Yesterday, the judge in the SAC case accepted the firm's plea deal with the Justice Department, in which the firm and its subsidiaries pled guilty to wire fraud and securities fraud and agreed to pay a $900 million penalty and $300 million in disgorged profits. The Southern District hailed the deal as the crowning victory in their multi-year campaign against insider trading, which notably has resulted in more than 70 convictions and exactly zero acquittals. Congratulations.
But what many of us want to know is: why, immediately after the most severe financial crisis in more than seventy years, which resulted in the loss of almost nine million jobs, did the Justice Department choose to train its heavy artillery on insider traders? Sure, insider trading is bad. It's very rich people cheating to make themselves extravagantly rich. It should be illegal, and people should go to jail for it. But it's far from the biggest thing wrong with our financial markets and institutions.
There are some serious academics who even think that insider trading should be legal. The argument goes roughly like this. Say a company discovers a new drug that can cure cancer. Once that information becomes public, the company's stock price will soar. But we all know that some people find out sooner than others. By the time you read it in the Wall Street Journal, lots of other people know it already. High-speed trading firms buy access to electronic news and data feeds in part so that they can trade on that information milliseconds before anyone else. In any case, you aren't going to be the person who buys more stock in the brief window before the stock reaches its new equilibrium price. It's going to be some hedge fund manager in Greenwich. Now, why is that better for society than if the person who benefits from the information is a company insider? Furthermore, if we allow insiders to trade, then stock prices will respond to new information more rapidly, which means stock prices will more accurately reflect fundamental values, which is a good thing.
The world is more complicated that, and as I said above, I do think insider trading should be illegal. But I don't think it's nearly as bad—either in a moral sense, or in its impact on society—as, say, pushing toxic loans onto poor people, or misleading investors about the contents of CDOs, or fraudulently foreclosing on people when you don't even own the note for their mortgage loan.
But, you say, the behavior that produced the financial crisis wasn't actually illegal, so the government couldn't send anyone to jail for it. Well, to some extent this is just a question of motivation. Most lawyers will tell you that the Justice Department has an awe-inspiring array of resources, if it chooses to use them. The dizzying array of crisis-related settlements provides strong evidence of serious wrongdoing—wrongdoing that could have been the basis for criminal indictments, had the DOJ been so inclined.