The Wall Street Journal has a pretty interesting article on how the Securities and Exchange Commission's Regulation Fair Disclosure — "Reg FD" — "inadvertently helped pave the way for a new era of insider trading." The article also notes that "Insider trading isn't defined by a legal statute."
Reading the FBI agent's statement about the guys arrested yesterday, one thing that struck me is that the government is essentially trying to keep information about a company a secret from people who own or are considering owning the company. Part of the case concerns an investor seeking information from an employee of Flextronics, which supplies chargers for iPhones to Apple. If the Flexcon employee breached his confidentiality that he had agreed to with Apple, Apple might be able to fire Flextronics as a supplier or to seek a remedy in a civil action. But I don't see how it becomes a job for the FBI to run around enforcing Apple's contracts. Apple had competitive reasons to keep the iPad secret — it didn't want other companies to copy it, and it wanted a marketing splash surprise. But if some investor owns Apple shares, or is considering buying some, should the FBI stand in the way of the investor's trying to find out about what products Apple has up its sleeve?
The argument will be made that not everyone has the $200,000 or whatever it is to hire a consultant to find out Apple's plans. But there are lots of inequalities in the world of investing that the government doesn't try to level. Some investors can afford to rent a Bloomberg terminal or subscribe to Grant's Interest Rate Observer. Some can afford a $599-a-year subscription to an Apple Investor newsletter. Some do enough business with money management firms that they get firm-written research reports. Some may be mathematically inclined. Some may be computer illiterate.
I'm not issuing a blanket defense of the behavior of these firms or of "insider trading" in general, or a blanket condemnation of the prosecutors in these cases. Nor do I think investing in a hedge fund that makes its money by paying a "consulting firm" for the right to ask anonymous company officials questions over the phone about quarterly sales is a good strategy for long term wealth accumulation. I do think it's a strange situation, though, because in general the government often takes the position that it wants investors to have as much information as possible about a potential investment, while in this case, the government seems to want to work on behalf of management to prevent information from reaching investors.
The information, in these situations, is like water flowing downhill or money flowing around campaign finance regulations. It has a way of wanting to get out there and into the price of stocks, and whatever system the government tries to set up to slow the flow is going to create its own reactions, as the Journal article points out.
Meanwhile, technology is pushing in the opposite direction. The Financial Times had an interview the other day with the chief executive of Toys R Us, Gerald Storch, in which he reported, "I also have my computer set up to give me a flash every 15 minutes on how sales are going nationwide." Toys R Us is not publicly traded. It'd be difficult or impossible to run a business if all company information were totally transparent, and it makes some sense for the decision on what is publicly disclosed to rest with management rather than with some random mid-level employee who is freelancing for a consulting firm with a hedge fund client. But just imagine some management, somewhere, said, you know what, I'm sick of the threat of the these shareholder lawsuits blaming me for inadequate disclosure, I'm just going to put a direct feed of that every-15-minute flash onto our company investor-relations Web site. Which would be a more effective way of combating "insider trading," that, or a bunch of FBI wiretaps?