Last week’s sentencing of Mathew Martoma for insider trading may signal the end of the SEC’s efforts to bring down his former boss, Steven A. Cohen, but it will almost certainly guarantee another round of debate over the legal regime that has sent Martoma behind bars for the next nine years.
Like other laws that attempt to maintain a spirit of equity, insider trading is a legal distinction that rests on a moral misgiving. It identifies a way of gaining information for a financial transaction that seems (there is no better word for it) unfair. In the case of Martoma, his crime was convincing doctors to provide him confidential information about drug trials involving two companies in which SAC Capital, the hedge fund he worked for, had made a $700 million investment. A day after he passed along the information to Cohen, SAC’s founder, the fund began selling its shares in both companies before the information became public, allowing it to avoid losses and book profits totaling $275 million.
The U.S. Attorney who led the prosecution’s case, Preet Bharara, described Martoma’s crime as akin to buying “the answer sheet before the exam,” which is to say, he and his employer cheated.
It may seem surprising, given the widespread repudiation of insider trading in polite society, but not everyone agrees. “[I]t’s essential that capital reach the best, most growth-enhancing ideas as quickly as possible,” John Tamny, a Forbes columnist, wrote in June. Insider trading expedites this process, ensuring that capital isn’t “under-utilized or destroyed to the economic detriment of us all.” And while it is true that tips like the one Martoma obtained can allow for substantial “first-mover profits,” any shrewd investor is working to get better and faster information. For “naysayers to suggest that none of this is “fair,” Tamny declared, “is for them to misunderstand basic economics.”