Making Insider Trading Legal

[n2doc]

BY PATRICK RADDEN KEEFE


Do you run a hedge fund? If so, I have exciting news. The prominent campaign by Preet Bharara, the United States Attorney in Manhattan, to crack down on insider trading in the three-trillion-dollar hedge-fund industry has just ground to an inglorious halt. Late last week, it was quietly announced that prosecutors would drop all charges against one of Bharara’s highest-profile targets, Michael Steinberg, who worked at the fourteen-billion-dollar hedge fund S.A.C. Capital Advisors.

Steinberg, a trusted deputy of Steven A. Cohen, the founder of S.A.C., was convicted of insider trading, in 2013. (I wrote about the investigation of S.A.C. for the magazine last year.) But Steinberg appealed. Last December, in a separate case, a New York appeals court overturned the convictions of two other hedge-fund traders and issued an opinion that dramatically narrowed the definition of insider trading, by requiring that prosecutors prove both that the tipper received some sort of compensation for sharing the information and that the individual who traded on that information knew it was an illegal tip. Bharara’s office challenged the ruling, but, earlier this month, the Supreme Court declined to hear the case.

Under this new interpretation of insider trading, Steinberg appeared likely to win his appeal—so Bharara dropped the charges against him, and also dismissed the guilty pleas of six coöperating witnesses who had acknowledged trading on material nonpublic information. The United States Attorney’s office maintains that the majority of its insider-trading convictions will remain unchallenged by this change in the legal landscape. But the truth is that if you operate a hedge fund and care to structure your business around the gaping loopholes that the Supreme Court has implicitly endorsed, insider trading is now effectively legal in the United States.

Successful hedge funds are like vast information combines, voraciously churning market data and analysis. At its height, S.A.C. employed about a thousand people, and portfolio managers were charged with generating investment ideas upon which the firm would bet enormous sums. But because there are so many hedge funds, each with its own army of analysts, the trick is to find some nugget of information that the rest of the market doesn’t know. This is where the culture of insider trading took hold.

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http://www.newyorker.com/business/currency/making-insider-trading-legal

[geek tragedy]

1. the statute for insider trading is remarkably incomplete

it needs to be enhanced (good luck with that happening with this Congress, of course)

[erronis]

2. These people are smart enough to dance right on the line

They have lots of leagles and are very careful not to allow any verbal (oral/written/etc.) documentation show that they were colluding. It's very much like fighting the mafia or the new breed crooksta - the internet thief.

Of course the crookstas in congress don't want their buddies and probably benefactors to be prosecuted either. Pull the fangs and the funding of the prosecutors.

It's a rare stupid congressthing that actually has to serve time (Hastert, DeLie, etc.)