The civil insider trading complaint that the Securities and Exchange Commission filed against Leon Cooperman and Omega Advisors, Inc. is interesting for several reasons. Matt Levine has a characteristically shrewd take on it over at Bloomberg (ignore the headline and read down into the column, if you are interested). Mr. Levine writes:
Here's what the SEC says happened:
- An Atlas executive told Cooperman some material nonpublic information about the Elk City sale.
- Cooperman traded on it before it was public.
When you say it like that, it sounds bad, but it is not necessarily illegal. I know, it's wild, but here we are. There is no allegation that the Atlas executive violated any fiduciary duties to Atlas when he told Cooperman -- one of Atlas's largest shareholders, who regularly talked with management -- about the upcoming deal. For all we know, the executive had a good corporate purpose in telling Cooperman -- to get his advice, say, or to encourage him to support the company. There is certainly no allegation that the executive got any personal benefit for tipping Cooperman. So this isn't a classic insider trading case in which an insider illicitly tips a friend, who then trades on it and gives the insider a bag of cash as a thank-you gift.
But the aspect of the case that I find particularly interesting, and that hasn't yet attracted much attention so far as I can see, is the geography. The SEC complaint says that Mr. Cooperman "resides in Boca Raton, Florida." It says that Omega Advisors, a Delaware corporation, "is, and was during the relevant time period, a registered investment adviser based in New York, New York." The case, meanwhile, is filed in the U.S. District Court for the Eastern District of Pennsylvania and is brought by the Philadelphia Regional Office of the SEC.
They can find a nexus in Pennsylvania on the basis that Atlas and its executive were there. But Pennsylvania is not in the Second Circuit, where the ruling in United States v. Newman and Chiasson made crystal clear (or at least even clearer than it was before) the requirement that for the insider trading to be illegal the tipper needed to receive some personal benefit in exchange for the information. Maybe the SEC is looking for a court that will rule more favorably to its view than did the Second Circuit (whose opinion the Supreme Court declined to review).
The other point is that at some juncture Mr. Cooperman moved his legal residence from New York (or Short Hills, N.J.) to Florida. David Tepper did the same. Florida has no state personal income tax and no estate tax at the state level.
Maybe Mr. Cooperman moved for the weather or for family reasons, but maybe the tax advantages were a factor, too.
That tax competition got me thinking. What if instead of a national SEC, we left these insider trading regulatory regimes to the states? If some state – Florida, for example — wants to set up a permissive regulatory regime for market-related information, then let it do that. If another state — Pennsylvania, or Vermont — wants to set up a strict regime for the same information, let it do that. Then let investors decide for themselves whether they want their money managers in the low-information states or in the states where information flows more freely. Or let the money managers and companies decide for themselves where they want to situate themselves. The competitive variation seems to work out okay on the tax front. In other words, if the SEC wants to game the regional variations in insider trading law as a way of choosing where to file its enforcement actions, why not allow investors to do the same?