Two readers have sent me emails objecting to my blog post yesterday, “Free Mark Cuban and Abolish the SEC,” in which I opposed the SEC’s action against Mark Cuban for supposedly violating insider-trading laws. The readers said that insider trading is fraudulent and unfair.
Fraud involves the intentional misrepresentation of a material fact or the intentional omission of a material fact, with the intent to deceive.
Let’s assume that insider-trading laws were repealed. Each company would then be free to set its own policy on insider trading. Let’s assume ABC Company announces that its executives will be entitled to buy and sell the company’s stock based on inside information that has not yet been released to the stockholders or the public.
Where is the fraud in that situation? There has been neither a misrepresentation of fact nor an omission of a material fact. On the contrary, all the facts have been openly disclosed.
What if people don’t like the company’s insider-trading policy? They have a simple remedy: Don’t work there and don’t buy stock in that company. If they don’t buy stock, they can’t lose any money on the stock.
Why would a company establish a policy that would permit insider trading and why would people want to invest in such a company? The company might feel that the increase in compensation would attract extremely competent executives to run the company. Those executives might attract investors who would be seeking a nice return on their investment, notwithstanding the fact that the company’s executives are making lots of money trading on inside information.
Another company might set an entirely different policy, one which bars its executives from trading on inside information. Employees and investors could then make their employment and investment decisions accordingly. If an executive violated the company’s policy, the company could seek damages or other relief in a civil action against the executive.
Obviously, if a company were to lie about its insider-trading policy, that would mislead investors and constitute fraud. But if the company is open and above-board about its policy, there is no fraud because no one is misled.
Why do people support insider-trading laws and other economic regulations? The answer is similar to that in the war on terrorism, where Americans traded away their civil liberty in the hope that the government would keep them safe from “the terrorists.” People think that the government will provide them with economic security if they will just relinquish their freedom to the government. Thus, many decades ago — long before the war-on-terrorism trade was made — Americans traded away their economic liberty in the hope that government would keep their income, purchases, savings, and investments safe.
As Americans are learning with respect to both civil liberty and economic liberty, trading freedom for safety or security is just a fake, false, and fraudulent pipe dream. Trading away freedom for safety or security doesn’t make people safer or more secure. Instead, it actually accomplishes the opposite, especially given that the biggest threat to their freedom and well-being lies with the entity to whom they have traded away their freedom—the government. The situation is akin to a bunch of chickens trading away their freedom to a fox because the fox assures them that he will take care of them and keep them safe.
Isn’t it better to be free and insecure than to be not free and insecure? And even if government could guarantee safety, wouldn’t it be better to be free and insecure than to be secure and not free?
To learn more on the wrongfulness and harm of insider-trading laws, here is a list of articles on insider trading that The Future of Freedom Foundation has published over the years:
The Fraud of Insider Trading Laws by Sheldon Richman
Insider-Trading Prohibitions Should Go Out of Style by Donald J. Boudreaux
Martha Down Under: Kangaroos in the Courtroom by William L. Anderson and Candice E. Jackson
Business Ethics by Richard M. Ebeling
Martha Stewart Case: Where’s the Victim? by Sheldon Richman
Free Martha! Free Bobby! by Sheldon Richman