at the end of it all there would have been additional buyers and sellers. The general principle is but for the trading, they would have more money, thus they were harmed. You have $90 more, and some combination of people has $90 less, unless you can find a source other than an investor for the money. Otherwise you are saying that this sort of thing creates money, and I want to know where it comes from.

Remember, we are considering two hypotheticals, or seperate universes, at the same exact point in time in each, and the only difference between the two is the timing of the insider's sale. The total amount of money or wealth in either universe has to be exactly the same unless the insider trade creates more.

(As an aside, this allows us to ignore the whole zero vs. positive sum game question. By isolating the one variable we can now logically assume any differences in the two universes must have come from our variable, the timing of the sale.)

In one universe you have $90 more than in the other. In that universe the total of (everybody minus you) is $90 less, and that means somebody (or somebodies) is worse off, but Ed knows who. Just because we can not identify the exact individual does not mean harm did not occur. We can show that some harm did happen.


So you're saying the trading harms others selling the stock at the same time? How can that be, when the price will have obviously not dropped beneath the limits they set to their broker? They're still selling the stock at a price they voluntarily accept.

First of all, voluntary acceptance does not equal lack of harm. All fraud is based on voluntary acceptance, and we at this point are discussing whether financial harm occured.

Second, that it did not drop below a limit does not mean there was no harm. If the sell limit was $7 and they get $8 for the stock, it is still harm if but for the insider trade they would have sold at $11.

At this point the only point I am seeking to make is that the insider trade did in fact put some person in a worse position than if the insider trade never happened. As per your suggestion I am not considering the illegality of the trade, mentioning it only as a reference. I am sticking to showing how someone was negatively impacted by the sale at the higer price.

We could change the information our "hero" relies on from illegal insider information to his just being a smart guy, and it doesn't change the math of the situation. I'm just trying to show that all other things being equal, w/r/t the transaction, if he sells high there is somebody with less money than if he sold low once the scenerio plays out.

The morality is a seperate issue, all that "fiduciary duty" and "representation" stuff we kicked around earlier. Lets leave that for later and stick to this discussion of harm, as if it can be concluded that the "higher" sale had no negative impact on anyone, as good libertarians we should end the inquiry right there, no?

If it turns out there is a negative impact, we then need to look into things like morality, utility, and I would guess most important to you, whether there is implied consent by that person getting into the market in the first place, but that can wait for now. I'm just trying to show negative impact (harm).

[69dodge]

Originally posted by shanek
No, no, no! You're ignoring supply and demand again! Fewer shares available that could possibly be bought would cause the price of those shares to rise.What difference does that make?

If you don't offer your shares for sale, the guy who would have bought them might choose not to buy at the higher price. Or he might buy from someone else who wouldn't otherwise have sold. In the first case, he's better off. In the second case, he's slightly worse off, but the guy he bought from is much better off. Either way, the two, considered together, are better off if you hold on to your shares and worse off if you sell them. Which makes a lot of sense, considering that you're better off if you sell your shares and worse off if you hold on to them.

[Jaggy Bunnet]

Originally posted by 69dodge
In the first case, he's better off. In the second case, he's slightly worse off, but the guy he bought from is much better off. Either way, the two, considered together, are better off if you hold on to your shares and worse off if you sell them. Which makes a lot of sense, considering that you're better off if you sell your shares and worse off if you hold on to them.

Lets look at an example - insider has 1 share and is willing to sell for £100, non-insider has 1 share and requires £110 to sell. Purchaser has £110.

If insider does not sell and purchaser buys:

Potential purchaser has 1 share, non-insider has £110. Insider has 1 share.

If insider does not sell and purchaser does not buy:

Potential purchaser has £110, non-insider has 1 share. Overall, the two are unaffected. Insider has 1 share.

If insider sells:

Purchaser has 1 share and £10, non-insider has 1 share. Insider has £100.

Purchaser is therefore better off than if he buys from non-insider (as he has £10 in addition to his share). To claim he is harmed you must assume he would not have bought in the absence of insider trading. I don't think that is a justified assumption.

Non-insider could have sold for £100 but chose not to. Having made that choice, it is irrelevant if someone else is willing to sell at that price. If he is not willing to sell at the prevailing market price before the announcement, he will inevitably suffer the loss. This is the case whether insider or purchaser owns the other share at the time of the announcement. He is only harmed if the additional supply resulting from inside trades causes the market price to drop below a level he would have sold at before the announcement. Again, I don't think it is reasonable to assume that is likely to be the case.

[shanek]

Originally posted by Suddenly
Towards the end of the post it occured to me a possible communication gap w/r/t the word harm. In this context I am using the word harm as meaning "negative impact" and not necessarily having any "moral" meaning.

Well, "negative impacts" happen in the stock market as a matter of course and anyone who doesn't realize that is going to be in for a major shock.

Close to what I am getting at. We dump a cup of water into a pool. We then pass out cups of water to people until the pool is empty. Who gets your cup of water? We don't know. Someone did. Maybe a combination of people did. But they did get the water.

And the pool (no pun intended) of buyers may not have gotten all of the water; there may be some left. Supply and demand will try to balance that out, but generally at any given time there are always some shares of a certain stock for sale.

Again, I agree we will never really be certain of who exactly suffers exactly how much financial harm. We can show that in general a specific amount of harm was suffered by one or more people involved somewhere in the market during the span of relevant time.

How did you putting in one cup of water cause any amount of harm to the people who took out water?

The general principle is but for the trading, they would have more money, thus they were harmed.

But that doesn't make any sense! Yes, they're out the money, but since they bought at such a low rate they're figuring to make it back and more when the stock rises again, which it usually will.

You have $90 more, and some combination of people has $90 less,

Again, this ignores the change in the value of the stocks. It won't be $X-$90 going after all of the other stocks; it will still be $X. And the people putting up the $X will all be competing with each other to obtain the stock. If they can outbid the others and gain the stock, they'll do so. So it is NOT the case that there is 90 less dollars traded just because the insider decided not to sell.

unless you can find a source other than an investor for the money.

The source is all of the prospective buyers, who still have the same amount of money regardless of who is selling.

So, instead of asking where the $90 came from in the one universe, really a better question is, in the OTHER universe, where did the $90 go? Did someone just magically decide to spend 90 less dollars on the stock? I think that is such an absurdly remote coincidence that we can safely discard that possibility.

All fraud is based on voluntary acceptance,

Now, that is just a ridiculous notion. Fraud is not voluntary. It wouldn't be fraud if it were.

Second, that it did not drop below a limit does not mean there was no harm. If the sell limit was $7 and they get $8 for the stock, it is still harm if but for the insider trade they would have sold at $11.

That is an extremely weak argument. The fact of the matter is that the sellers are still getting a price they think is fair and acceptable for the stock.

Joe is the only car salesman in town, so he is free to charge whatever the local market will bear for cars. Bob builds a car lot next door and starts selling cars for $1,000 less than Joe, forcing Joe to lower his prices. But for Bob, Joe would be getting an extra $1,000 for each car he sells. So has Bob harmed Joe?

At this point the only point I am seeking to make is that the insider trade did in fact put some person in a worse position than if the insider trade never happened.

Just as Bob did to Joe.

[shanek]

Originally posted by 69dodge
What difference does that make?

It makes all the difference in the world! As I have repeatedly pointed out, you have not altered the pool of money the buyers have to purchase the stock. So you have the same amount of money chasing fewer stocks. This creates an inflation of sorts, and the price of the stock rises to match the money being offered.

If you don't offer your shares for sale, the guy who would have bought them might choose not to buy at the higher price.

It isn't a matter of "buying at a higher price." He'll just purchase fewer shares for more or less the same price.

Or he might buy from someone else who wouldn't otherwise have sold.

Why would someone magically decide to sell at the same time the insider decides not to? None of this makes any sense. The buy and sell orders have already come through. At that point, everyone figures out what the prices are going to be, and as I explained earlier, no one really knows what the final price is going to end up being once all the transactions are made.

[Eventually]

This is "Suddenly." I just realized I didn't log out my wife's account, and I want to go sleep now so I'm not going to open my account in another window for fear it may erase this (again) so I'm posting as her. Just wanted to point out this isn't a sockpuppet or anything. Just occured to me a cut and paste to wordpad would have been quicker than typing. Too late now. Oh well, she can use the post count...

Originally posted by shanek


Joe is the only car salesman in town, so he is free to charge whatever the local market will bear for cars. Bob builds a car lot next door and starts selling cars for $1,000 less than Joe, forcing Joe to lower his prices. But for Bob, Joe would be getting an extra $1,000 for each car he sells. So has Bob harmed Joe?



Just as Bob did to Joe.

Yes, Joe has suffered a negative outcome. He is most likely out some money (I say most likely, as his market is split and his price lowered, but the possiblility remains that Joe could sell more cars due to the low price, and if the market is big enough he could wind up making more money because of Bob, but that assumes a lot of particular factors not in the setup, so hang that. It seems your point is that Joe is going to make less money). However, this is not an unjust outcome, and I have no problem with it. But there is a likely negative outcome, or harm to Joe due to Bob's acts. That is just life.

Now, consider the same where Bob is able to offer a lower price than Joe because Bob uses slave labor in his sales support and service departments (Attracts new people by fraud and works them to death). As a result Bob has to slash his margins and makes almost no money on the sales and is losing money and getting ready to give up the buisness. At this point, Bob's labor practices are discovered when a slave escapes.

It is clear that Bob has harmed his workers. No doubt there, he's going to be sued and jailed.

However, Bob's illegal practices also harmed Joe by stripping his profits and putting him out of buisiness.


In both cases there is harm, but in the second case we identify harm to Joe, not necessarily because of the harm to the workers, as much as because of a lack of fairness, in that there was no earthly way, all things being equal, that Joe could have prevented the harm. Bob's use of slave labor didn't give Joe a chance.

This is not inconsistent with core libertarian principles, either. Any time one goes into buisiness it is not considered an initiation of force against existing businesses in the free market because we imply consent to business competition to anyone who tries to compete in a free market. This is in fact the very essence of the free market, competition. However, we do not consent to people who use fraud or force to get a leg up in the market. Those people are thus in a sense initiating force against other businesses by doing so, and the harm they cause should be redressed.

Think about it and tell me what you think. Ignore that I haven't gone on to tie this back into insider trading, as I'll try that tommorrow. This message wiped out on me once already and I'm going to bed now.

[69dodge]

Originally posted by Jaggy Bunnet
Non-insider could have sold for £100 but chose not to. Having made that choice, it is irrelevant if someone else is willing to sell at that price. [. . .] He is only harmed if the additional supply resulting from inside trades causes the market price to drop below a level he would have sold at before the announcement. Again, I don't think it is reasonable to assume that is likely to be the case.Originally posted by shanek
Why would someone magically decide to sell at the same time the insider decides not to? None of this makes any sense. The buy and sell orders have already come through.You both seem to be arguing that, since everyone has already decided what price to buy or sell at, precisely the same transactions will occur regardless of whether the insider sells his shares.

This is impossible.

Clearly, if I buy a share, someone must have sold it, and vice versa. The number of shares bought equals the number of shares sold, whether the insider sells his shares or not. Now, let's exclude the insider and just look at shares bought and sold by everyone else, because we're trying to compare what happens to those people in the two cases. If the insider keeps his shares, the number of shares bought and sold by everyone else will be equal. If the insider sells his shares, the number of shares bought by others will be greater than the number sold by others, the difference being exactly the number of shares the insider sells.

It is not possible that everyone sells who would have sold and everyone buys who would have bought. If the insider sells, there must be at least one person who buys more shares than he otherwise would have, or at least one person who sells fewer shares than he otherwise would have.

Not only is it "reasonable to assume that is likely to be the case," it in fact is certain to be the case. Not all buy and sell orders placed get filled; which ones get filled depends in part on whether the insider trades. There is no magic involved.

[Jaggy Bunnet]

Originally posted by 69dodge
You both seem to be arguing that, since everyone has already decided what price to buy or sell at, precisely the same transactions will occur regardless of whether the insider sells his shares.

It is not possible that everyone sells who would have sold and everyone buys who would have bought. If the insider sells, there must be at least one person who buys more shares than he otherwise would have, or at least one person who sells fewer shares than he otherwise would have.

Your analysis assumes that the price at which the purchaser is willing to buy is absolutely fixed. Why ignore the possibility in the example I used earlier that if they can't buy at £100, they will buy at £110 rather than not buy at all?

In that case the purchaser would lose more money when the value falls, so is certainly not harmed by the inside trader. Arguably the shareholder who doesn't sell is harmed, but only if you assume that such a trade would have taken place - would you argue they were harmed by the purchaser if no trade took place as they were only willing to pay £100?

[Thanz]

Something is still bugging me. Why is the partner example not the same as insider trading?

[Suddenly]

Originally posted by Thanz
Something is still bugging me. Why is the partner example not the same as insider trading?

You mean Wildcat's?

Here's another way to think about it, shanek. You're in business w/ one partner. Your company makes widgets for MegaCorp and a few other companies, but MegaCorp accounts for 75% of sales.

One day your partner gets a phone call from MegaCorps purchasing dept., they've decided to cancel the contract and buy their widgets from someone else. Your partner doesn't tell you this, rather he suddenly informs you of his desire to retire and wants to sell you his share of the company. You've been wanting him out of the way anyway so you buy him out. After the buyout is signed and the $$ transferred he says, "Oh, BTW, MegaCorp is no longer a client of ours. Have a nice day sucker!".

Now, you wanted to buy him out anyway, so you weren't really harmed, right?

Shanek's first objection implied that the duty to a partner is somehow greater than that to a shareholder. He's wrong, as I pointed out in a later post where I quoted from the Buisness Law text I use to teach, both relationships involve the same fiduciary duty of loyalty and fair dealing.

Or, if he doesn't accept that, we can also change the example and instead of "partner" we can make it a corporation with each owning 50% of the stock, where the other partner is one that does not involve himself in the day to day activity. He is simply a stakeholder. Our "hero" still gets the info and sells out just like above, but in the context of an officer - shareholder relationship.

If Shanek says that the changes in the above paragraph make the harm disappear, I'd love to know how.

I suspect the real answer is that Shanek is assuming a very large market for stock shares where the stakeholder could have sold to someone else if our "hero" isn't selling.

I think the examples above show pretty clearly that his "no harm" claim falls apart when dealing with a limited market of a very small number of investors, like described above.

[Suddenly]

[Double Post]

[Jaggy Bunnet]

Originally posted by Suddenly


You mean Wildcat's?



Shanek's first objection implied that the duty to a partner is somehow greater than that to a shareholder. He's wrong, as I pointed out in a later post where I quoted from the Buisness Law text I use to teach, both relationships involve the same fiduciary duty of loyalty and fair dealing.

Or, if he doesn't accept that, we can also change the example and instead of "partner" we can make it a corporation with each owning 50% of the stock, where the other partner is one that does not involve himself in the day to day activity. He is simply a stakeholder. Our "hero" still gets the info and sells out just like above, but in the context of an officer - shareholder relationship.

If Shanek says that the changes in the above paragraph make the harm disappear, I'd love to know how.

I suspect the real answer is that Shanek is assuming a very large market for stock shares where the stakeholder could have sold to someone else if our "hero" isn't selling.

I think the examples above show pretty clearly that his "no harm" claim falls apart when dealing with a limited market of a very small number of investors, like described above.

Just to clarify, the harm arises only because you have bought more shares? Which you wanted to do, at a price you were happy with.

What if the phone call came the day after you bought the shares, whose fault is it then? What if it comes between you making the offer and him accepting it?

And this is not the circumstances where insider trading arises - if you are buying 50% of a business from someone you know is involved in the management. In that case you normally undertake investigations on the company to find out if what you are buying is worth the proposed price and you get warranties from the vendor about the state of the business. If you don't go through that process, its your own fault.

Can you not see the difference between that and a stock market where you have no idea who you are buying from? You are in exactly the same position whether you buy from another shareholder or the insider (and you need never know who you have bought from) - if you are in the same position, where is the harm?

[Thanz]

Originally posted by Suddenly


You mean Wildcat's?
That is exactly the example I mean.

Shanek's first objection implied that the duty to a partner is somehow greater than that to a shareholder. He's wrong, as I pointed out in a later post where I quoted from the Buisness Law text I use to teach, both relationships involve the same fiduciary duty of loyalty and fair dealing.
I don't think that shanek addressed this, hence my question.

Or, if he doesn't accept that, we can also change the example and instead of "partner" we can make it a corporation with each owning 50% of the stock, where the other partner is one that does not involve himself in the day to day activity. He is simply a stakeholder. Our "hero" still gets the info and sells out just like above, but in the context of an officer - shareholder relationship.

If Shanek says that the changes in the above paragraph make the harm disappear, I'd love to know how.
As would I.

I suspect the real answer is that Shanek is assuming a very large market for stock shares where the stakeholder could have sold to someone else if our "hero" isn't selling.

I think the examples above show pretty clearly that his "no harm" claim falls apart when dealing with a limited market of a very small number of investors, like described above.
So the difference is a public market? The assumption that a public market makes a big difference seems to also rest on the assumption that a stock is fairly heavily traded. This is not necessarily the case. For many thinly traded companies there is not the same pool of buyers and sellers, and making a transaction can actually be difficult. I'd like to know how shanek would deal with a publicly traded corporation that has a low volume of trades and whether that makes any difference to him.

[Suddenly]

Originally posted by Jaggy Bunnet


Just to clarify, the harm arises only because you have bought more shares? Which you wanted to do, at a price you were happy with. Being happy with a transaction at the time does not equal not being harmed by it. The harm comes from misappropriation of information. The seller violated his duty of loyalty to the shareholder by using the information which he possesed for business purposes for personal gain.

What if the phone call came the day after you bought the shares, whose fault is it then? What if it comes between you making the offer and him accepting it? There is no misappropriation of information, so this is just tough luck.

And this is not the circumstances where insider trading arises - if you are buying 50% of a business from someone you know is involved in the management. In that case you normally undertake investigations on the company to find out if what you are buying is worth the proposed price and you get warranties from the vendor about the state of the business. If you don't go through that process, its your own fault.

Can you not see the difference between that and a stock market where you have no idea who you are buying from? You are in exactly the same position whether you buy from another shareholder or the insider (and you need never know who you have bought from) - if you are in the same position, where is the harm?

The difference is that in the big stockmarket situation, the negative impact of your actions falls on someone that can't be identified. The complexity of the market makes identification impossible, thats all. The larger market does not somehow erase the negative outcome, it just shifts it around.

Consider this twist on WildCat's hypo.

This time we have three people, A B and C, that are each 1/3 shareholders of X corp. A acts as CEO, and B and C are just stakeholders. B wants to buy another 1/3 of the company.

One day, C decides he's going to sell out. C and B are negotiating a sale for about $1,000,000. Meanwhile, A as above, acting as CEO gets the call that their main client is fireing them, and they will lose 90% of their business. This means certain doom. He runs into the room where B and C are sitting and says he will sell his shares to B for $900,000. C refuses to go lower, and the sale is made. A then tells B and C of the phone call, and that the stock s now next to worthless.

Clearly, there is a violation of a fiduciary duty by the CEO. Who is harmed? B really isn't, because as in the larger market scenerio, he was going to buy from C anyway. In fact, C saved $100,000.

However, C is harmed, in that but for A's violation of the fiduciary duty he would have sold to B pre-crash. He suffered a financial harm because of A's violation of a fiduciary duty.

Insider trading is not about harming an individual buyer, it is about causing composite harm to those in the market due to a violation of a legal duty an insider has to shareholders.

[shanek]

Originally posted by Eventually
Now, consider the same where Bob is able to offer a lower price than Joe because Bob uses slave labor

What we're discussing is in no way tantamount to slave labor.

In both cases there is harm, but in the second case we identify harm to Joe, not necessarily because of the harm to the workers, as much as because of a lack of fairness, in that there was no earthly way, all things being equal, that Joe could have prevented the harm.

But it is unfair because it only comes about at the expense of others. Insider trading doesn't work that way.

I've said before, if, say, a banker were to invade his customers' privacy by going into their accounts and seeing what's going on and investing based on that, that would be fraud because the information was obtained fraudulently. But someone merely knowing the status of a certain aspect of the business is an entirely different thing.

Just as Bob's harm to Joe came about because of other actions which constituted force or fraud, so must the inside information itself have been obtained through forceful or fraudulent means in order for it to even come close to justify treating it as a crime.

[shanek]

Originally posted by 69dodge
You both seem to be arguing that, since everyone has already decided what price to buy or sell at, precisely the same transactions will occur regardless of whether the insider sells his shares.

Where did I ever say anything approaching that?

[shanek]

Originally posted by Thanz
Something is still bugging me. Why is the partner example not the same as insider trading?

Because it's a case where one partner has defrauded the other. That's not the same as a someone simply using his knowledge of the company to sell stocks he thinks will likely decline in price.

[shanek]

Originally posted by Suddenly
If Shanek says that the changes in the above paragraph make the harm disappear, I'd love to know how.

None of that had to do with the harm caused by one partner not informing the other of the status of the contract.

Now, tell me how the relationship between those two partners is in any way comparable between someone selling stock which eventually ends up being bought by someone he has never met and couldn't really find out who he is if he wanted to.

[shanek]

Originally posted by Suddenly
The difference is that in the big stockmarket situation, the negative impact of your actions falls on someone that can't be identified. The complexity of the market makes identification impossible, thats all. The larger market does not somehow erase the negative outcome, it just shifts it around.

Disregarding the fact that I think I've debunked this claim quite thoroughly, let's say you're right and the harm does get spread around among probably hundreds of people buying the stock some of whom might have gotten some of the shares the insider sold.

How, then, is it any kind of a solution to concentrate that harm in one place, on the insider, by forcing him to sit on his stocks until the information is revealed? 1000 bees each stinging 1000 different people, I would argue, causes a lesser overall harm than those same 1000 bees stinging a single person.

Consider this twist on WildCat's hypo.

Still not the same as what we're talking about, where the insider doesn't have a clue who's going to be buying the stocks. The person buying the stock may not even be an existing stockholder. This hypothetical does not track at all to what we're talking about.

[Suddenly]

Originally posted by shanek


What we're discussing is in no way tantamount to slave labor. Of course it isn't. It is an exageration to make a point, sort of like at the begining of this thread, when responding to a point that insider trading is illegal, you compared it to those that helped slaves escape into Canada.

Your obvious point was that law is not infallable, but I'd hope you see that your comments could be shown in a harsher light, similar to what you just did to mine.

My point is there is a harmful act done to person X (the workers) that results in a harm to person Y (Jim). We recognize that as redressable harm, although were the circumstances different and Bob had acheived his lower price by wringing out costs in a legal manner, we would go tell Jim to take a hike.



But it is unfair because it only comes about at the expense of others. Insider trading doesn't work that way.

I've said before, if, say, a banker were to invade his customers' privacy by going into their accounts and seeing what's going on and investing based on that, that would be fraud because the information was obtained fraudulently. But someone merely knowing the status of a certain aspect of the business is an entirely different thing. Insider trading is almost identical to what you lay out above. I think I mentioned this before, but I'll go point by point.

1)The banker has possession of information, so does the insider.
2)The banker has this information for serving clients. The corporate insider has this information for serving shareholders.
3)The banker is acting as the agent of the client. The insider acts as the agent of the shareholder. (according to basic agency and corporate legal principles)
4) By appropriating the information for pesonal use, the banker is obtaining the information fraudulently. By appropriating the information for personal use, the insider is obtaining the information fraudulently.

This even holds up w/r/t liability of non-insiders, as follows:

If our banker approaches a friend and tells the friend that the banker has some hot investment advice he got from sneaking around his client's files, that friend will be liable for making trades based on information he knows was originally stolen, or fraudulently obtained by the banker. Same basic legal premise behind posession of stolen property. It is illegal to knowingly take possesion of something you know to be stolen.

Just as Bob's harm to Joe came about because of other actions which constituted force or fraud, so must the inside information itself have been obtained through forceful or fraudulent means in order for it to even come close to justify treating it as a crime.
Exactly. Now that we have got the "negative impact" aspect out of the way, we can discuss the "fiduciary duty" part of the equation. I'll conceed that forcing someone into bondage is not of the magnitude of violating a fiduciary duty owed that person, but they are both a type of wrongful act.
To say otherwise would be akin to saying pickpocketing should be just dandy because it is much less a personal violation than rape. Clearly absurd. Thus, magnitiude isn't the issue, rather the issue is whether 1) there is a duty and 2) is that duty violated.

[Suddenly]

Originally posted by shanek


None of that had to do with the harm caused by one partner not informing the other of the status of the contract. The change I am referring to is where they are no longer partners. They are stockholders with one also being the CEO. This is was a very common small business arrangement, or at least it was before the advent of the LLC (or LLP or whatever depending on what state). What the CEO does next is classic insider trading. He gets information through his capacity as an agent of the shareholder, and acts on it before the shareholders are made aware.

The only difference is the size of the market makes it easy to identify the harm. That is it.

Now, tell me how the relationship between those two partners is in any way comparable between someone selling stock which eventually ends up being bought by someone he has never met and couldn't really find out who he is if he wanted to.

As I've pointed out before, that situation is just larger and more complex. You are stick on the principle that the other party to the actual insider transaction is harmed. That is not always going to be the case.

[Thanz]

Originally posted by shanek


Because it's a case where one partner has defrauded the other. That's not the same as a someone simply using his knowledge of the company to sell stocks he thinks will likely decline in price.
Well, that's more of an assertion than an explanation.

I'd appreciate it if you could address the following situations. They all deal with Wildcat's company (X co.) that relies upon Acme for 75% of its business. There is no formal arrangement (supply agreement or whatever) between the two such that Acme cancelling is not a breach of contract or whatever. In all cases below, Adam is the insider who knows about the cancellation and Bob is the person who wants to buy stock in the company, but doesn't know about the Acme cancellation. Adam never tells Bob about the cancellation prior to a sale, and in each case Adam sells the shares and Bob buys them.

In which of the following scenarios is it fraud and in which is it not fraud?

1. Adam and Bob are partners
2. Adam and Bob are 50-50 shareholders in X co.
3. Adam owns 25% and Bob owns 75% of X co.
4. Adam and Bob each own 33% of X co.
5. Adam and Bob are 2 of 10 equal shareholders.
6. Adam owns 30%, Bob is an outside purchaser.
7. Adam owns 75%, Bob is an outside purchaser.
8. Adam and Bob trade shares in a very thinly traded public market (their trade is the only one that day for the stock) and (a) Bob is a current shareholder or (b) Bob is a new shareholder after the purchase.
9. Adam and Bob trade in a slightly busier trading day - their's is one of 10 trades and (a) Bob is a current shareholder or (b) Bob is a new shareholder after the purchase.
10. Adam and Bob trade in a busy market - their trade is one of hundreds that day and (a) Bob is a current shareholder or (b) Bob is a new shareholder after the purchase.

I realize that is a lot of questions, but I am trying to understand where you are coming from and where the line gets drawn (if anywhere).

[Suddenly]

Originally posted by shanek


Disregarding the fact that I think I've debunked this claim quite thoroughly, let's say you're right and the harm does get spread around among probably hundreds of people buying the stock some of whom might have gotten some of the shares the insider sold. You haven't debunked it. You've managed to confuse it quite a bit though, and part of that may be my fault for not being very clear in what I am trying to explain. I think I have a clearer apporach and I'll put it at the end of this post...

How, then, is it any kind of a solution to concentrate that harm in one place, on the insider, by forcing him to sit on his stocks until the information is revealed? 1000 bees each stinging 1000 different people, I would argue, causes a lesser overall harm than those same 1000 bees stinging a single person.

Bit of a false analogy, but not so much of one, in that toxic effects become more acute w/r/t level of venom in the blood. Better analogy is more direct: If I steal one dollar from a thousand people instead of stealing one thousand dollars from one person, which is worse is a matter of opinion and circumstance. However, I'm still a thief.

Still not the same as what we're talking about, where the insider doesn't have a clue who's going to be buying the stocks. The person buying the stock may not even be an existing stockholder. This hypothetical does not track at all to what we're talking about. First, the only variable missing is the inability to identify parties. Other than that, it is the small version. Can you at least admit that not all corporate stock has to be traded over an exchange? Ever hear of a closely held corporation?

Anyway, as to the above "harm goes somewhere" theory you claim you have debunked, I'll put it in a more clear form.

Consider two universes. I mean, quasar to quasar full universes. We aren't going to need all that space, but the fact is nothing new is coming in.

These universes are identical, but for one difference mentioned later. Both are identical to each other and to ours. Except for the following.

In both A and B:
1) You own 100 shares of GolfBall.
2) You are the CEO of GolfBall.
3) An anouncement will be made tommorow at noon that your only product is now considered "nonconforming" by the USGA and R&A, the upshot being that your equipment will not be legal under the rules of golf. You are aware today of this announcement, but it will not be made public until tommorrow.

Now, A and B are identical except:

In A you sell the stock at 11:30 A.M. tommorrow for $100 per share. ($10K)
In B you sell at 12:30 P.M. tommorrow for $30 per share. ($3K)


We now measure the universes at exactly 2 P.M tomorrow. The following can be established:

1) The two universes have the same amount of money, as they are identical but for the timing of the sale. So, this is true unless your sale created money.

2) In Universe A you have $7K more money than in Universe B.

3) From 1) and 2) above, we can establish that people who are not you have 7K less in A than in B.

The only way some sort of alternate form of wealth (other than money) can be used to claim that the people in A are somehow not 7K worse off than those in B is if this wealth or money is created by the timing of the sale, as universes are identical in every other detail. They only diverge at 11:30 P.M., and only where affected by the sales.

[shanek]

Originally posted by Suddenly
The only difference is the size of the market makes it easy to identify the harm. That is it

No, it's not. I've pointed out twice that a big difference is that the people in your scenario have a working relationship with each other, a relationship that does not exist in the exchange market.

[specious_reasons]

Originally posted by shanek


No, it's not. I've pointed out twice that a big difference is that the people in your scenario have a working relationship with each other, a relationship that does not exist in the exchange market.

I would disagree. I think the buying and selling a stock is a business relationship, much like buying and selling a product.

Very limited relationship, but yes, a relationship.

[a_unique_person]

The whole concept of the "insider trading" is wrong because it acknowledges that there is no "level playing field" for those in the business of buying and selling shares. If there were no restrictions on it, the damage would be to the sharemarket itself, as everyone not "in the know" would be more reluctant to trade shares. Those with inside knowledge would have a profit making leverage that others would not. People who know that the game is skewed against them do not like playing that game.

[Eventually]

(Whoops - wrong account)


- Suddenly

[Suddenly]

Originally posted by shanek


No, it's not. I've pointed out twice that a big difference is that the people in your scenario have a working relationship with each other, a relationship that does not exist in the exchange market.

The relevant relationship is the one between a company officer/director/employee and the shareholders that consists of a fiduciary duty. It is slightly more complex, but in short, this is how corporations are set up.

The shareholders own it, and hire the directors. The directors hire the officers, and the officers hire the employees. All except the shareholders are agents of one or more higher level, and owe a fiduciary duty to same.

In both a closely held corporation with one or two owners and a corporation with 1,000,000 owners, these same relationships and duties exist.

[a_unique_person]

Originally posted by Suddenly
You haven't debunked it. [/B]

We will have to add this to the JREF drinking game.

Someone claims that something has been debunked when it hasn't. Take a sip.

[shanek]

Originally posted by specious_reasons
I would disagree. I think the buying and selling a stock is a business relationship, much like buying and selling a product.

Very limited relationship, but yes, a relationship.

How can it be considered by any stretch of the definition a "relationship" when not only do you never meet the person, you very likely don't have a real chance of finding out who he is if you tried? That doesn't sound like much of a relationship to me.

[shanek]

Originally posted by a_unique_person
The whole concept of the "insider trading" is wrong because it acknowledges that there is no "level playing field" for those in the business of buying and selling shares.

There isn't, and trying to make it so just makes things worse. The sooner people realize that the better off everything will be.

[shanek]

Originally posted by Suddenly
The relevant relationship is the one between a company officer/director/employee and the shareholders that consists of a fiduciary duty. It is slightly more complex, but in short, this is how corporations are set up.

This is very disingenuous of you. The relationship we're talking about is a stockholder who happens to have some inside information and other people who may or may not already be stockholders. I know you keep trying to twist it into being something more than that, but really that's all that it is. We aren't talking about an officer or director making false statements about the well-being of the company; I've already agreed that that's fraud. We are talking about a stockholder and his "relationship" with people he doesn't even know who may not even be stockholders at the time.

[American]

- Working hard is being a thief

- Earning a degree is being a thief

- Being qualified

- Sacrificing personal interests, family life, quality time


All of that is being a thief to a democrat, because they would not dream of having the vision and drive to be more than average. "Can't" is their favorite word.

That's you, unique.

[a_unique_person]

If I was arguing those ideas, you might have a point, but I wasn't, so you don't.

[Suddenly]

Originally posted by shanek


This is very disingenuous of you.

Quite frankly I'm tired of this crap. I guess that it isn't that I misunderstand what you are saying, or Ed forbid you maybe lack understanding on an issue. Nope, it is me being disingenuous.

You have found me out. I'm just making this all up. This is all a troll. You can tell because I never make an effort to explain things, and I just say over and over that I have already debunked your position. Or.....

It could be that the harm embodied in insider trading, and the legal issues that surround it do not fit into your "X harms Y" mentality, and that ....

F*ck it. Harry Browne says it doesn't cause harm so it must be true.

Yeah. The guy buying the stock would have bought it anyway, and he got a lower price. The insider winds up with cash he wouldn't have had otherwise, but since the buyer isn't harmed neither is anyone else. Heck, if everyone could do what our noble insider did, we'd all be rich and nobody would be poor!! Woo Hoo!!

[Thanz]

Originally posted by shanek

This is very disingenuous of you. The relationship we're talking about is a stockholder who happens to have some inside information and other people who may or may not already be stockholders. I know you keep trying to twist it into being something more than that, but really that's all that it is. We aren't talking about an officer or director making false statements about the well-being of the company; I've already agreed that that's fraud. We are talking about a stockholder and his "relationship" with people he doesn't even know who may not even be stockholders at the time.
Again you refer to the relationship. I ask you to please answer my previous post and let me know in which of the 10 situations I outline fraud exists. You keep asserting that it is different - just when does it make the leap from "fraud" to "not fraud"?

[DavidJames]

Suddenly,
You have exercised sound judgment, logic and reason and presented your arguments in a straightforward unambiguous manner. The fact is you have cleaned, and fumigated, shanek's Libertarian clock on this issue. Disingenuous is a term I've used to describe shanek's posts on many occasions and was going to again after he posted this nugget, but decided not to:

"The fact of the matter is that the sellers are still getting a price they think is fair and acceptable for the stock."

Thanks for adding your considerable expertise to this and some of the other threads. I can hardly blame you for dropping this one as your head must be sore from banging it against the monitor when you read this stuff. I think you may need to clean up

ps,
1) I know exactly where "mine mine mine" comes from (I have kids) and I used the phrase because it describes perfectly how Libertarian's view their stuff. And yes, the Nemo DVD will be part of the DavidJames family collection next month :)

[shanek]

Originally posted by Thanz

Again you refer to the relationship. I ask you to please answer my previous post and let me know in which of the 10 situations I outline fraud exists. You keep asserting that it is different - just when does it make the leap from "fraud" to "not fraud"?

This is EXACTLY what upsets me about you, Thanz. I have answered this question several times in this thread, and I think it's obvious to anyone going through it reading my posts. And I just don't have enough free time to go repeating myself 18 times over.

[shanek]

Originally posted by Suddenly
Quite frankly I'm tired of this crap. I guess that it isn't that I misunderstand what you are saying, or Ed forbid you maybe lack understanding on an issue. Nope, it is me being disingenuous.

Yes, it is! Because as I explained in the part of my post which you snipped and apparently don't even want to read, not only have I acknowledged several times that breaches of trust and withholding information between partners and officers of the corporations and the kind of insider trading we're talking about. I have explained the difference several times, and yet you continue to try and pull the discussion back to the former issue, which I have stated several times is fraud, and not to the issue of insider trading that you all are trying to say should be illegal that I say shouldn't!

And since I have explained that several times, I can think of no other reason why you would cling to that aspect of the discussion.

[shanek]

Okay, some more views on insider trading:

O'Keefe, Matthew, "In Praise of Insider Trading," Economic Notes No. 18

http://www.capital.demon.co.uk/LA/economic/insider.txt

[A] little over ten years ago, before the creation of regulatory bodies and the passing of legislation like the Financial Services Act, the "crime" of insider trading was unheard of on the London Stock Exchange. If insider trading has become criminal in the 1980s, then it should be regarded in the same light as the "crime" of bootlegging in the USA of the 1920s, i.e. as a crime invented by the government. Neither "crime" involves any direct trespass against person or property.

The sole reason for the laws against both is that the moral majority regarded them as "wrong."

What, then, is "wrong" with insider trading?...[H]ostility towards insider dealing merges in practice with hatred of capitalism itself in the belief that "the rich get richer and the poor get poorer." Of course this is not how free enterprise works. Nor, I think, is it how insider trading works. If a stockbroker learns of an imminent take-over bid and uses this confidential information to make a profit on the stock market, clearly he has become richer for it. But even if the insider dealer acts purely for personal gain, it is hard to see who, if anyone, has become the poorer. On the contrary, if he is a good stockbroker, it is quite easy to see others who have benefited, such as the stockbroker's clients. Consider if I were to become a brilliantly successful insider trading stockbroker tomorrow - wouldn't you want to put your money with me? How long would it be before I started to attract the custom of my "law abiding" but less successful contemporaries and win a bigger and bigger share of the market? And wouldn't all my clients, rich and poor, knowledgeable or otherwise, receive the benefit of my access to inside information?

Insider trading should be legalised. This would not exempt frauds like Boesky who stole information through the use of bribes. Neither gentlemanly "codes of honour" nor over-zealous regulations seem to me the answer to the problem of fraud in Wall Street or the City of London. What is needed is a strict system respecting property rights in information, one which will surely be more conducive to the dissemination of information than the regulation-strangled system we have now. When voluntary exchange becomes the basis of disseminating information, perhaps people will realise that the truth about capitalism and the institutions of private property is that "the rich get richer and the poor get richer."

[shanek]

And another:

http://www.webleyweb.com/tle/libe231-20030713-04.html

This entire ruckus surrounding Stewart and Waksal dates all the way back to December 27th, 2002 when ImClone, the pharmaceutical company, was receiving signs from the FDA (another Roosevelt machination founded in 1938) that its approval application for its new anti-colon cancer drug Erbitux was about to be denied. ImClone had already submitted its study to the agency, arguing that the drug indeed did work; however, the agency refused to examine the application, claiming that its numbers were so flawed. When this transpired, ImClone's stock price nose-dived by a shattering 9.7 percent at the end of the business day. Such a significant drop would be too coincidental to assign blame to several of Waksal's family members or even Stewart for her paltry stake.

The stock, in case anyone hasn't noticed, initially opened at approximately $62 a share that day. The pressboards were buzzing with rumors that the stock price was going to tumble, and of course, many shareholders feared that the FDA debacle would depress the price. Bloomberg News issued a notice, saying, "ImClone Systems Inc. shares fell as much as 9.7 percent on concern about whether the Food and Drug Administration will approve the company's Erbitux cancer drug, financial news network CNBC reported." It also should be pointed out that there were potentially thousands of shareholders who were dumping their ImClone shares at the same time. Of course, Waksal and his family had already put up their shares for sale in the wee hours of the morning, totaling approximately $9 million at between $62 and $63 a share.

As for Martha, she contacted Waksal's office at 1:43 p.m. Waksal's secretary answered the phone and took her message, which said, "Something is going on with ImClone, and she wants to know what." (This proves that Martha had no idea of what was happening at that point.) It now stands to reason that Stewart, who grew tired and impatient of awaiting his callback, called her broker Peter Bacanovic and instructed him to sell her 3,928 shares. It was not until 90 minutes later that the stock price dropped to $58 a share. Regrettably, the media hardly took notice of these events.

It wasn't until later that night that Waksal returned Stewart's phone call and told her about what had transpired. Interestingly no one denies that he had actually done this. (This also proves that Stewart was oblivious to the entire ImClone/FDA matter, considering that the federal government's original claim was that she was aware of the details of the impending stock price drop and the FDA's rejection of ImClone's application.)

The federal government alleges that Stewart had lied to Justice Department officials and federal prosecutors about her explanation for the transaction she made. She told them that Bacanovic and she entered into a pre-existing sales agreement to sell the shares weeks in advance before December 27th and it had already been finalized. The government, in response, claimed that Bacanovic warned her about the price drop on the day of December 27th and recommended that she should sell the shares. This is in stark contrast to the Justice Department's original charge that Waksal tipped Stewart off before she uploaded her shares.

Of course, it must be pointed that the government's prime witness Douglas Faneuil, who was a Merrill Lynch trading assistant at the time, contended that he was directed by Bacanovic to tip off Stewart that Waksal and his daughter were interesting in dumping their shares. Faneuil originally testified that she had an agreement with Bacanovic to sell the shares if the price fell below $60. Even Bacanovic confirmed it, the fact that Faneuil altered his story notwithstanding.

As a result, the government also went after Bacanovic, who has been indicted ever since.

Laws Outlawing Insider Trading are Destructive and Antithetical to a Free Society

Not only that, they are primarily based on an apocryphal theory—onein which it states that if one sells his commodity to profit from it, solely based on the nonpublic (i.e., "inside") knowledge in his possession, he has gained an "unfair" advantage at the expense of traders who sustain financial losses without that knowledge.

Of course, this theory is problematic at best. In a free marketplace, individuals who engage in economic transactions—particularly when they have information—will profit from the knowledge in their possession. If I decide to embark upon a venture in hotel management and I open a new hotel with the knowledge I have in starting the business, I will most likely make financial gains because of my expertise. However, if I open my business without having an idea of what entails in running a hotel, then I will most likely incur financial losses. Nevertheless, keep in mind that this would be done at my own expense.

Moreover, these losses would be occurring due to the financial success of my competitors who are more experienced in running a business than I am. Ironically, no one even believes that the knowledge held by any experienced hotel manager gives him or her any unfair advantage at the expense of their losing competitors.

[A]n activity requires any marketable equity price to unveil all and any relevant information immediately. The correct price of any product is a reflection of both the relevant information of the item and the true value of the company that makes the product. In Martha's case, insider trading resulted in this information much sooner and faster than it would have been expected otherwise. Considering the fact that the FDA thumbed its nose at ImClone's application, the true value of that firm depreciated. Stewart certainly sold her shares because of inside knowledge, but she helped the market by depressing ImClone's market price, which required the firm's true value to be revealed. Even though the public was oblivious to this information that prompted her sales, knowledge-hungry investors noticed the information firsthand and much more quickly than they would have been able to do had Stewart not sold her shares. When they received data showing that ImClone was truly not as profitable as it seemed to be, they responded by selling the shares after seeing the price dwindling.

The SEC's mission statement states the following:

"The primary mission of the U.S. Securities and Exchange Commission (SEC) is to protect investors and maintain the integrity of the securities markets... The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public, which provides a common pool of knowledge for all investors to use to judge for themselves if a company's securities are a good investment. Only through the steady flow of timely, comprehensive and accurate information can people make sound investment decisions."

According to the SEC's chartered statement, it is a dismal failure.

Any sane, rational individual knows that its regulations are incredibly futile. Since the 1930s, more and more regulations have been dumped on investors, resulting in requirements burying them with useless data. During the Enron scandal, the Wall Street Journal's own Holman Jenkins Jr. noted that shady accounting firms like Arthur Andersen are the result of their role produced by the federal requirement which calls for an annual audit of all corporations. As Jenkins put it, it's all part of "the federal gravy train."

[Thanz]

Originally posted by shanek


This is EXACTLY what upsets me about you, Thanz. I have answered this question several times in this thread, and I think it's obvious to anyone going through it reading my posts. And I just don't have enough free time to go repeating myself 18 times over.
I am not asking you to repeat yourself. I know that you have said that the relationship is important. So, I have outlined 10 different relationship scenarios and have asked you to tell me in which cases the action of selling the shares would be fraud and in which it wouldn't. Why can't you do this simple thing? Despite what you say, you haven't answered my questions.

[Suddenly]

Originally posted by shanek


Yes, it is! Because as I explained in the part of my post which you snipped and apparently don't even want to read, not only have I acknowledged several times that breaches of trust and withholding information between partners and officers of the corporations and the kind of insider trading we're talking about. I have explained the difference several times, and yet you continue to try and pull the discussion back to the former issue, which I have stated several times is fraud, and not to the issue of insider trading that you all are trying to say should be illegal that I say shouldn't!

And since I have explained that several times, I can think of no other reason why you would cling to that aspect of the discussion.

Uh huh. You figured me out.

Because as I explained in the part of my post which you snipped and apparently don't even want to read, not only have I acknowledged several times that breaches of trust and withholding information between partners and officers of the corporations and the kind of insider trading we're talking about. Maybe if you added a clause this sentence would mean something. A hint: when you use "not only have I" there should be an "also" type word in there or you are just babbling.

I read your post. My gut response was "Holy sh*t you have no idea what you are talking about!! Perhaps if you read the actual law that makes insider trading illegal and then read some of the cases on the subject you will realize just how stupid your claims are."

But what good does that do? Just going to make you defensive and in the odd chance you do bother to read that stuff you are just going to manipulate it somehow so you can claim that it is something other than it is, to avoid the painful realization that some of us (not you it appears) have made from time to time that we are wrong about something.

So, I tried to explain it as diplomatically as I could. I suggested you may want to get more familiar with the topic, that whatever Libertarian Party Communique you are working off of just may not be giving a clear picture of the whole truth.

Silly me!! Thinking that a greater understanding of an issue is more important to you than spreading and defending The One True Political Faith. What was I thinking. Those Libertarians make it seem all so simple, don't they? I liked it when I was a Libertarian. Much easier than all that difficult thinking and stuff I have to do now.


Plus, If I were wrong about something, I'm sure you would respond with a link, a rolleyes smiley, and a terse "Educate yourself." (Actually, that is exactly what you did)

So, I give up. I think the thread speaks for itself.

[shanek]

Originally posted by Thanz

I am not asking you to repeat yourself. I know that you have said that the relationship is important. So, I have outlined 10 different relationship scenarios and have asked you to tell me in which cases the action of selling the shares would be fraud and in which it wouldn't. Why can't you do this simple thing? Despite what you say, you haven't answered my questions.

Because those questions are NOT about "relationship scenarios," which don't have a thing to do with how many shares one person has vs. another! It has to do with what kind of information the person has and what they're representing to the other person. And all you need to do is reread through my posts on this thread to see that.

[shanek]

Originally posted by Suddenly
Perhaps if you read the actual law that makes insider trading illegal and then read some of the cases on the subject you will realize just how stupid your claims are.

Unnecessary. I've been looking at REAL WORLD APPLICATIONS of the law, which are more pertinent since that's what the law is actualy being used for.

Unless you've finally come up with a reason Martha Stewart has hurt others?

[shanek]

Here's Alexandre Padilla's paper, "Can Agency Theory Justify the Existence of Insider Trading?"

http://www.ifrance.com/alexpadilla/job%20Paper.pdf

I think those of you with open minds will find it enlightening.

[Suddenly]

In case anyone wants a balanced article that tackles several schools of thought w/r/t insider trading should try this link. (http://www.frbatlanta.org/publica/eco-rev/REV_ABS/97ER/q4/Noe-Hu.pdf) (pdf format)

This is an article from the Federal Reserve Bank of Atlanta Economic Review, Fourth Quarter of 1997, titled "The Insider Trading Debate."

This gives a discussion of the legal basis and economic theories that make up a very, very complex topic rather than the oversimplified knee-jerk two bit opinions (mine included) expressed in this thread.

I will note one passage:

Economists generally agree that any informed trading, including insider trading, hurts liquidity traders, who may be forced to trade in order to balance their portfolios or hedge their positions but are at an informational disadvantage and inevitably lose money to insiders and other informed traders. This argument is confirmed in the analysis by, for example, Manove (1989), Noe (1997),Fishman and Hagerty (1992), and Leland (1992).

Go figure.

Anyway, this is a good primer on the subject, one that doesn't take a one dimentional approach to the problem, like some other articles. It has a bit of jargon, but it doesn't say things like "property rights are in fact a necessary condition for human action." It seeks to inform, not persuade, and does not attempt to reduce a massively complex issue to trivial simplicity.

I won't assume an "open mind" is a necessary condition to finding it interesting, as even closed minded simpletons will find something they can agree with and then declare to be "The Most Important Thing."

Enjoy!

[Thanz]

Originally posted by shanek

Because those questions are NOT about "relationship scenarios," which don't have a thing to do with how many shares one person has vs. another! It has to do with what kind of information the person has and what they're representing to the other person. And all you need to do is reread through my posts on this thread to see that.
Nice attempt at a dodge, but I'm not buying it. In each of those scenarios the insider has the same knowledge (loss of a big customer) and says nothing to the other party (same representation or non-representation). From your posts here, you seem to be saying that when one partner does this to another it is fraud (number 1 on my list), but if the the same guy does it in the stock exchange it is not (number 10 on my list). This makes no sense to me, so I laid out some scenarios to try and see when and where it crosses the line from being fraud to being okay. And you have steadfastly ignored the questions.

[Suddenly]

Originally posted by Thanz

Nice attempt at a dodge, but I'm not buying it. In each of those scenarios the insider has the same knowledge (loss of a big customer) and says nothing to the other party (same representation or non-representation). From your posts here, you seem to be saying that when one partner does this to another it is fraud (number 1 on my list), but if the the same guy does it in the stock exchange it is not (number 10 on my list). This makes no sense to me, so I laid out some scenarios to try and see when and where it crosses the line from being fraud to being okay. And you have steadfastly ignored the questions.

There is a very simple explaination that answers your question, however it requires some background.

The fact is there is a reasonable argument to be made that insider trading should not be regulated, but it is far from generally accepted among economists.

I've been a bit naughty in this thread. I was aware of these theories from the begining, but I get a bit upset when I see someone take a novel and obscure, but perhaps reasonable theory, then mistate it, present an extremely simplistic model of it and claim it represents absolute truth. So I went into the simplistic arguments to try to point out the flaws. Due to that, this thread is more confused that it should be. In hindsight I should have taken a different, and more mature, approach to the discussion, so I'm going to "hit the reset button" so to speak.

I'm going to post a reasonable formulation of the whole "insider trading should not be regulated" theory in a different thread this afternoon. While I disagree with the concept on several points, I think when it is formulated more completely it will make for an interesting discussion.

I'd do it now but I have to go talk to some life residents at The House Of No Fun soon, and I need to prepare for that .

[shanek]

Originally posted by Thanz

Nice attempt at a dodge, but I'm not buying it. In each of those scenarios the insider has the same knowledge (loss of a big customer) and says nothing to the other party (same representation or non-representation).

Now you're being disingenuous. We've already established that the kind of insider trading we're talking about involves a person who has absolutely no idea whom he's selling the stock to, nor could he have any real likelihood of finding out if he tried! And that brings us straight back to the very question you and everyone else here refuse to answer...

[Thanz]

Originally posted by shanek


Now you're being disingenuous. We've already established that the kind of insider trading we're talking about involves a person who has absolutely no idea whom he's selling the stock to, nor could he have any real likelihood of finding out if he tried! And that brings us straight back to the very question you and everyone else here refuse to answer...
Not in the slightest. That scenario is the last scenario in the chain of examples I gave. I am trying to find out when you say it becomes okay. Why do you continue to avoid this? Can an insider who knows about the loss of a big contract sell his shares in the market without disclosure of that fact or not? And if he can, where along the spectrum I have outlined does this become acceptable behaviour?

[specious_reasons]

Originally posted by shanek


Now you're being disingenuous. We've already established that the kind of insider trading we're talking about involves a person who has absolutely no idea whom he's selling the stock to, nor could he have any real likelihood of finding out if he tried! And that brings us straight back to the very question you and everyone else here refuse to answer...

You know, if I fire a gun into a large crowd and run away, then after the crowd disperses, I can see blood on the ground, but no dead bodies, it's a victimless crime, right? After all, I don't know who got hurt.

Am I misreading your argument?

[shanek]

Originally posted by Thanz
Why do you continue to avoid this?

Because it's completely irrelevant! You are setting up a strawman version of my claims about the relationships with the people involved. You are also trying to get me to draw a definitive line, when with ANY law there will always be grey areas. Your request is irrelevant and invalid, period.

[shanek]

Originally posted by specious_reasons
You know, if I fire a gun into a large crowd and run away, then after the crowd disperses, I can see blood on the ground, but no dead bodies, it's a victimless crime, right? After all, I don't know who got hurt.

Oh this is just the living end! Are you seriously telling me that selling stock is tantamount to shooting someone??? Shooting into a crowd IS going to cause harm, and directly to the person who took the bullet. That person IS definitively harmed. NO ONE can point me to ANYONE harmed by insider trading no matter how many times I ask them to.

Can't you people see how pigheaded you're being about this?

[DavidJames]

Thanz,

When shanek said: "Your request is irrelevant and invalid", he, of course, is saying he's unable to provide a response that doesn't reveal the absurdity of his position. Much like in another thread (on moving jobs oversears) when he couldn't (wouldn't?) answer my questions, he responded that I was asking the wrong questions.

[Thanz]

Originally posted by shanek


Because it's completely irrelevant! You are setting up a strawman version of my claims about the relationships with the people involved. You are also trying to get me to draw a definitive line, when with ANY law there will always be grey areas. Your request is irrelevant and invalid, period.
How is it in any way a strawman? I am not claiming that you are arguing X and then knocking it down. I am simply asking questions based on your responses to queries thus far. The questions are fair. You say that the first situation if fraud, and the last situation is not fraud. I am asking what other situations are fraud. The fact that you consistently refuse to do this simple analysis, which would take all of five minutes, leads me to believe that DavidJames analysis of your response is correct.

If a certain situation in my list is uncertain, simply say so. And if it is uncertain, I would like to know why. I am not being unreasonable - I am trying to understand your stance on this issue.

At the very least, explain how my questions are "irrelevant and invalid". Simply asserting this does not make it so.

[Suddenly]

Originally posted by shanek


Because it's completely irrelevant! You are setting up a strawman version of my claims about the relationships with the people involved. You are also trying to get me to draw a definitive line, when with ANY law there will always be grey areas. Your request is irrelevant and invalid, period.

His request is releveant because you are missing one very important point about deregulation of insider trading. That is that legalization doesn't automatically give an insider the right to trade on inside information. It only gives the stockholders the ability to choose whether to allow officers, directors and other agents to use inside information for personal use. The stockholders then "sell" the information to the agents in the form of compensation. This is because the information "belongs" to the stockholders and the agent's personal use without consent amounts to a form of theft, and a clear violation of agency duties.

Did you even bother to read the Padilla article you were so smug in suggesting? If you did this concept should be clear as the point of that whole article was about the efficency of the free market in enforcing the above choice of the stockholders.

Or was it that you got a cite for that article off of some Libertarian type website and you posted it without bothering to read it?

The answer is with deregulation that each company has the right to allow or disallow insider trading. The fact is that even most rational deregulation proponents accept there are companies that will for whatever reason not want to allow agents to use the inside information. Those companies will not allow the trading. It is that simple.

[Skeptic]

Now you're being disingenuous. We've already established that the kind of insider trading we're talking about involves a person who has absolutely no idea whom he's selling the stock to, nor could he have any real likelihood of finding out if he tried!

Not knowing who the victim is is not the same as there being no victim. If I rape someone in the dark and never find out who she was, does it mean she wasn't raped?

[Skeptic]

NO ONE can point me to ANYONE harmed by insider trading no matter how many times I ask them to.

Shanek--let me speak frankly, and, unfortunately, perhaps in a way that will insult you. But this isn't personal; it's an example of what happens when skepticism is gone.

You are behaving PRECISELY like the crank inventor who keeps claiming "NO ONE can EVER tell me why my earth-is-hollow theory is wrong NO MATTER how many times I ask!!!". There are, usually, a few reasons for this "inability" of the critics to "prove you wrong", and both of you exhibit all of them.

1). First, the crank's "theory" is usually so vague and meaningless it cannot be "proven wrong" for the same reason any meaningless noise cannot be proven "wrong".

This applies both to the hollow-earther and to most of your economic theories. In most cases, it is extremely difficult to figure out what, exactly, the flat-earther or you are really saying--leaving both of you with the convenient "that's NOT what I meant" excuse whenever you feel like it.

Neither of you seem to realize that if just about EVERYBODY "viciously misunderstands" you all the time, and are "too stupid and careless" to "fairly" figure out what you "really mean" (as you keep claiming), then the fault is probably lies not in the stupidity and evil actions of others, but in the fact that your claims are so vague and nonsensical as to HAVE no clear meaning.

2). Second, the crank does not see the forest from the trees.

The flat-earther will drone on endlessly about (say) the tensile strenght of iron or the optical qualities of spy satellite cameras in an attempt to prove a round earth is "impossible" and satelites photos showing the opposite are a hoax, and never consider the inherent absurdity of his "earth is flat" hypothesis for a zillion obvious reasons.

You act the same way: you are so busy looking up obscure statistics and legal definitions to "support" your views, that you never realize how absurd on its face what you're arguing for is.

I recall you arguing against car seatbelts, calling for the dismantling of the FDA, and viciously attacking--of all things--safety caps on medicine bottles. "Long live insider trading!" is just the latest in a run of palpably absurd claims which you clearly never recognized as such.

3). Third, the crank refuses to listen and set impossible standards of "refutation", thus "winning" by default.

Since everybody "misunderstands" him, and clearly just will not "acknowledge the truth", the flat-earther quickly stops listening to criticism, and claims it is all "unfair caricatures of my position and a mean personal attack". The cranks then sets up impossible standards of "proof" that he is wrong the critics must ascend to in order to "really" prove he is wrong.

When the flat-earthers are confronted by photos of earth from space, they dismiss them as a hoax, and therefore as not "really" evidence against their view; to "really" prove it, the critic must hire a supersonic plane and travel with them around the earth. Nobody does it--it's not worth the bother--so the cranks claim "victory".

You act the same way: when people tell you that insider trading hurts those who buy the stocks at inflated prices when the collapse comes, you first wring your hands and say that they aren't "really" victims and that you mean something completely different by the word "being hurt". You then you ask people to give you the name (and address, and social security number, and photographs) of a person who was "hurt by insider trading"--as if not having a name means nobody was hurt. Naturally, since such information is not something you would post on the internet, the critics don't do it, so you claim "victory" because "nobody has ever shown you a victim".

Simply put, Shanek, you're an economic kook, a crank who--in this field--holds the most absurd views with the fanaticism of a true believer, and is imprevious to argument.

Perhaps "eccentric" is a better word; I am not claiming you are GENERALLY like this in ALL fields, of course. I'll bet you're quite normal on all other issues. Alas, like most eccentrics, the one field you are totally wrongheaded about is the one you are most passionate about, as well.

But wait, don' tell me: I "misuderstand" you, I'm being "unfair", I just "cannot refute" your great arguments, I'm a really nasty guy for saying all this, you're still correct, I'm still wrong, etc., etc., etc...

(Sigh)

[shanek]

Originally posted by Skeptic
NO ONE can point me to ANYONE harmed by insider trading no matter how many times I ask them to.

Shanek--let me speak frankly, and, unfortunately, perhaps in a way that will insult you. But this isn't personal; it's an example of what happens when skepticism is gone.

You are behaving PRECISELY like the crank inventor who keeps claiming "NO ONE can EVER tell me why my earth-is-hollow theory is wrong NO MATTER how many times I ask!!!". There are, usually, a few reasons for this "inability" of the critics to "prove you wrong", and both of you exhibit all of them.

No, I'm not. I'm merely requiring such skepticism of THEM. If insider trading is wrong and causes harm, then they should be able to point to at least ONE person actually harmed by Martha Stewart's actions. They can't. It's as simple as that. If they can't even point to one person who was actually directly harmed, how can they be said to even have a case?

You're complaining about cranks wanting people to prove a negative. I'm not doing that. I'm asking support for a positive claim: that people are harmed by insider trading. And surely asking for just one actual such person isn't unreasonable.

ONE person. That's all I'm asking for. ONE.

[shanek]

Originally posted by Thanz

How is it in any way a strawman?

Because I am not now nor have I ever denied that when people who have a working relationship and trust with each other that acting in bad faith is a breach of that. And yet, that is exactly the scenario you and everyone else keep falling back on. But that ISN'T WHAT WE'RE TALKING ABOUT! THAT'S why the questions are irrelevant and invalid!

[shanek]

Originally posted by Suddenly
His request is releveant because you are missing one very important point about deregulation of insider trading. That is that legalization doesn't automatically give an insider the right to trade on inside information. It only gives the stockholders the ability to choose whether to allow officers, directors and other agents to use inside information for personal use.

Which is all I'm talking about doing. It would STILL be fraud in all of the other scenarios you've brought up to try and rebut me.

Did you even bother to read the Padilla article you were so smug in suggesting?

Yes, and in fact that was the very reason I brought it up. Now, here you are pretending that my argument is something other than what I've stated endlessly here and trying to turn my source around against me as if I didn't understand it. And you wonder why I think you're being disingenuous.

The answer is with deregulation that each company has the right to allow or disallow insider trading.

Which is exactly as I think it should be.

[shanek]

Originally posted by Skeptic
Not knowing who the victim is is not the same as there being no victim. If I rape someone in the dark and never find out who she was, does it mean she wasn't raped?

Here we go again! Rape, in each and every case, causes direct harm to another. Selling stock doesn't. Don't you people see how desperate this is?

[Suddenly]

Originally posted by shanek


Which is all I'm talking about doing. It would STILL be fraud in all of the other scenarios you've brought up to try and rebut me.
Why couldn't you answer the question then? Why did you babble about working relationships and the like when the answer to the question is that absent consent, the insider violates his duty to the stockholder in every one of the scenerios, and that you simply propose that the stockholders be permitted to consent to the act thus removing the violation of a duty as in certain market situations the benefits of such consent (efficiency and less direct compensation) arguably outweigh any possible negative effects? Is that so hard?

Yes, and in fact that was the very reason I brought it up. Now, here you are pretending that my argument is something other than what I've stated endlessly here and trying to turn my source around against me as if I didn't understand it. And you wonder why I think you're being disingenuous. Ha Ha. I'm not pretending. You have made such a mess of an otherwise reasonable argument that I'm beginning to feel some duty of intellectual honesty to point out that the regulation concept isn't completely unreasonable. If your considering me disingenuous helps you in your own mind save face, fine, whatever. Otherwise, you should point out what in my deregulation formulation is wrong. I state it more fully in the "Deregulate insider trading?" thread.

Which is exactly as I think it should be.

Which means that the shareholders have the right to the information, and thus the right to sell it to the insiders if they choose. Which means that absent that consent the insider has taken without compensation something of value from the sharehholder that should have been obtained through a negotiated sale.

Which means the shareholders, if they do not consent, are harmed by the insider trading as their information is being taken without any compensation. Or is it in your view OK to steal something from someone if a sale is impossible for external reasons?
.

[Suddenly]

Originally posted by specious_reasons


You know, if I fire a gun into a large crowd and run away, then after the crowd disperses, I can see blood on the ground, but no dead bodies, it's a victimless crime, right? After all, I don't know who got hurt.

Am I misreading your argument?

I won't speak for shanek, but I can give a reasonable answer from the deregulation perspective.

First and foremost in the consent issue. If insider trading were legal, and a company decided to allow it's insiders to use inside information to trade, then that would be public knowledge and anyone buying stock would be deemed to consent to the use of such inside knowledge by other investors. Thus, the investor has consented to any possible negative financial effect as a result of such a trade.

The above is becomes very reasonable in a complex market situation. In that situation, such as a stock traded on the NYSE with a high volume, tracking exactly who suffers a negative effect from the insider trading is more or less impossible, although most economists agree that market professionals, such as specialists and professional traders suffer most of the negative results.

So, any possible negative effects are consented to in this scenerio, and they are most likely spread out anyway.

[shanek]

Originally posted by Suddenly
Which means that the shareholders have the right to the information, and thus the right to sell it to the insiders if they choose.

IF the company makes that its policy. Of course, it's in their best interests to keep people buying the stock, and so they're going to try to avoid policies that steer people away from buying it. That's why I think the whole argument for regulations is bogus. It just makes the innocent "insider trading" illegal.

It should be up to the company. If the company makes that policy, fine, and people don't have to deal with the company if they don't like the policy. That's how the free market works.

[shanek]

Originally posted by Suddenly
So, any possible negative effects are consented to in this scenerio, and they are most likely spread out anyway.

Funny; I believe I said that several dozen posts ago...

[Suddenly]

Originally posted by shanek


IF the company makes that its policy. Of course, it's in their best interests to keep people buying the stock, and so they're going to try to avoid policies that steer people away from buying it. That's why I think the whole argument for regulations is bogus. It just makes the innocent "insider trading" illegal.

It should be up to the company. If the company makes that policy, fine, and people don't have to deal with the company if they don't like the policy. That's how the free market works.

There is no "if." They have the right to sell that information, so it is theirs. Thus, those that use that information for personal use without compensating the stockholders are harming the stockholders. Period. That is the answer I first gave about 3 pages ago, that insider trading is at heart a theft of information that has value.

[specious_reasons]

Originally posted by shanek


Oh this is just the living end! Are you seriously telling me that selling stock is tantamount to shooting someone??? Shooting into a crowd IS going to cause harm, and directly to the person who took the bullet. That person IS definitively harmed. NO ONE can point me to ANYONE harmed by insider trading no matter how many times I ask them to.

Can't you people see how pigheaded you're being about this?

Of course I'm being pigheaded and difficult. My gun post is there to piss you off.

But, some of the insider trading scenarios you brushed off because even though there was potential harm, you don't know who exactly the victim is. That's the same logic I used in my example. Can't you see how pigheaded you're being?

[shanek]

Originally posted by Suddenly
There is no "if." They have the right to sell that information, so it is theirs.

But they also have the right NOT to sell that information. Hence the "if." They also have the right to impose whatever requirements they want on it as a condition of the sale. They can choose to not care whether or not someone uses that information in their dealings in the stock market. It's all in whatever the company sets as a policy. Absent any insider trading laws, of course.

[shanek]

Originally posted by specious_reasons
Of course I'm being pigheaded and difficult. My gun post is there to piss you off.

But, some of the insider trading scenarios you brushed off because even though there was potential harm, you don't know who exactly the victim is. That's the same logic I used in my example. Can't you see how pigheaded you're being?

No, because you're misrepresenting my reasons for bringing up that point. I NEVER said it was okay because you don't know who the "victim" is. I brought that up when people said that the trader had an obligation to inform the buyer about the conditions that inspired him to sell his stock. I was pointing out how ridiculous that statement is since the seller has no realitic way of even finding out what that is.

This is just the perfect example of how my arguments and statements get twisted in this forum.

[Suddenly]

Originally posted by shanek


But they also have the right NOT to sell that information. Hence the "if." They also have the right to impose whatever requirements they want on it as a condition of the sale. They can choose to not care whether or not someone uses that information in their dealings in the stock market. It's all in whatever the company sets as a policy. Absent any insider trading laws, of course.

So you agree that the right to use the information belongs to the stockholders and is theirs to do with as they please, sell it or give it away or whatever, correct?

[shanek]

Originally posted by Suddenly
So you agree that the right to use the information belongs to the stockholders and is theirs to do with as they please, sell it or give it away or whatever, correct?

Sure, as long as you agree that the company has the right to set a policy on the use of that information as a condition of buying or selling their stocks.

[Suddenly]

Originally posted by shanek


Sure, as long as you agree that the company has the right to set a policy on the use of that information as a condition of buying or selling their stocks.

For the purposes of this discussion, it really doesn't matter what I think. I would say they have a property right to do what they want with their property, but those rights can be restricted by the state for legitimate governmental purposes. What is a "legitimate governmental purpose" is something that it is pretty clear you and I differ on, so lets leave it at that.


1) Something belongs to the stockholders (in this case the use of the information).

2) Someone takes that thing without consent of the stockholders.


The fact that the stockholders can not consent to the taking due to regulation doesn't affect the above. Neither does some assertion that the stockholders will make less use of the information.

The use of the information is an intangible asset, it is something that can be (if it were legal) bought and sold. It is the property of the stockholders.

Thus, if Martha Stewart in fact knowingly made use of inside information she knew to have been appropriated without the consent of the stockholders, she has participated in a taking of the property belonging to the stockholders as a class, and has thus committed harm against them.

[shanek]

Originally posted by Suddenly
For the purposes of this discussion, it really doesn't matter what I think. I would say they have a property right to do what they want with their property, but those rights can be restricted by the state for legitimate governmental purposes. What is a "legitimate governmental purpose" is something that it is pretty clear you and I differ on, so lets leave it at that.

Fair enough.

The fact that the stockholders can not consent to the taking due to regulation doesn't affect the above.

It does in the sense that the stockholders and company officials can't choose to make a policy that allows for such consent to be made.

The use of the information is an intangible asset, it is something that can be (if it were legal) bought and sold. It is the property of the stockholders.

Actually, I would submit that it is the property of whomever obtained the information. If that is the corporation itself, then it arguably does belong to the stockholders, but that isn't always the case.

Thus, if Martha Stewart in fact knowingly made use of inside information she knew to have been appropriated without the consent of the stockholders, she has participated in a taking of the property belonging to the stockholders as a class, and has thus committed harm against them.

Let's look at it this way;

Let's say you and I are neighbors. Let's say you're sick to death of the sight of me and want to build a privacy fence, but that I don't like the fact that you want to build it over 7' high. And let's also say that I want to build an outbuilding that goes within 10' of the line where my property meets yours, and you don't like that.

There are two ways we can both get what we want. The first is for you and I to get together and make a deal. We agree, in writing and in the form of a contract, that I will not build within 10' of the property line and that you will not build a privacy fence over 7' in height. We can also agree that we will not sell our property without making the buyer agree to these same terms, including the restriction that he can only sell the property if the new buyer agrees to the same terms, and so on. And so we both get what we want.

The other way is to use zoning. We go appeal to the government, who—by gunpoint, if necessary—forces you to not build that high a fence and forces me not to build that close to your property (and at the same time incurring all of the related expenses of regulatory compliance, not to mention the increased tax burdens). In doing so, we also force everyone else in our municipality to live by the same rules, even if they don't mind high fences and buildings near the property line.

The former is a voluntary arrangement made by peaceful means, which is how it should work in a free society. The latter is an arrangement of force, of bad neighbors forcing each other how they should live their lives, and has no place in a free society.

This information business is the same way. The corporation has every right to set policy on what information should be given to the shareholders and when, and what the shareholders are allowed to do with that information. If you don't like it, you don't have to buy stock in that corporation.

[Suddenly]

Originally posted by shanek


Fair enough.

Ha! That's wrong because ...wait a minute. You agree? Nevermind. :)



It does in the sense that the stockholders and company officials can't choose to make a policy that allows for such consent to be made.True. What I mean is that restriction of the ability to transfer property does not destroy the property right so that theft of that property is justified.



Actually, I would submit that it is the property of whomever obtained the information. If that is the corporation itself, then it arguably does belong to the stockholders, but that isn't always the case.
It always will be the case when dealing with what the current law considers "inside information." Any information an insider obtains while performing tasks for the corporation belongs to the corporation. It gets complicated when dealing with "outside" recipients of "inside" information, but the information must have at some point been that which an insider recieved in furtherance of corporate business.

Unless you mean that who finds it keeps it. No offense, but that sounds kind of Marxist. If I pay for labor, the fruits of the labor are mine, not the laborer's. Likewise, if a CEO is being paid to work for the stockholder's best interests and in those duties recieves information, it belongs to the stockholders as fruits of the labor.



Let's look at it this way;

Let's say you and I are neighbors. Let's say you're sick to death of the sight of me and want to build a privacy fence, but that I don't like the fact that you want to build it over 7' high. And let's also say that I want to build an outbuilding that goes within 10' of the line where my property meets yours, and you don't like that.

There are two ways we can both get what we want. The first is for you and I to get together and make a deal. We agree, in writing and in the form of a contract, that I will not build within 10' of the property line and that you will not build a privacy fence over 7' in height. We can also agree that we will not sell our property without making the buyer agree to these same terms, including the restriction that he can only sell the property if the new buyer agrees to the same terms, and so on. And so we both get what we want.

The other way is to use zoning. We go appeal to the government, who—by gunpoint, if necessary— (let me just inturrupt to say: :rolleyes:. Thank you.) forces you to not build that high a fence and forces me not to build that close to your property (and at the same time incurring all of the related expenses of regulatory compliance, not to mention the increased tax burdens). In doing so, we also force everyone else in our municipality to live by the same rules, even if they don't mind high fences and buildings near the property line.

The former is a voluntary arrangement made by peaceful means, which is how it should work in a free society. The latter is an arrangement of force, of bad neighbors forcing each other how they should live their lives, and has no place in a free society.
Some problems with your story:

1) People are jerks.
2) My innocent use of property can decrease your property value.


So, what I'm going to now is threaten to do all sorts of weird crap to improve my bargaining position. How can you prove I didn't always want to open a biker bar out of my basement? It only works if we are reasonable, and act contrary with a principle other than pure self-interest. I think that quite an assumption.

Anyway, there is another problem, enforcement.

So, we make all sorts of agreements with people in the neighborhood. Fence size, property use, and so on. Common in the 'burbs. Enforcement? Civil suit. So much for efficency. My firm handled one back in the day. We billed $125 an hour.

If you win the civil suit, then what? Uh oh! Here come the guys with the guns to enforce the judgment.

So, in the end the same guys with guns come to my house and make me tear down the fence.


This information business is the same way. The corporation has every right to set policy on what information should be given to the shareholders and when, and what the shareholders are allowed to do with that information. If you don't like it, you don't have to buy stock in that corporation.

I see it as the classic prisoner's dilemma. While it perhaps arguably (but I doubt it) makes a particular corporation better, widespread application will likely decrease market liquidity as 1) it scares of some investors (don't like it, don't buy) and 2) Specialists and market professionals will take it right in the shorts and get out of the market.

Plus I have serious doubts about the efficiency of private enforcement, both with regard to companies not allowing it, and those that do w/r/t to insiders making decisions to manipulate stock price for personal gain. Lots of rich lawyers either way.

Of course, this doesn't touch the point that I was making. If we can identify a property right to use of information on the part of stockholders, doesn't it follow that appropriating the use of that information is a harmful act against the shaeholders?

[shanek]

Originally posted by Suddenly
It always will be the case when dealing with what the current law considers "inside information." Any information an insider obtains while performing tasks for the corporation belongs to the corporation.

But again, the corporation could set a policy stating what information is to be available to the stockholders and when. Someone who doesn't like that arrangement doesn't have to buy the stock.

It gets complicated when dealing with "outside" recipients of "inside" information,

And the company can set policy on that as well, and enforce it through things like non-disclosure agreements if they wish.

Unless you mean that who finds it keeps it.

No, I mean that the company should have the right to set its own policy saying what can and can't be done with the information.

1) People are jerks.

Not a criminal act, last I checked.

2) My innocent use of property can decrease your property value.

So, what I'm going to now is threaten to do all sorts of weird crap to improve my bargaining position. How can you prove I didn't always want to open a biker bar out of my basement?

But what possible harm could come to me or my property as a result that doesn't stem from an initiation of force?

It only works if we are reasonable,

Well, if we both are unreasonable, then neither of us gets what we want. We still don't have a right to go crying to mommy government.

So, we make all sorts of agreements with people in the neighborhood. Fence size, property use, and so on. Common in the 'burbs. Enforcement? Civil suit. So much for efficency. My firm handled one back in the day. We billed $125 an hour.

If you win the civil suit, then what? Uh oh! Here come the guys with the guns to enforce the judgment.

So, in the end the same guys with guns come to my house and make me tear down the fence.

So? That's because you reneged on a deal that you made voluntarily. That's different from zoning, where the fence requirements are forced on you without your consent.

I see it as the classic prisoner's dilemma. While it perhaps arguably (but I doubt it) makes a particular corporation better, widespread application will likely decrease market liquidity as 1) it scares of some investors (don't like it, don't buy)

What company in its right mind is going to enact or maintain a policy that scares away investors? They want to attract investors, so they will make sure their policies don't scare them away.

and 2) Specialists and market professionals will take it right in the shorts and get out of the market.

Why?

Of course, this doesn't touch the point that I was making. If we can identify a property right to use of information on the part of stockholders, doesn't it follow that appropriating the use of that information is a harmful act against the shaeholders?

If it is in violation of whatever policy the shareholders agreed to when they bought the stock, yes. I'm saying that this policy shouldn't be forced on all companies.

[Thanz]

Question Avoider shanek,

Why would any rational company adopt a policy that allows for insider trading? It can only have the effect of depressing the stock price - which means less money for the corporation on a stock issue and more difficulty in raising capital in the first place. It sets up conflicts of interest for the officers and directors of the corporation. It scares away potential investors. There is no benefit to the corporation by allowing its insiders to trade on confidential information.

So, why would a company adopt such a policy?

[Suddenly]

quote:
--------------------------------------------------------------------------------
Originally posted by Suddenly
It always will be the case when dealing with what the current law considers "inside information." Any information an insider obtains while performing tasks for the corporation belongs to the corporation.
--------------------------------------------------------------------------------



But again, the corporation could set a policy stating what information is to be available to the stockholders and when. Someone who doesn't like that arrangement doesn't have to buy the stock.

Yes, if that were possible under the law. I'm just stating a fact, that the types of insider information we are discussing must have been information rightfully belongingto the company. Otherwise it isn't "inside" information.

quote:
--------------------------------------------------------------------------------
2) My innocent use of property can decrease your property value.

So, what I'm going to now is threaten to do all sorts of weird crap to improve my bargaining position. How can you prove I didn't always want to open a biker bar out of my basement?
--------------------------------------------------------------------------------



But what possible harm could come to me or my property as a result that doesn't stem from an initiation of force?

Get real here. If you live in a nice "quiet" neighborhood, and I open a biker bar next door, or some kind of concern that attracts people, or even an anatomically correct 50 ft tall statue of Ron Jeremy, your property value will drop.

(This suggests an interesting topic for another day w/r/t libertarianism and Shelly v. Kraemer, 334 U.S. 1 (1948))



quote:
--------------------------------------------------------------------------------
I see it as the classic prisoner's dilemma. While it perhaps arguably (but I doubt it) makes a particular corporation better, widespread application will likely decrease market liquidity as 1) it scares of some investors (don't like it, don't buy)
--------------------------------------------------------------------------------



What company in its right mind is going to enact or maintain a policy that scares away investors? They want to attract investors, so they will make sure their policies don't scare them away.

I'm talkng about liquidity in the whole market. Some people will give the entire market a miss if they believe insider trading is going on, regardless of a particular company's position. Relates to the prisoner's dillema.


quote:
--------------------------------------------------------------------------------
and 2) Specialists and market professionals will take it right in the shorts and get out of the market.
--------------------------------------------------------------------------------



Why? For professionals: more or less because these people profit from being the most informed investors in the market by a means of investigation and analysis of public information. Allowing insider trading introduces a class of investor with information a regular market professional simply cannot access. Thus decreasing the profits to be made, which will weed out their number, making the market less liquid.

Specialists being harmed is somewhat along the same lines. They trade on demand, and carry an inventory of a particular stock and are expected to make a market and trade with all comers. The more informed the investor pool, the less money they make, as they are in essence the "house."




quote:
--------------------------------------------------------------------------------
Of course, this doesn't touch the point that I was making. If we can identify a property right to use of information on the part of stockholders, doesn't it follow that appropriating the use of that information is a harmful act against the shaeholders?
--------------------------------------------------------------------------------



If it is in violation of whatever policy the shareholders agreed to when they bought the stock, yes. I'm saying that this policy shouldn't be forced on all companies.


But that policy is forced on them right now. It does exist. Thus, insider trading, as you agree in your first sentence, harms the stockholders.

[shanek]

Originally posted by Thanz
Why would any rational company adopt a policy that allows for insider trading?

If it has a detrimental effect, then they wouldn't. I made that point above; obviously you ignored it in favor of yet another dig at me. But that's the thing about voluntary policies vs. government regulations: the voluntary policies are based on what actually works; government regulations are based on what's politically expedient. So people who believe that insider trading does cause such harm shouldn't have any problem with my position.

[Thanz]

Originally posted by shanek


If it has a detrimental effect, then they wouldn't. I made that point above; obviously you ignored it in favor of yet another dig at me. But that's the thing about voluntary policies vs. government regulations: the voluntary policies are based on what actually works; government regulations are based on what's politically expedient. So people who believe that insider trading does cause such harm shouldn't have any problem with my position. (emphasis mine)
This post illustrates your bias quite succinctly, especially the italicized portion. You have no reason to allow insider trading - yet you don't want the government to regulate simply because you don't like government regulation. Your broad assertion seems to imply that no government regulation actually works, and that they are all just boondoggles for bureaucrats and politicos. You probably don't go as far as all regulations, but I'd be willing to wager that you think the vast majority of regulations are ineffective and unnecessary.

You, of course, prefer voluntary arrangements. Wouldn't we all? Wouldn't it be nice if we could all just get along? Well, it would be nice, but as Suddenly has pointed out people have a knack for being jerks. In your zoning example, you posit two neighbours who agree on the height of a fence and the setback from a property line. Sounds nice and fair. In reality, however, what would happen is that the one person will build a tall fence and the other person will build right next to it.

A small example. My parents backyard neighbour has a pool. A few years ago, the fence between the properties was rotting, old, and in need of replacement. My parents wanted to replace it before holding a party for a wedding as it was an eyesore. So, my dad went to the neighbour and proposed splitting the cost of a new fence. The neighbour refused, and claimed that the fence belonged to my parents and if they wanted to replace it, they could pay for it.

My parents didn't really care if there was a fence there or not - they just wanted the eyesore fence ripped out. As the neighbour has the pool, he is required to have a certain height of fence to prevent little kids from drowning in the pool. My dad pointed out to the neighbours that they needed the fence, but they still refused to split the cost of one. So, my dad just had the old one ripped out and the neighbour had to replace the fence at his own cost.

This little story is just meant to illustrate one small example of people being stupid regarding the things that you think they should agree about.

The laws against insider trading are similar to other criminal and quasi-criminal laws. They are designed to prevent a harm not only to those involved in the specific transaction, but the market as a whole. Insider trading erodes investor confidence and has no counterbalancing benefits. Preventing it through regulation benefits many - just as zoning laws benefit entire neighbourhoods.

[shanek]

Originally posted by Thanz
(emphasis mine)
This post illustrates your bias quite succinctly, especially the italicized portion. You have no reason to allow insider trading - yet you don't want the government to regulate simply because you don't like government regulation.

This stylization reflects YOUR bias: I facor peaceful, voluntary solutions over forceful ones.

You, of course, prefer voluntary arrangements. Wouldn't we all? Wouldn't it be nice if we could all just get along? Well, it would be nice, but as Suddenly has pointed out people have a knack for being jerks.

Wait a minute—just two posts ago, you said, "Why would any rational company adopt a policy that allows for insider trading?" You can't have it both ways.

In reality, however, what would happen is that the one person will build a tall fence and the other person will build right next to it.

Why isn't that happening in places without any zoning laws?

A small example. My parents backyard neighbour has a pool. A few years ago, the fence between the properties was rotting, old, and in need of replacement. My parents wanted to replace it before holding a party for a wedding as it was an eyesore. So, my dad went to the neighbour and proposed splitting the cost of a new fence. The neighbour refused, and claimed that the fence belonged to my parents and if they wanted to replace it, they could pay for it.

My parents didn't really care if there was a fence there or not - they just wanted the eyesore fence ripped out.

If they're the ones who want a new fence, and the neighbors don't care, why should the neighbors be forced to pay for something they don't want?

This little story is just meant to illustrate one small example of people being stupid regarding the things that you think they should agree about.

Sorry, but it seems to me that this situation worked out—to your parents' advantage! So, what exactly is the problem?

Preventing it through regulation benefits many - just as zoning laws benefit entire neighbourhoods.

Except that zoning laws don't benefit entire neighborhoods. They drive property values down, stifle growth, and discourage neighbors from working together. You need only compare places without zoning to similar places with zoning to see this.

Likewise, there's no benefit from "insider trading" regulations that you couldn't get from voluntary corporate policies.

[Thanz]

Originally posted by shanek

This stylization reflects YOUR bias: I facor peaceful, voluntary solutions over forceful ones.
I think that most people would, generally speaking. The problem is that in some situations peaceful voluntary solutions simply cannot be worked out.

Wait a minute—just two posts ago, you said, "Why would any rational company adopt a policy that allows for insider trading?" You can't have it both ways.
It was a comment on voluntary arrangements in general. See above.

Why isn't that happening in places without any zoning laws?
It probably is. Are you saying that in places without zoning laws people don't have any problems with what their neighbours build/do with their property? I find that very hard to believe.

If they're the ones who want a new fence, and the neighbors don't care, why should the neighbors be forced to pay for something they don't want?
It is something that the neighbour (because of the pool) is required to have. I am not saying they should be forced to pay for it - I am saying that one of the mutually beneficial voluntary arrangements was proposed, and the guy turned it down in spite of himself.

Sorry, but it seems to me that this situation worked out—to your parents' advantage! So, what exactly is the problem?
It did, and I don't have a problem, per se. I was posting it as an example of people behaving irrationally in this sort of situation. The neighbour was presented with an option: (a) Let's split the cost of a fence, or (b) I'll rip out the old fence (that you insist is mine) and you'll have to buy a new fence on your own. And the guy chose option b. Not exactly rational, and the attempt at voluntary peaceful arrangements fell flat.

Except that zoning laws don't benefit entire neighborhoods. They drive property values down, stifle growth, and discourage neighbors from working together. You need only compare places without zoning to similar places with zoning to see this.
Evidence, please, as this seems to be quite counter-intuitive. Which places (specifically) are you comparing?

Likewise, there's no benefit from "insider trading" regulations that you couldn't get from voluntary corporate policies.
I disagree. The benefit that you get from insider trading regulations is in the area of deterrence and enforcement. If you only have a corporate policy against insider trading, the deterrence is much less. There is also a much lesser risk of being caught - the people to police the policy are the very people that are governed by the policy. The fox guarding the chicken coup, so to speak. A corporate policy by itself against insider trading is likely to be ineffective.

[shanek]

Originally posted by Thanz

I think that most people would, generally speaking. The problem is that in some situations peaceful voluntary solutions simply cannot be worked out.

Are you saying that in such a situation you're justified in using force to get what you want, even if no force has been applied against you?

It was a comment on voluntary arrangements in general.

Well, we aren't talking in general. We're talking about insider trading.

It probably is. Are you saying that in places without zoning laws people don't have any problems with what their neighbours build/do with their property? I find that very hard to believe.

Argument from incredulity. I've researched it. For example, just this past year voters in Buncombe County in NC overwhelmingly voted against zoning in the county, and the reason most people gave was because they saw the problems neighboring counties with zoning had. During my 2002 campaign, I cited Trimble County, KY, a county very similar to my home county with very much the same issues, but no zoning. Voters there the year before overwhelmingly rejected a zoning referendum for much the same reasons. And even here in this forum, I've asked people to point to similar problems in Houston, TX, the largest metropolitan area in the US with no zoning laws at all. Nobody can do it. And property values in Houston are greater than they are even in similar areas of town with zoning that they've grown around.

Evidence, please, as this seems to be quite counter-intuitive. Which places (specifically) are you comparing?

I've just given you three above. And it's only "counter-intuitive" because you've let government talk you into the fact that you need it, when I'll bet anything you've never actually lived in a place without zoning.

I disagree. The benefit that you get from insider trading regulations is in the area of deterrence and enforcement. If you only have a corporate policy against insider trading, the deterrence is much less. There is also a much lesser risk of being caught - the people to police the policy are the very people that are governed by the policy.

And a "scorched earth" policy is better?

[Thanz]

Originally posted by shanek

Are you saying that in such a situation you're justified in using force to get what you want, even if no force has been applied against you?
What I am saying is that a policy that uses force to prevent others from taking advantage of people is a better policy. The information ultimately belongs to the shareholders. If an insider uses that information to his own personal benefit before the shareholders are informed, he is taking advantage of them and committing a serious breach of his duty.

Argument from incredulity. I've researched it. For example, just this past year voters in Buncombe County in NC overwhelmingly voted against zoning in the county, and the reason most people gave was because they saw the problems neighboring counties with zoning had.
What were these problems?

During my 2002 campaign, I cited Trimble County, KY, a county very similar to my home county with very much the same issues, but no zoning. Voters there the year before overwhelmingly rejected a zoning referendum for much the same reasons.
Which are....?

And even here in this forum, I've asked people to point to similar problems in Houston, TX, the largest metropolitan area in the US with no zoning laws at all. Nobody can do it. And property values in Houston are greater than they are even in similar areas of town with zoning that they've grown around.
I have never been to Houston, so I don't think that I can point out whatever problems they may have there either. Disputes between property owners are not exactly national, let alone international, news items.

As for property values, I cannot simply accept your word for it. I would need to know that apples are being compared with apples, and whether any price differences can be attributed to zoning or not.

I've just given you three above. And it's only "counter-intuitive" because you've let government talk you into the fact that you need it, when I'll bet anything you've never actually lived in a place without zoning.
Yes, that's right, I'm just a zombie brainwashed by the gov't.

And a "scorched earth" policy is better?
If you mean an all out prohibition, yes, it is better. Your idea of choice is not any meaningful choice at all. You have demonstrated no benefit to insider trading.

Just like a "scorched earth" policy on robbery, fraud and murder is better.

[shanek]

Originally posted by Thanz

What I am saying is that a policy that uses force to prevent others from taking advantage of people is a better policy.

No, you aren't, because we're not talking about that. I'm not "taking advantage of you" by building on my property no matter how close it is to the property line, and you aren't "taking advantage of me" by building a high fence. These are things that we should be able to do with our own property, and no one should be able to force us to do otherwise. We make the agreement because we both get something out of it. If we're stubborn and disagreeable, then neither one of us gets what we want. That's just life.

The information ultimately belongs to the shareholders.

Yet again, I point out this is a circular argument.

What were these problems?

Lower property rates, higher property taxes, higher costs of building and maintenance due to compliance with zoning ordinances, lots of things, including a very bad attitude among neighbors who went running to the government whenever a neighbor did something he didn't like as opposed to trying to work it out with the neighbor first.

You say we need zoning because people act like jerks. I say zoning makes people act like jerks. And experience bears out my claim.

Which are....?

The same ones that I noted.


As for property values, I cannot simply accept your word for it.

Fine. Look at "The Effect of Zoning on Residential Values" by Meredith H. James, and "Tracking Houston's Home Prices," The Houston Post, July 23, 1993, G-4.

Yes, that's right, I'm just a zombie brainwashed by the gov't.

Perhaps you'd care to explain why the people who insist we need zoning are the ones who have never lived in an area without it, and those who have lived in areas without zoning don't believe we need it, as evidenced by the aforementioned referenda.

[qutoe]You have demonstrated no benefit to insider trading.[/quote]

The burden of proof is NOT on me. This is supposed to be a free country; we shouldn't expect to have that freedom taken away from us just because we "have demonstrated no benefit" to it. The burden should be on the ones in favor of inhibiting that freedom to show how harm is being caused, and after several requests, none of you have been able to do so.

[Thanz]

Originally posted by shanek

Fine. Look at "The Effect of Zoning on Residential Values" by Meredith H. James, and "Tracking Houston's Home Prices," The Houston Post, July 23, 1993, G-4.
Thank you for the references.


The burden of proof is NOT on me. This is supposed to be a free country; we shouldn't expect to have that freedom taken away from us just because we "have demonstrated no benefit" to it. The burden should be on the ones in favor of inhibiting that freedom to show how harm is being caused, and after several requests, none of you have been able to do so. Actually, I think that Suddenly has explained the harm quite well. Insider trading smacks of fraud and dishonesty. Nothing erodes investor confidence quicker than fraud and dishonesty. It also sets up perverse incentives and conflicts of interest for directors and officers who have a duty to act in the best interests of the corporation. If an insider can make more money by manipulating the price of the companies stock than by efficiently managing the corporation, that harms all of the investors.

[Underemployed]

Could one of you stop being so plausible please, I'm having a hell of a time picking a side here.

[Thanz]

Originally posted by Underemployed
Could one of you stop being so plausible please, I'm having a hell of a time picking a side here.
I am going to shamelessly lobby for your vote. :D

I refer you to a post I made on page 4 of this thread, in which I asked shanek to address a number of situations and let me know if fraud was present in each instance. He has insulted my questions and called them irrelevant, but not answered them. Obviously I disagree with his characteriztion. Here is a copy of that post:
I'd appreciate it if you could address the following situations. They all deal with Wildcat's company (X co.) that relies upon Acme for 75% of its business. There is no formal arrangement (supply agreement or whatever) between the two such that Acme cancelling is not a breach of contract or whatever. In all cases below, Adam is the insider who knows about the cancellation and Bob is the person who wants to buy stock in the company, but doesn't know about the Acme cancellation. Adam never tells Bob about the cancellation prior to a sale, and in each case Adam sells the shares and Bob buys them.

In which of the following scenarios is it fraud and in which is it not fraud?

1. Adam and Bob are partners
2. Adam and Bob are 50-50 shareholders in X co.
3. Adam owns 25% and Bob owns 75% of X co.
4. Adam and Bob each own 33% of X co.
5. Adam and Bob are 2 of 10 equal shareholders.
6. Adam owns 30%, Bob is an outside purchaser.
7. Adam owns 75%, Bob is an outside purchaser.
8. Adam and Bob trade shares in a very thinly traded public market (their trade is the only one that day for the stock) and (a) Bob is a current shareholder or (b) Bob is a new shareholder after the purchase.
9. Adam and Bob trade in a slightly busier trading day - their's is one of 10 trades and (a) Bob is a current shareholder or (b) Bob is a new shareholder after the purchase.
10. Adam and Bob trade in a busy market - their trade is one of hundreds that day and (a) Bob is a current shareholder or (b) Bob is a new shareholder after the purchase.

I realize that is a lot of questions, but I am trying to understand where you are coming from and where the line gets drawn (if anywhere).
shanek has previously said that the first situation is fraud and his position on the last one is that it is not fraud. He has refused to comment on the ones in between. I ask you to contemplate whether there is a substantive difference in Adam's behaviour in any of those situations such that in the first example it is fraud but not in the last. My position is that there is no substantive difference.

[a_unique_person]

Originally posted by shanek

You say we need zoning because people act like jerks. I say zoning makes people act like jerks. And experience bears out my claim.


You think people only started acting like jerks since zoning laws came in? I don't think history is on your side.

[shanek]

Originally posted by a_unique_person
You think people only started acting like jerks since zoning laws came in?

I never said anything of the kind and you know it. Stop it.