Insider Trading

It seems obvious on first glance: Insider trading is cheating and ought to be a crime. Ivan Boesky and hedge fund billionaire Raj Rajaratnam famously went to jail for doing it and George Soros paid a big fine. Actually, though, it’s not obvious at all. In the U.S., where prosecutors have vigorously pursued insider trading cases, there’s no law defining it. Courts are split about where to draw the line between legal and illegal use of private information in pursuit of profit. Some scholars think it shouldn’t be illegal at all, reasoning that outlawing it restricts information flow in markets. There’s also a huge variance in penalties, with a maximum two years’ jail time in France versus 20 in the U.S. and South Korea.

The U.S. Supreme Court upheld a case in December that resolved what sort of benefit a defendant must receive to make insider trading a crime. The decision restored some, though not all, of the leverage lost by prosecutors in 2014 when an appeals court in New York narrowed the definition and made it harder to bring cases. The New York court backtracked further in August when it upheld the conviction of a former portfolio manager at hedge fund SAC Capital Advisors LP. The decisions provided a confusing coda to the biggest crackdown in U.S. history, in which SAC paid a record $1.8 billion after pleading guilty to reaping hundreds of millions of dollars in illegal profits for more than a decade. But federal prosecutors in New York dismissed or lost on appeal 14 of 91 convictions from August 2009 to December 2015. Famous convictions include that of Rajaratnam, who was sent to jail after wiretaps showed that his firm used insiders to trade ahead of public announcements about earnings, forecasts and mergers. The U.K. convicted a high-profile ex-Moore Capital trader, while billionaire Paul Singer’s Elliott Management was assessed $22 million in civil penalties in France. In 2015, a French court blocked a trial of Airbus executives who sold shares when they knew about costly production delays. Meanwhile, hedge funds are snooping on their own employees, using keystroke-reading software to spot rogue traders.