Rep. Chris Collins (R-NY), Associates, Arrested on Insider Trading Charges
Even though it's illegal, the ability to spread knowledge that ought to affect stock prices is likely better for overall market efficiency.
Rep. Chris Collins, a Republican Congressman from New York, was arrested today along with his son and the father of his son's fiancee for various crimes associated with the insider trading of stock in Innate Immunotherapeutics.
The U.S. Attorney's office for the Southern District of New York claim in an indictment that Collins, who was on Innate's board of directors, learned about a failed clinical trial in June 2017 involving their primary drug in development, which was intended to treat multiple sclerosis. Collins is accused of calling his son Cameron Collins to tell him that the trial had failed. (The Trump connection: Collins was at the White House when he made those allegedly illegal phone calls!)
The young Collins then allegedly informed Stephen Zarsky, his finacee's dad, and the two of them, along with other unindicted co-conspirators, sold batches of Innate stock numbering well over a million shares. The Feds claim that the younger Collins et al. saved themselves a collective $768,000 compared to what they would have made had they sold the same number of shares after the failed trial became public. The stock plunged from 45 cents a share to three cents a share after that news broke. Rep. Collins is not himself accused of selling any Innate stock.
As the indictment notes, the company had called a halt to Innate stock trades on the Australian Stock Exchange (ASX) before Collins' associates did their potentially illegal sales in America, a move that should have alerted the savvy that something big was happening with the company. The indictment blandly notes that the ASX "routinely halts trading at a company's request in situations in which the company has become aware of material information, either positive or negative."
Everyone active in ASX, then, was essentially tipped off with insider knowledge that something big was going on while Collins' associates were selling in the U.S. That could be conceived as an example of the strangely-unspoken-of crime of insider non-trading, or situations when people choose to hold a stock they might have otherwise sold absent the non-public information.
The three men are charged with "conspiracy, securities fraud, wire fraud, and making false statements to the FBI." The Securities and Exchange Commission (SEC) is simultaneously pursuing a civil suit against all of them.
As Martha Stewart learned when she went to prison—not technically for insider trading but for lying about stock trades to the government—these laws are designed as perjury traps, and just the "lying to FBI" part of the charges against the men could get them each five years behind bars. The securities and wire fraud charges have potential 20-year penalties.
The precise details of the investigation will be interesting to learn as they unfold. Who squealed on who? What level of niggling digging into people private lives did it take to unearth the fact that an act that is in most cases perfectly legal—choosing to sell a stock—was in this case illegal because of the thoughts and motivations in the minds of the seller?
The U.S. Attorney's office pointed out in a press release that Rep. Collins "was already under investigation by the Office of Congressional Ethics ("OCE") in connection with his holdings in, and promotion of, Innate. Indeed, he had been interviewed by OCE personnel on or about June 5, 2017, just 17 days earlier." The indictment shows the feds possess phone and text records of the defendants relevant to the stock sales and discussions of same.
It's quite likely other people were selling Innate stock in the period between Collins learning of the clinical trial and the theoretical ability of the world to learn it. It would be misleading to say "when the world learned," since all knowledge flows at its own speed and its own path to every individual mind. There is no such thing as everyone who might think of buying or selling a stock knowing every relevant bit of information that might feed into that decision at any given moment, nor is there an objective set of facts that everyone would agree should feed into a decision to buy or sell a stock.
Many economists wonder whether the time and effort and potential years of incarceration are really worth it. The feds do all this to nail a few poor suckers to the wall for an act that is almost certainly performed far, far more often than it is ever discovered by federal agents.
In addition, it's more than possible that more insider trading would be good for markets overall. As noted in The Washington Post back in 2013:
Insider trading is actually an active good. Markets work best when goods are priced accurately, which in the context of stocks means that firms' stock prices should accurately reflect their strengths and weaknesses. If a firm is involved in a giant Enron-style scam, the price should be correspondingly lower. But, of course, until the Enron fiasco was unearthed, its stock price decidedly did not reflect that it was cooking the books. That wouldn't have happened if insider trading had been legal. The many Enron insiders who knew what was going on would have sold their shares, the price would have corrected itself and disaster might have been averted.
That's the argument of Henry Mannes, an economist at George Mason University who's advocated legal insider trading for decades now. Referring to the Enron and Global Crossing's scandals, he says, "I don't think the scandals would ever have erupted if we had allowed insider trading because there would be plenty of people in those companies who would know exactly what was going on, and who couldn't resist the temptation to get rich by trading on the information, and the stock market would have reflected those problems months and months earlier than they did under this cockamamie regulatory system we have." And that's months and months where investors could have allocated money toward more promising investments, increasing market efficiency.
More formal economic models reach the same conclusion. Christopher Matthews at TIME…points to a study by researchers at the Atlanta Fed, who surveyed a wide array of models and found that insider trading makes stock prices more informationally efficient….
Informational non-asymmetry is built into a world where time and attention are scarce, so it seems silly and unfair to selectively enforce a law that pretends to solve that "problem" when it comes to stock market transactions, a problem inherently impossible to solve at any rate.
As I wrote in USA Today in 2002:
Every day, brokers advise Americans to buy or sell stocks. Do we really want laws that require us to launch congressional-level inquiries into what "illicit" knowledge our brokers might have had?
Laws that turn legal actions into bureaucratic crimes based on our state of mind—on whether we know what we know or decide what we decide "fairly"—require….an unsavory degree of government snooping into who said what to whom when…..Insider-trading laws turn an act that any American should have a perfect right to perform into a crime, in the name of the impossible standard of equal information. There is no way to make everyone know what everyone else knows, all at the same time.
As for any alleged victim who bought the stock from the insider traders without knowing what they knew, well, they were in the market that day to buy stock at a given price, and certainly could have ended up buying it from someone else, not the handful of people legally barred because of knowledge in their heads from doing such selling. The same "harm" would have likely befallen those buyers even had the accused not done a thing.
This 2014 trend report on insider trading notes both that medical and biotech fields seem most rife with such charges, and a growing SEC preference for trying the cases in their own administrative courts, not the standard federal court system. A more recent November 2017 analysis of SEC insider trading actions notes, "Recent cases show other areas of interest for the SEC's Enforcement Division: outside professionals entrusted with sensitive information; an increasing focus on high-tech trading schemes; and the identification of abuses of political intelligence."
The SEC pursued 41 insider trading actions in 2017, slightly less than the 45 it did in 2016, in each case representing slightly less than 10 percent of its total prosecution caseload.
Collins is still insisting today this will not slow down his re-election bid.