Witchhunt

Insider trading is the media's favorite white-collar crime. Is it the evil side of yuppie ambition, or is it an SEC-created offense with no victims and no rules?

Common criminals. That is how the three stock market professionals were portrayed by Rudolph Giuliani, the U.S. Attorney for the Southern District of New York, at a February 1987 press conference publicizing their arrests. And that is how the media portrayed them on front pages and in cover stories everywhere. The manner and circumstances of their arrests were carefully calculated to allow no other conclusion.

Timothy Tabor, the head of risk arbitrage at Merrill Lynch & Co., was arrested by federal agents at his East Side Manhattan apartment late in the afternoon on February 11. He spent the night in the Metropolitan Correction Center.

The next day, Tabor's former colleague, Richard Wigton, the head of risk arbitrage at Kidder, Peabody & Co., was arrested in his Wall Street office, unceremoniously put up against a wall, frisked, and led away in handcuffs.

Later that same day, Robert Freeman, head of the arbitrage department at Goldman, Sachs & Co., was also arrested at his Wall Street office. He had been planning to leave the next morning on a skiing vacation.

Their alleged crime: securities fraud. More specifically, insider trading. Despite considerable government pressure on them and their employers, however, the men refused to plea bargain and implicate others. Three months later, the charges were dismissed. The government stated that the case was "substantially more complex and complicated than originally anticipated" and conceded that it would have lost had the case gone to trial.

Yet today the three men remain under suspicion, twisting in the wind, their careers in tatters. When the charges were dismissed, the government claimed they were "merely the tip of an iceberg" and promised new indictments of the three in "record-breaking time." Well over a year later, the promise remains unfulfilled.

The notorious Ivan Boesky got a better deal on the insider trading charges against him. No handcuffs. No frisking. No overnight in the slammer. And the opportunity to cut his trading partnership's liabilities by $1.32 billion through a series of government-sanctioned insider trades. Securities and Exchange Commission Chairman John Shad later told a House committee that the market wasn't hurt by those trades because, after a one-day loss, it bounced back.

Once he had made his approved trades, the SEC announced that Boesky had agreed to pay a record $100 million in penalties for trading on inside information purchased from Dennis Levine, the Drexel Burnham Lambert investment banker whose indictment and conviction marked the beginning of the current wave of insider trading charges. The Wall Street Journal estimated that Boesky had made more than $200 million in profit from Levine's information. By cutting a deal, Boesky kept half of his illicit profits.

Welcome to the upside-down, Alice-in-Wonderland world of insider trading, a world in which disregard for civil liberties, due process, and free markets is open and blatant:

• where innocent men remain under a criminal cloud for over 18 months while the government tries to figure out what it is doing;

• where Congress has never defined the crime of insider trading in any law;

• where the SEC has openly boasted of the vagueness of the crime as one of its virtues;

• where the Supreme Court has twice explicitly refused to endorse the SEC's position on insider trading;

• where criminal laws are used to restrict the flow of information vital to the operation of free markets;

• where a convicted felon like Ivan Boesky is allowed by the government to engage in "good" insider trading, which supposedly does not hurt capital markets, in order to raise money to pay the penalties for his "bad" insider trading, which somehow does hurt markets;

• where there is no evidence that the ability of the nation's securities markets to raise capital has ever been impaired by insider trading; and

• where the real beneficiary of insider trading prohibitions is not the individual investor but the SEC itself.

There is a broad consensus among Washington policymakers and Wall Street securities executives alike that trading on inside information is harmful to investors and the market. It is a consensus that is not supported by history, the experience of other countries with market economies, or empirical evidence. Yet for the past 25 years the SEC has waged a war to create, maintain, and expand the scope of the "crime" of insider trading and to perpetuate the myth that scores of insiders are secretly enriching themselves at the expense of the investing public. It has been, in many respects, a successful war. And it's still being fought.

What is insider trading? Traditionally, it meant stock trades by a corporate officer, director, or major shareholder—someone with a fiduciary responsibility to a company's stockholders—with "inside" information not available to the public. A hundred years ago, such traditional insider trading was both commonplace and legal, especially when it involved trading in the stock of corporations on impersonal stock exchanges. Even those few states that later passed laws against the practice limited their prohibitions to essentially fraudulent trades in which majority shareholders took advantage of minority shareholders by withholding information and then trading on it.

Similarly, foreign countries with market economies either have not prohibited insider trading or have casually enforced what minimal prohibitions are on the books. Hong Kong, for example, adopted its first insider trading prohibition in 1974 and repealed it a few years later. Inside trading is not considered immoral in France, and cases under the narrow prohibitions in that country are few. Japan's Securities Transaction Council has stated that insider trades are not unlawful, although the Tokyo Stock Exchange investigates insider trading by members.

New Zealand has no significant prohibitions and even has a flourishing "insider trading hotline," run by the Ascorp Group Trust, to which the investing public can subscribe. In the United Kingdom, insider trading did not become a crime until 1980. Since then, only eight cases have been prosecuted, with five convictions and no prison terms imposed.

By contrast, insider trading prohibitions in the United States go far beyond "traditional" insiders. Yet even traditional insider trading was not prohibited in this country until the passage of the Securities Exchange Act of 1934—specifically Section 10(b), which generally prohibits fraud in the sale of securities. Only since the 1960s has the SEC tried to expand the scope of prohibited insider trading.

In 1961, the agency sued the brokerage firm of Cady, Roberts & Co., claiming for the first time that Section 10(b) and its SEC-promulgated companion, Rule 10b-5, extended far beyond traditional corporate insiders. In this case, a director of Curtis-Wright Corp. told a Cady Roberts broker that the company planned to reduce its regular dividend. Before the decrease was announced publicly, the broker sold shares of Curtis-Wright owned by his wife and his clients.

The SEC conceded that the broker was not a traditional insider and did not have a fiduciary duty to Curtis-Wright or its stockholders. But, the agency said, Section 10(b) was "designed to encompass the infinite variety of devices by which undue advantage may be taken of investors and others."

It was inherently unfair, said the SEC, for the broker to sell shares when he knew that the persons buying them did not have the same information he had. The SEC ignored the fact that, in an economic sense, all trades on impersonal stock exchanges involve the potential for asymmetric information—one party to a trade will frequently have different information, in quality or kind, from the other. Instead, the SEC determined that its mission was to make the markets "fair" and to mandate a "level field" for all investors, large and small. The SEC has never reconsidered this mission.

In its pursuit of an artificially level field, the SEC soon found a willing ally in the U.S. Court of Appeals for the Second Circuit, which covers New York City and therefore handles many securities cases. In the 1968 case SEC v. Texas Gulf Sulphur Co., the agency asked the court to expand the definition of insider trading, and the court obliged.

Texas Gulf was a traditional insider case. Company officers and employees made substantial purchases of Texas Gulf stock before public announcement that an enormous supply of copper had been discovered at one of its drilling sites. But in its ruling, the court went beyond the case at hand and applied the duty to refrain from trading to anyone in possession of material nonpublic information. The court accepted the SEC's notion that investors trading on impersonal exchanges have a "justifiable expectation" of "relatively equal access to material information." Neither the SEC nor the court gave any consideration to whether Congress intended such a result or whether there was any empirical evidence supporting such a conclusion.

A basic problem with the SEC's level-field rationale for prohibiting all insider trading is that it does not make economic sense. Apart from a vague—and by now abandoned—appeal to "fairness," the rationale assumes that unless trading on inside information is prohibited, the public will lose confidence in the stock market and will not invest, thereby hindering capital formation. Yet the specter of the public abandoning the stock market en masse because of a perception that some people have an unfair informational advantage is not supported by either historical or economic evidence.

In his classic 1966 book, Insider Trading and the Stock Market, Henry Manne of George Mason University Law School showed that the unrestricted use of inside information actually makes the stock market function more efficiently. Stock market efficiency includes both the speed and the accuracy with which new information is assessed by the market and incorporated into a particular company's stock price. When insiders trade on their knowledge, that information is immediately reflected in the stock price, thereby conveying their information to the market. The more information available, the more accurate the stock's price—leading to the most efficient allocation of capital.

Nor is there evidence that market professionals distort the market by trading on inside information. A largely ignored 1987 study by the SEC's Office of the Chief Economist suggested that almost all stock trading by professional arbitrageurs like Freeman, Wigton, and Tabor could be explained and justified as the legitimate exchange of information in the market.

The study evaluated prebid market activity and the run-up in a stock's price before a tender offer is announced. Nearly 40 percent of the increase in the price of the takeover target, the study determined, occurred before any public announcement of a takeover attempt. Many people, including the SEC's enforcement division lawyers, would conclude that insider trading causes the prebid run-up.

The SEC economists, however, pointed to many ways in which market professionals such as traders, arbitrageurs, and stock analysts can legitimately acquire information in the market. In a study testing this idea, the economists found that inside information was not the cause of the prebid run-up in stock prices. The run-up was entirely the result of speculation in the media, how much stock the potential raider bought before announcing the takeover bid, and whether it was a hostile or friendly takeover.

Indeed, that same 1987 study undercuts the SEC's war on insider trading in other ways. A little digging turns up a surprising footnote that seems to have been lost on the SEC itself. In the footnote, the SEC economists essentially confirm what Henry Manne has contended for over 20 years—insider trading does not harm those who trade with the insider.

It is presumed that inside traders profit at the expense of less-informed investors, observed the footnote. But does anyone actually lose? "Those selling into the market when the better informed are buying probably would not have sold had they possessed the same valuable information. However, they still would have sold if the information specialist had refrained from buying, especially if the trading of the specialist did not affect significantly the stock price. This holds true whether the trading is based on insider information or on careful analysis and successful anticipation of the event."

An insider, by definition, has better information than an outsider. So does a market professional. Whether the trader with better information acquired it from an inside tip or simply through diligence and hard work, the economists reasoned, does not change the effect on either the market or the other party to the trade. Moreover, they noted that the outsider would have traded anyway even if the insider had been barred from doing so.

Not only is the SEC's level-field theory bad economics. On the two occasions when it addressed the issue, the U.S. Supreme Court has held that the theory is bad law, as well.

The first case, decided in 1980, involved a blue-collar worker named Vincent Chiarella who worked in the composing room of Pandrick Press, a financial printing company. Chiarella handled the announcements of five corporate takeover bids. Despite Pandrick's use of code names for the companies, Chiarella was able to deduce their identities.

Armed with this knowledge, he made modest trades in the target companies' stock, buying before the takeover announcement and selling immediately after. His profits were as modest as his trades—a little over $30,000. The SEC investigated, confronted Chiarella, and not only made him give up his profits but referred the case to the U.S. attorney for criminal prosecution. Chiarella was indicted for securities fraud, brought to trial before a jury, and convicted. The Second Circuit Court of Appeals routinely rubber-stamped the verdict.

On appeal, however, the U.S. Supreme Court destroyed the SEC's cherished level-field theory. There had to be fraud, said the Court, and none was there. Chiarella had no duty to shareholders of the target corporation. Chiarella's employer worked for the corporate raider, not the target. In an opinion by Justice Lewis Powell, the Court held that Chiarella had no duty either to the general market or to the target corporation's shareholders:

"Section 10(b) is aptly described as a catchall provision, but what it catches must be fraud. When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak," wrote Powell. Chiarella had no such duty—unless the law required all market participants to disclose what they know or to refrain from trading on such information. But, the opinion noted, "Neither the Congress nor the Commission ever has adopted a parity-of-information rule."

The second Supreme Court defeat for the SEC's level-field theory involved an investment analyst named Ray Dirks who specialized in the insurance industry. Two employees of Equity Funding Corp. of America gave Dirks insider information that enabled him to uncover one of the most shocking and pervasive insurance scandals in recent history. Dirks learned that Equity Funding had concocted records of policies that never existed to bolster sales figures, engaged in threats of Mafia retaliation against employees who threatened to expose the fraud, and falsified other corporate records to paint a picture of fiscal health. And the corporation's executives seemed to know exactly what was going on.

Dirks did two things when he learned of the extent of the scandal. First, he told his clients, who predictably sold their stock in Equity Funding. Then he told the SEC and the Wall Street Journal. Instead of hailing Dirks as a hero, the SEC hauled him into court. As punishment for giving his clients the "inside information" about Equity Funding, Dirks was prohibited for six months from trading or associating with a registered broker/dealer. He appealed to the U.S. Court of Appeals for the District of Columbia, which upheld the SEC's action.

In a decision that can charitably be described as confused, the appeals court ruled that the Supreme Court really did not mean what it had said in Chiarella just three years earlier. Even though he had no fiduciary responsibility to Equity Funding, the court said, Dirks had an overriding obligation to the SEC and the trading public to disclose the fraud or to refrain from trading. Dirks appealed to the Supreme Court.

The High Court was not amused. In its opinion, Powell cut through the tangled legal thicket that the SEC and the D.C. circuit had erected in their effort to preserve the level-field theory. In unusually blunt language, Powell wrote: "We were explicit in Chiarella in saying that there can be no duty to disclose where the person who had traded on inside information was not [the corporation's] agent,…was not a fiduciary, [or] was not a person in whom the sellers [of the securities] had placed their trust and confidence."

The Supreme Court's message to the SEC in Dirks was as clear as it was in Chiarella: if you want a level field, go see Congress, not us. The Court also went out of its way to chastise the SEC for its inconsistency in insider trading enforcement. Suggesting that it was "hazardous" to deal with the SEC, the Court accused the commission of saying something one day about its enforcement policy and then without warning bringing a "test case" that contradicted its earlier statement. Powell's opinion quoted from a speech by a former SEC chairman stating generally that the SEC "'does not contemplate suing every person who may have come across inside information" and specifically listing as people who would not be sued "persons outside the company such as the analyst or reporter who learns of inside information"—persons such as Ray Dirks.

Like analyst Dirks, Wall Street Journal reporter Foster Winans learned the hard way that you cannot trust what the SEC says about outsiders not being sued. Winans was one of the writers of the Journal's "Heard on the Street" column, which provides market information about stocks and frequently affects their prices. Winans agreed to disclose the subject of the next day's column to a broker, Peter Brant. Brant sometimes would trade on that information, giving Winans a small portion of his profit.

Like Chiarella, Winans was hit with both civil and criminal charges even though he had no fiduciary obligations to either the buyers or sellers of the stocks Brant traded. The only person he defrauded was his employer, the Wall Street Journal (which fired him but did not file criminal charges). Clearly, the only basis for the insider trading charges against Winans was the same old level-field, general-obligation-to-the-market theory. Yet Winans was convicted on the insider trading charges as well as federal mail and wire fraud, and the conviction was upheld by the Second Circuit.

Late last year, the Supreme Court affirmed Winans's mail and wire fraud conviction. It split 4–4 on the insider trading conviction, however, and issued no opinion. Powell, who had retired a few months earlier, would have been the deciding vote. Given his strong opinions in Chiarella and Dirks, there is little doubt he would have thrown out the insider trading charges. What Winans and Chiarella did was wrong. But it was not securities fraud. What Ray Dirks did was not wrong, it was laudatory. And it, too, was not securities fraud.

The absurd lengths to which the SEC has gone in its 25-year witchhunt are exemplified by the case it brought in 1984 against Oklahoma football coach Barry Switzer. At a track meet, Switzer overheard an oil company executive and his wife discussing a takeover. Switzer and a group of friends bought a substantial number of shares in the acquisition target, which they sold at a profit of $600,000 after news of the planned merger became public. The only true insider—the corporate executive—was not included in Switzer's group and did not profit from Switzer's trade. But the SEC sued Switzer.

Fortunately for Switzer, the suit was filed in federal court in Oklahoma, where Supreme Court decisions are taken seriously. The SEC deserved to lose, and it did. That the case was ever filed, however, says a lot about the SEC's indifference to the Supreme Court's attempts to keep the agency within the limits established by Congress in 1934.

The SEC has been similarly indifferent over the years to the civil liberties of its targets. Monroe Freedman, the dean of Hofstra Law School and a noted civil libertarian, observed in a 1974 law review article that "securities regulation is characterized by denial of the right to counsel, corruption of the independence of the Bar and of the traditional professional standards of attorneys' obligations to their clients, a police-state system of investigation, and denial of a variety of other basic due process rights." In some cases, the benefits of better enforcement outweigh the costs in lost liberties. But "even if a balancing test were appropriate" in the case of SEC regulations, wrote Freedman, "what is there to place on the other side of the scale?"

Rudolph Giuliani's highly publicized and wholly unnecessary arrests of Freeman, Wigton, and Tabor in 1987 were completely in keeping with the SEC's sorry record on civil liberties. At the time, no grand jury had even been convened, no testimony had been taken, and no indictments had been issued. All three men had spotless reputations, and the government had no information that any of them were about to flee or to transfer funds outside the country.

At a press conference called to publicize the arrests, Giuliani disingenuously commented that "it's not at all unusual for us to arrest people for federal felonies." In fact, only one person had been handcuffed and arrested in the government's new wave of insider trading cases—Dennis Levine. And Levine, who had been stashing his gains from insider trading in offshore accounts, was arrested only after the government learned he was planning to secretly move funds off-shore.

One explanation for the government's conduct was to put pressure on the three men to confess and implicate others. As Giuliani said in an interview in The Manhattan Lawyer, one of the purposes of arrest is to "give the person the opportunity to cooperate with the government." That tactic failed. They did not cooperate; they declared their innocence and have done so ever since.

A more compelling explanation for the government's unusual conduct is that its purpose was to terrorize and provide an object lesson for the rest of Wall Street. Anonymous lawyers "close to the investigation of insider trading" confirmed as much to the New York Times:

"'Put yourself in the role of a young investment banker at Goldman, Sachs who sees one of your mentors led away by Federal marshals,' said one of the lawyers. 'It will have a very powerful effect on you and perhaps make you realize that insider trading is just as serious as armed robbery as far as the Government is concerned.'"

While Giuliani claims he did not approve of the publicity given to the three arrests, he should not be believed. Less than a month earlier he had told the Los Angeles Times that destroying reputations was one of the tactics he intended to employ in dealing with Wall Street:

"Q: What do you think about the impact of what the government is doing in the insider trading area? Do you think you've sent a strong message to the market?

A: If you can present people with the distinct possibility, even if not the probability, that they could be caught and that they can be held up to public shame, ridicule and possible prison sentences, you're going to be able to affect their behavior."

Giuliani has a hard-earned, justified reputation as a crusading U.S. attorney whose office has prosecuted and won a major series of cases that have crippled New York's five organized crime families. Widely reported to have been considered to head the FBI and the SEC, he is openly ambitious for higher political office. But Giuliani is not a paper prosecutor. He personally tried and won the biggest and most important organized crime cases himself.

When it comes to insider trading, however, this very effective prosecutor and his office have yet to try—let alone win—a single case. All of Giuliani's 10 convictions since the beginning of the insider trading scandal in mid-1986 have come from plea bargains, not trials.

There was no plea bargain with Freeman, Wigton, and Tabor, because all the government really had was the dubious word of a convicted felon, investment banker Martin Siegel. One of America's most successful investment bankers and a leading takeover-defense expert, Siegel had accepted $700,000 in cash from Boesky in exchange for insider information on forthcoming deals. Siegel pleaded guilty to two felony counts the day after Giuliani's press conference. As part of his plea bargain, he implicated Freeman, Wigton, and Tabor. But Siegel may well have sold Giuliani a bill of goods.

Prosecutors claimed that Freeman had leaked information to Siegel about a forthcoming tender offer by Unocal. Siegel, who was then at Kidder Peabody, supposedly passed this information on to his subordinates, Wigton and Tabor. They allegedly used the information to trade in Unocal stock for the benefit of Kidder Peabody (not themselves) before Unocal's tender offer was publicly announced.

But the government changed its story when indictments were finally issued by a grand jury in April 1987. The indictments said that the Kidder Peabody trades had been made after the Unocal defense became public. Hence, Wigton and Tabor had not used inside information for the benefit of Kidder Peabody or anybody else.

The implications for Freeman were equally significant. If Siegel was telling the truth and Freeman had given him inside information on Unocal before it was public, why didn't either Siegel or Kidder Peabody act on that information until after it became public? In the face of these contradictions, the dismissal of the charges against the three men was a foregone conclusion, the government's failure to reindict predictable, but the continued cloud on their careers inevitable.

Congress has never ratified the wisdom of the SEC's level-field theory or tested its rationale in the legislative crucible. In truth, lawmakers have been largely indifferent on the subject of insider trading over the past 25 years. Until Levine and Boesky made it a household word, Congress had not even bothered to ask the SEC what the agency meant by insider trading.

When the SEC asked Congress in 1983 to put teeth in the "insider trading laws," lawmakers obliged without asking just which laws were involved. In the Insider Trading Sanctions Act of 1984, the civil penalty for insider trading was increased to three times the profit gained or loss avoided. A criminal fine of $10,000 to $100,000 was also promulgated. But no definition. As in the past, that was left to the ingenuity of SEC lawyers.

Those lawyers thrive on public ignorance of what constitutes "insider trading." For years the SEC strongly opposed any efforts to clearly define the crime. As SEC enforcement chief Gary Lynch complained to a congressional committee, he had a tough enough time winning insider trading cases as it was. A legislative definition of the crime would only make things more difficult.

It sure would. As things stand now, even judges do not know what the law is. U.S. District Judge David Sweet has been on the bench for nine years. A graduate of Yale Law School and formerly a deputy mayor of New York, Sweet is a highly regarded judge. He handled the case of Ilan Reich, a young Wall Street lawyer who had passed inside information to Dennis Levine before Levine was exposed. Reich never received any profits from the deal. Nevertheless, Sweet sentenced him to a year in prison.

Later, in an Esquire interview, Sweet offered a startling definition of insider trading that would certainly come as news to the Supreme Court: "Right now the laws on the books say that the public has to believe that the markets are fair, and in order to sustain that faith, there has to be no information passed on that is not yet public information." Sweet sympathized with Reich's plight but said that he deserved a jail term "because somewhere there is a line we do not step over."

Sweet doesn't know just where that line is, and the SEC wants to keep it that way. Its lawyers want the freedom to move the line as they choose—to catch honorable men like Ray Dirks, unethical journalists like Foster Winans, or respected investment bankers like Robert Freeman and Richard Wigton. And Judge Sweet is not alone in his ignorance.

In testimony before a Senate subcommittee, Gary Tidwell, of the College of Charleston in South Carolina, presented results of a survey of 121 stockbrokers designed to determine how well they understood "insider trading" based on current case law. The stockbrokers flunked. Eighty-four percent said it is defined by federal law, and—when confronted with specific hypothetical instances—they could rarely identify cases of insider trading correctly. "We believe that it is because of a lack of a clear definition of insider trading that a confusion exists in distinguishing lawful from unlawful conduct," Tidwell told the committee, suggesting that such a definition would make insider trading less likely.

For a time last year, it looked as if Congress might actually pass a law defining insider trading, either by codifying existing case law or by giving the SEC a virtually open-ended charter to prosecute. The SEC abandoned its long-standing opposition to a legislative definition and backed a bill that would allow prosecution of anyone who received or passed on inside information, regardless of whether that person benefited—or expected to benefit—from that action. So, for example, the SEC could charge the executive who unwittingly tipped Coach Switzer. It could also go after market professionals like Dirks, who acted on behalf of his clients, or Freeman, Wigton, and Tabor, who acted on behalf of their firms. In hearings in the summer of 1987, the SEC's Lynch admitted that the agency's advocacy of this provision stemmed in part from its inability to prove personal benefit in several cases, "particularly in recent months."

But Congress is unlikely to define insider trading any time soon. The Reagan administration has avoided the issue. And, more importantly, John Dingell (D–Mich.), chairman of the House Energy and Commerce Committee, strongly opposes any legislative definition. Lacking such support, the impetus for a definition of the "crime" has dwindled.

Ideally, insider trading should be regulated by the existing criminal laws in many states that prohibit industrial espionage and the theft of trade secrets and sensitive commercial information. So, for instance, Levine could be prosecuted for stealing proprietary information from his employer and selling it to Boesky. Anything more should be left to the public companies and the stock exchanges on which their shares are traded. If companies want to permit or prohibit insider trading by their executives, let them say so publicly and let investors decide if they want to buy shares based on that policy. If a stock exchange believes insider trading damages investor confidence, let it make that a requirement for companies whose shares trade on the exchange.

The SEC does not want this to happen. And its prosecution of Ray Dirks for saving his clients from the Equity Funding fraud explains why. The SEC does not care about protecting individual investors. Insider trading has no effect on them anyway. It does not care about the integrity of the market or capital formation. Insider trading has no effect on that, either—witness the absence of restrictions in foreign markets, as well as how our own market bounced back from Ivan Boesky's SEC-sanctioned insider trades. The only people protected by SEC prosecution of the vague and undefined "crime" of insider trading are SEC lawyers and their allies.

Bureaucratic self-interest goes a long way toward explaining the SEC's position on insider trading. Forget the lip service to "fairness, efficiency, and integrity." Even the SEC's own economists do not support that myth. When a financial analyst like Dirks who protects the interests of his clients and the market by exposing fraud is subject to prosecution, the inevitable result will be the exposure of less, not more, fraud. That the SEC's proposed legislation will still leave the Ray Dirkses of the world at risk says it all. There is no irony here, only the smell of self-interest and hypocrisy.

Contributing Editor Michael McMenamin is a lawyer in Cleveland.