Death to insider traders

Larry Ribstein —  16 February 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.

Larry Ribstein


Professor of Law, University of Illinois College of Law

7 responses to Death to insider traders

    N. Joseph Potts 24 February 2011 at 9:31 am

    Stiffer penalties for violating laws increases the “leverage” that enforcers/adjudicators/legislators exercise over society.

    The reason violators “deserve” stiffer sentences is because those who mete out such sentences (convictions, indictments, etc.) “deserve” more power over the rest of us.

    Slowly, inexorably, the market becomes illegal. Just like in the Soviet Union.


    It’s a point that’s been made before but one that I’ve never heard the anti-insider-trading folks address: Trading based on inside information is illegal, but declining to make a trade based on same is not. If we’re afraid of inside information influencing stock-trading decisions, insider trading laws really only deal with half the problem.


    I’m sure you’d find virtue in pedophilia. What better way for a child to learn about sex than having an adult show you how it’s done. Orgasms should not be misunderestimated no matter how they are achieved.

    north fork investor 17 February 2011 at 5:10 am

    duuh. I’m no academic. jes a glorified day trader. can barely reed.


    Spoken like a true good academic. Enuff sed.

    north fork investor 16 February 2011 at 3:36 pm

    “Most importantly, the trading itself generally helps the market by making it more efficient.”

    enuff of this old wives tale. just cause you say it alot does not mean it is good academic work.

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