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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.

Rep Chris Collins officeRep Chris Collins office

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.

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  • shortviking||

    It isn't clear to me how it's wrong to put family and friends above "public good"

  • Rev. Arthur L. Kirkland||

    I hope you are able to develop some character.

  • shortviking||

    Fuck off.

  • BigT||

    Public good: th Rev kills himself. Will the Rev follow through?

    Of course it depends on who says what is the public good. That's why the Rev is FOS.

  • aajax||

    Often it is not.

  • Ken Shultz||

    Selling something you know to be worth much less than its market value to someone who is ignorant of its defects is basically fraud.

    It's like selling a Picasso that's about to be exposed as a fake.

  • Fist of Etiquette||

    It's worth at that moment to the buyer what he is willing to pay.

  • Ken Shultz||

    Um, no.

    He's not willing to pay that for it at all since it isn't what it appears to be.

    It's not a Picasso, and you knew it wasn't a Picasso, but you sold it to him as if it were a Picasso and let him pay the price for a Picasso.

    He was paying for a Picasso, but you gave him Yellow River on White Wall by I.P. Freely.

  • Agammamon||

    The free market does not require perfect information to function.

  • Ken Shultz||

    This isn't imperfect information. This is effectively fraud.

    You knew the product was defective.

  • Kivlor||

    Gotta love the libertarians on here arguing that fraud is fine because the customer was willing to pay for it at the time.

  • aajax||

    This kind of nonsense gives libertarians a bad name.

  • Jim Logajan||

    "Selling something you know to be worth much less than its market value"

    Um, there is no way for me to know its market value until I go and try to sell it.
    And the stock market exchanges have no mechanism to place an addendum on a particular sell order like "Oh by the way, on this sale of N shares at asking price P I happen to know X, which others may not know."

    Under your definition of fraud, it seems ANY information I may glean through my own efforts (e.g. observation of cars piling up in a car factory's temporary storage) makes any transaction I may attempt fraudulent unless I first announce the information I discovered.

  • aajax||

    Some libertarians have called for the elimination of insider trading laws for this reason. Let no one be lulled into thinking they are protected against having to do due diligence before buying a stock. But this will mean that stocks will automatically drop in value, while stock investing will become too risky and/or expensive for small investors.

  • Restoras||

    Stock investing, at least in single companies, is already too risky for individual investors. The deck is stacked against them, and always will be. The big funds (pension, mutual, hedge, etc) have access to more information and also private conversations with company managements that give them an edge that can never be eradicated. You can make insider trading illegal and prosecute the odd dummy that gets caught, but the big pools of money already have 'insider' access.

    Individual investors should largely confine their investing to mutual funds, ETFs, etc - the ones that have that access and can benefit from it. If an individual investor wants to invest in shares of individual companies they should go in with eyes wide open and with money they don't need.

  • Sevo||

    Beat me to it by a minute.

  • Sevo||

    I can't find the book just now, but there was a case regarding a mining outfit and a good assay found at a new site. And the timing of some trades after a presser.
    Was 30 minutes enough time to assume the information was public? After the first story was filed? Monty Python couldn't have written more complicated and laughable rules.
    Regardless of any public harm from 'insider trading', there is no way to stop it and the SEC should be sured for fraud for claiming they are 'protecting' the 'small investor'.
    There are big numbers involved, which means there are some very smart people spending their entire working lives trying to get an edge on others of similar skills. And YOU are going to outsmart them?
    "Small investor" stock picking = slow or not so slow way to lose a lot of money.

  • Jim Logajan||

    Indeed:
    More specifically, fraud occurs only when a false representation of fact is made (there are actually 5 elements to fraud, but this element is the most relevant here.) Selling N shares of stock at either an asking or bid price of P involves no false representation of facts - in fact no facts (other than perceived value) are being exchanged at all. Further, all buyers and sellers have some mismatch of factual knowledge of the entities being traded. No amount of law or regulation can hope to "equalize" the difference in known facts before a trade for reasons too involved to be spelled out in an article's comment section (but are hopefully self-evident to most libertarian readers.)

    Suffice to say that laws against false representation are sufficient, while laws preventing one from acting on information are always inimical to the one with the information (because one cannot act as if they merely didn't have the information, since in some cases they might have traded anyway - only by showing a loss can they ever prove they didn't act on the information.)

  • Jerryskids||

    So if you decide to sell your GM stock because you no longer think it's a good investment and I decide to buy your GM stock because I think it's a good investment, do you have an obligation to tell me I'm an idiot for buying a bad stock at a high price or do I have an obligation to tell you you're an idiot for selling a great stock at a low price?

  • Agammamon||

    No it isn't and never has been.

  • Dillinger||

    With you on all information should be known to all and insider trading laws are baloney. The "Trump Connection" tie-in needs quick death.

  • Giant Realistic Flying Tiger||

    I think that was sarcasm about how the media is probably going to bring up Trump when they cover this.

  • Dillinger||

    I hope so.

  • Horny Lizard||

    Do you doubt for one second Trump isn't giving inside info to his friends?

  • aajax||

    Trump and half of Congress. It's this how everyone seems to leave Washington wealthy?

  • DJF||

    """"(The Trump connection: Collins was at the White House when he made those allegedly illegal phone calls!)
    """"""

    So is Trump suppose to monitor and approve all phone calls from the White House?

    I thought that was the NSA job.

  • aajax||

    Ethics start at the top.

  • Sevo||

    In that case, it's a good thing the hag didn't win.

  • Happy Chandler||

    1) The Trump connection is that Collins was the first member of Congress to endorse Trump.
    2) The trades connecting to Collins made up half the volume that day. It didn't take huge detective work to find it. The traders all had connections to Collins.

    Insider trading reduces confidence in the markets. It's the lemon market problem. If people think that stocks are traded based on insider information, they're less likely to believe purchases are good, and everyone loses.

  • Scarecrow Repair & Chippering||

    Insider trading reduces confidence in the markets. It's the lemon market problem. If people think that stocks are traded based on insider information, they're less likely to believe purchases are good, and everyone loses.

    Keep telling yourself that government is THE solution. You might someday possibly admit that government is just ONE solution. Everyone with half a brain and a memory to match realizes that all government ever does is fuck things up; that goverment solutions are really just band-aids on problems created by government in teh first place.

    If insider trading was that dastardly, there would be no markets now, because insider trading occurs all the time. I bet there are 1000 undetected insider trades for every arrest. The arrests are just a dog and pony show to convince the rubes that (a) it is naughty, and (b) exceedingly rate and thus dangerous.

    Compare with speeding tickets. Very few speeders are actually ticketed; I drove in the slow lane once, at the speed limit, and 16 cars passed me for every car I passed. Didn't see a single cop. The ones that do get tickets are for ten over, most of the time, and weren't doing anything dangerous. The ones that are dangerous are arrested for reckless driving.

  • Agammamon||

    That makes no sense at all unless you think people ignore what others *do* and only concentrate on what they say.

    So if a company officer says everything's ok but is selling a large block of stock that people will just take his word for it instead of asking 'why is this guy selling off this stock if everything's fine?'

  • BigT||

    "Insider trading reduces confidence in the markets."

    You say that like it is a bad thing. It promotes caveat emptor.

  • damikesc||

    Collins should have been punished.

    As should virtually every other Congressperson who has any stock portfolio.

  • TrickyVic (old school)||

    ""1) The Trump connection is that Collins was the first member of Congress to endorse Trump.""

    So?

  • BYODB||

    Yeah, I saw this at another publication this morning. Amusingly, he'd have gotten away with it if he had only done it himself and not told anyone else. Fucking politicians. Figures it would be a New York Republican, too.

  • Diane Reynolds (Paul.)||

    (The Trump connection: Collins was at the White House when he made those allegedly illegal phone calls!)

    Jesus Doherty, I have to read all the way to the end of the 2nd paragraph before I get the Trump connection?

  • Scarecrow Repair & Chippering||

    along with his son and the father of his son's fiancee

    Awkward.

  • Rich||

    Especially if they're the same person.

  • Rich||

    the strangely-unspoken-of crime of insider non-trading

    Or the even worse crime of colluding to not speak about insider non-trading!

  • Rich||

    Obviously the solution is to not allow people to invest in their own companies.

  • Jerryskids||

    That's only half the problem - people should be barred from investing in any companies they have any knowledge of. It's not fair that knowledgeable people used their knowledge to buy Microsoft at 5 while ignorant people lacking that knowledge were buying Tandy at 15.

  • aajax||

    Is there any Friend of Donald that doesn't have his hand in the cookie jar?

  • Sevo||

    Instead of offering some innuendo, why don't you do the research and tell us?

  • BigT||

    Yes, some merely grab them by the.....

  • loveconstitution1789||

    In this game there needs to be rules that all players live by. The rules need to be decided before the game is played.

    If insiders can rigg the game, why would investors play? It would mostly be the end of capitalism.

    Anarchists and Lefties love this but it would spell ruin for the USA.

  • Sevo||

    loveconstitution1789|8.8.18 @ 11:05PM|#
    "In this game there needs to be rules that all players live by. The rules need to be decided before the game is played.
    If insiders can rigg the game, why would investors play? It would mostly be the end of capitalism.
    Anarchists and Lefties love this but it would spell ruin for the USA."

    You are commonly not real bright, but this suggests you hit the bottle. Imbecilic.

  • Agammamon||

    The actions of insiders - absent regulations preventing them from acting - *leak that very information* to the public. So insiders can only 'rig' the game for a very short period. And then everyone knows because if all the insiders suddenly buy or sell en-masse that's a very good indication that something very good or very bad is happening behind the scenes - so everyone else starts buying and selling that stock en-masse and then the insider advantage disappears.

  • Agammamon||

    Their leaking that information to the public through their actions is what justifies the profits (or reduced losses) that they'll make from acting on their inside information.

  • Agammamon||

    Its the incentive we give them to not keep that info to themselves so the market can act more efficiently.

  • sarcasmic||

    Prices are information upon which people make decisions. When insider trading is outlawed, the price does not reflect all the available information, and people are not able to make fully informed decisions. If insider trading was allowed, then prices would rise and fall based upon their actions, allowing people to make more informed decisions on whether to buy or sell.

    As it is, insiders are the ones who benefit from this legislation. They have an unfair advantage over people who do not have their information, and can make shitloads of money that moment they are allowed to act upon it. If they were able to act as soon as they had the information, then prices would reflect that information, and their advantage would be lost.

  • vek||

    I've never thought about the specific issue of insider trading really... I guess I always took the normal position that it is a bit shady... Because it is. But shady things can serve a purpose. Interesting idea to chew on really. I think as long as you maintained the laws that require WHO sold the shares to be public record, and to specifically mark those with inside information/major holdings in a company, it might actually improve things by tipping people off something big is happening.

    Frankly I don't think it's a huge effect either way really though, at least not in most cases.

  • Jerry B.||

    East to figure why the U.S. Attorney's office for the Southern District of New York brought this case.

    "[R-NY]"

  • Azathoth!!||

    All trades are 'insider' trades.

    From the initial offering you have someone offering inside information about how great the company is.

    An 'informed' broker is one who has their ear to a lot of inside information.

    Anti-insider trading laws are idiotic socialist 'fairness' laws. It's not fair that some people work to get more information than others.

    Are people too blind to see that?

  • Tony||

    Really? Is this the official libertarian line, or have you just not thought through the implications of legalizing insider trading?

  • Agammamon||

    Well, I know you haven't.

  • Tony||

    I know why it's a crime. I also know why people like you worship the market mechanism. I don't understand how allowing insider trading makes the market fairer or more efficient.

  • Azathoth!!||

    Insider trading IS legal. EVERY SINGLE TRADE is done with some iota of 'inside' info.

    The 'laws' are only enforced politically, against enemies. Against 'unfairness'.

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