The NASPP Blog

Last week, hedge fund manager Raj Rajaratnam was sentenced to a record 11 years in prison, following his conviction last May for insider trading. From my desk in metropolitan Washington, D.C., I could almost hear the celebration echoing from the Justice Department and the SEC.

In catching up on the news of the sentencing, I came across several op-ed articles that began to raise a provocative question: should we just take the plunge and legalize insider trading? My first thought: really? My second thought: REALLY? Intrigued, I began to dig deeper into the various opinions on the matter.

The Argument for Legalized Insider Trading
I can guess where the SEC falls in the debate over legalized insider trading. Mr. Rajaratnam’s conviction sends a message that the SEC is still focused on enforcement of insider trading violations. Interestingly, in Japan, where insider trading enforcement is nearly non-existent, CEOs are paid less in salary, but still come out overall as wealthy as their American counterparts. Some surmise that one reason may be that insider trading is more widely accepted in Japan. As a result, Japanese CEOs earn less in guaranteed pay, and rely on inside information to make lucrative trades in their company’s stock. Supporters of legalized insider trading claim that it’s a win-win situation. The CEO and company employees make money, but it’s a benefit of their employment and also motivates them to have a more vested interest in the upward mobility of the company’s stock price. When the stock price moves upward, all shareholders benefit. In addition, if employees rush out to trade on inside information, the flood of activity will cause the stock price to react more quickly to the information, limiting their immediate upward gain potential. Other arguments for the issue include the cost of enforcement.

Public Opinion
In the U.S., public opinion seems to be clear: insider trading is unfair and should be punished. The argument: Why should I have to work hard for an average pay, while the elite gain access to privileged information and use it to make themselves wealthier? In addition, the impact on corporate governance, public disclosures to shareholders, and economic issues are also hefty considerations in the debate. Would executives become more secretive in disclosing information to their boards and shareholders if they knew they could legally trade on material non-public information?

Taking a Stand
Where do I stand? I find myself squarely on the side of public opinion. We have enough problems in our economy; we shouldn’t even begin to entertain the idea of legalized insider trading. I’m always in favor of learning from my own mistakes and those made by others. In the case of Mr. Rajaratnam, the SEC and Justice Department seem to have sent a clear message: you can’t get away with it. In seeking meaning to the message, I believe we have an opportunity to remind employees that the SEC means business when it comes to enforcement of insider trading violations, and for now it appears that the laws aren’t going to change. So dust off that Insider Trading policy and take a moment to remind employees about the dos and don’ts of trading in the company’s stock.

One detailed article on this subject is Larry Harris’ op-ed article in the LA Times. You may also want to visit our Insider Portal for more information and sample documents.

-Jennifer