From: Harvey Newstrom (mail@HarveyNewstrom.com)
Date: Thu Jun 05 2003 - 11:02:28 MDT
gts wrote,
> Why is it a crime in the USA to profit from information one has in one's own
> brain that others don't have in theirs? Isn't knowledge and insight
> something we should reward? Where in the US Constitution is it stated that
> the federal government is granted the power to tell US citizens what they
> can and cannot do with the business information contained in their own
> brains? Who owns our brains, anyway?
Why insider trading is illegal for the company:
The theory is that the stockholders own the company. Any material information that would affect purchasing or selling decisions
must be disclosed to the owners affected. Any failure to do so jeopardizes the owner's assets and demonstrates a lack of due
diligence. This is why inside information is illegal. Nobody should be selling on secret information that has not been disclosed
to the public, because that would indicate that full and accurate disclosures are not being made.
Why insider trading is illegal for the broker:
Stock brokers are supposed to be working for the benefit of their clients. It is a conflict of interest for them to selectively
censor the information they pass to clients to manipulate their actions against their own interests in favor of the brokerage. To
disclose different information or advice to different clients is clear evidence of misrepresentation. When a stock broker advises a
big client to take the money and run, while deliberately letting their other clients keep their money invested, this is a conflict
of interest. They are choosing in advance who will gain and who will lose. They are consciously diverting funds from many smaller
accounts into the pocket of the big account. And this is done by giving different representations to different clients. This is a
conflict of interest, material misrepresentation, and deliberate fraud.
Why insider trading is illegal for the trader:
There is nothing in the law that prevents people from using their own brains to predict stocks and make lots of money. The legal
problem only comes in from receiving information secretly that should have been delivered to somebody else. It is the intellectual
equivalent of being a fence and receiving stolen goods. Instead of delivering the required information to the rightful owners (the
stockholders, all of them), this valuable information is secretly diverted to the insider traders. Like fences, they profit from
receiving the information only if all of the rightful owners (stockholders) are deprived of the information. They cannot profit
from inside information if it is equally shared with the rest of the stockholders. Thus, like an illegal fence receiving stolen
goods, the insider traders is receiving stolen information that is owned by someone else without the owner's knowledge in a
deliberate attempt to steal value from the owner. That is why even the trader is guilty under the law.
My disclaimer:
I am not a lawyer, but I do have a business degree which included accounting and business law. I am explaining my understanding as
to "why" insider trading is illegal. This speaks only to the motives of the lawmakers for passing these laws. This is not a
discussion of "what" is illegal or what "should" be illegal.
-- Harvey Newstrom, CISM, CISSP, IAM, IBMCP, GSEC Certified Security Manager, Professional, Assessor, Consultant, Technician <HarveyNewstrom.com> <Newstaff.com>
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