11 December 2014

US 2nd District Court of Appeals Issues the Economic Equivalent of the Dred Scott Decision


Any person who violates any provision of this title or the rules or regulations thereunder by purchasing or selling a security while in possession of material, non-public information shall be liable in an action in any court of competent jurisdiction to any person who, contemporaneously with the purchase or sale of securities that is the subject of such violation, has purchased (where such violation is based on a sale of securities) or sold (where such violation is based on a purchase of securities) securities of the same class.

Securities and Exchange Act of 1934

In their zeal to exonerate some Wall Street wiseguys associated with the infamous insider trading ring involving SAC Capital, the sophists on the 2nd US Court of Appeals, located in lower Manhattan near Wall Street, just issued the equivalent of the Dred Scott decision for US markets.

"Although the government might like the law to be different, nothing in the law requires a symmetry of information in the nation's securities markets."

Barrington Parker, 2nd U.S. Circuit of Appeals Judge

Are you kidding me?  Equal protection under the law?   Who says we have to do that? We can do whatever we want, and just try and stop us.  We own the lawmakers and we own the courts.

Symmetry of information, also known as a 'level playing field,' is the cornerstone and underlying principle of US Securities laws since 1933.
"Information symmetry is a condition in which all relevant information is known to all parties involved. For example, in the stock market, stock information has a full public disclosure, and all investors are in the same position to share information."

"In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure in the worst case. Examples of this problem are adverse selection, moral hazard, and information monopoly."
Is this the point where the pigmen take the masks off and say, 'what the hell, we really are just robbing and cheating you. So what are you going to do about it?  We own the system, and can have our sophists rationalize just about anything.'

Some judicial propeller head was encouraged to put themselves into super-literalist, laser-beam mode, and twist the letter of the law hard enough to find a reason for excusing some particularly blatant insider trading, and the substance of the law be damned.

As long as the exchanging of favors is sufficiently soft and undocumented, and not the explicit exchange of cash, videotaped and posted to Youtube, it's all good.  Cry havoc, and let slip the dogs of financial fraud on the general public.

The purpose of information symmetry is to prevent certain market actors from engaging in control frauds. This principle taken to a perfect and natural ideal was a cornerstore of one of the great economic canards that justified deregulating the markets. 
"In finance, the efficient-market hypothesis asserts that financial markets are 'informationally efficient'. In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made."
And now they are dropping the pretext. Are they counting on most people not understanding what 'symmetry of information' means?   Are they counting on you doing nothing about this?

Information symmetry means that some analyst or CEO cannot tell his friends that they are going to give downward guidance in a week, so that they can all sell their stock and even short it ahead of the public.

It means that the most powerful players in the market cannot traffic in private knowledge, presenting two sorts of datastreams, one for the public and one for themselves.

It's a big club.  And you aren't in it.

I expect this decision to be reversed, because otherwise there can be no confidence in US markets any longer, and no one who is not an insider can no longer believe in their impartiality and honesty.  They are worse than any casino, because the dealer can signal some of the players when he has an ace in the hole.

The basis of the reversal will be the judgement that the 2nd Court has misapplied the principles in Dirks v SEC.   In this case the Supreme Court sought to exonerate the recipient of information from a whistleblower who wished to exposed a corporate fraud, and in doing so released information to Dirks, who while passing it on to the Wall Street Journal, also passed it on to clients who used it to sell their stock in advance of the fraud and stock sell off. 

This led to the establishment of 'The Dirks Test' by the SEC:
A standard used by the Securities and Exchange Commission (SEC) to determine whether someone who receives and acts on insider information (a tippee) is guilty of insider trading. The Dirks Test looks for two criteria

1. Whether the individual breached the company's trust
2. Whether the individual did so knowingly

Tippees can be found guilty of insider trading if they know or should know that the tipper has committed a breach of fiduciary duty.
I believe this is one of those cases where courts can and will argue about reasonableness. Is it more reasonable to expect a trader who is licensed under Securities Laws to know the difference between legitimate information and material non-public information, moreso than an unlicensed amateur?

 And I think that the 2nd District Court has overreached in declaring that the prosecution ought to demonstrate that the tipper received personal benefit, rather than violated fiduciary trust of the corporation, and that the tippees needed to know this fact, rather than understanding the difference, as a professional, between gossip, information, and material non-public information which provides them a trading advantage which has been obtained in some manner which most certainly involves the violation of fiduciary responsibility in the chain of communication.
The most rational response from the rest of the world will be to shun US markets, and take steps to prevent the contagion of this abuse of privilege.

The only law the moneyed interests recognize is 'Do what you will,' and just don't document the evidence of wrongdoing and post it on the internet for bragging rights.

This is the kind of situation where the locker room talk at the Country Club gets leaked out in public, and the Very Important People who do it are suddenly exposed for exactly who and what they really are, and what they really believe. 
And brother, its a brave new world if this decision stands.