Death to insider traders

Cite this Article
Larry Ribstein, Death to insider traders, Truth on the Market (February 16, 2011),

NY U.S. Attorney Preet Bharara testified today at the U.S. Sentencing Commission for stiffer insider trading penalties.  He said “[t]he guidelines as they stand may be letting some defendants in some cases off with lighter sentences than they deserve” because stock market moves unrelated to the inside information reduced or eliminated profit on their trades.

The WSJ reports that  

One of the members of the commission, federal judge Beryl Howell, said she was “disappointed” Mr. Bharara’s testimony didn’t come with more specific details that would show the Justice Department’s “willingness to do the hard work” of updating the sentencing guidelines for such crimes. * * *

Marvin Pickholz, a former Securities and Exchange Commission lawyer now in private practice, said prosecutors like Mr. Bharara “already have all the weapons they need to pursue such cases.” Mr. Pickholz said that if penalties are stiffened for those who make little profit from insider trading, the practical effect could be a mandatory minimum sentence for convicted insider traders, which doesn’t exist currently.

Bharara’s complaint is just one of many possible illustrations of the disconnect between insider trading penalties and the actual harm caused by insider trading.  Most importantly, the trading itself generally helps the market by making it more efficient.  (The real problem is theft of the information, and this shouldn’t be a federal crime anyway.  See my article, Federalism and Insider Trading, 6 Supreme Court Economic Review, 123 (1998).)

Anyway, what Bharara and his ilk really want is draconian and automatic penalties that they can use to threaten potential defendants into submission so they don’t have to do the messy work of proving their case (e.g., by showing when expert networks actually violate the law). From this standpoint, while Bharara didn’t specify what he wanted, a mandatory death penalty would probably do just fine.

In general, the Sentencing Commission and other policymakers should keep in mind when deciding whether to give prosecutors more tools to use in going after corporate agents that prosecutors have their own agency problems.