12 October 2008
The IG report on Aguirre
Personally, I can't get too worked up about the underlying charge, i.e. that the possibility of insider trading regarding the GE/Heller merger wasn't pursued as it might have been.
I don't believe in the prohibition of insider trading per se. I suspect, in fact, that it is economically counter-productive. Yes, in many cases "insider trading" actually means "breach of fiduciary obligation." And, when that is the case, there ought to be remedies for the victims of that breach. But then the proper term to use is, precisely, "the breach of fiduciary obligation." Or if that's too many syllables, call it BFO!
The problem with "insider trading" is that it doesn't very snugly overlap with the long-standing legal understanding of a BFO.
Former hedge fund manager Ralph Cioffi stands accused of insider trading, for example. I know of no plausible BFO claim in that matter. [Subscription will be required if you follow that link].
Nor is it clear to me that Pequot Capital was the sort of "insider" who in a rational world would be prohibited from trading on the basis of what its execs knew about the upcoming acquisition of Heller by GE.
"Ah," you might reply, "but the law is what it is, whether you like it or not, and ought to be applied equally to all persons without fear or favor."
To which, IMHO, a shrug is a sufficient response. The problem with the prosecution of insider trades beyond the BFO limits is that it has a very strong detterent effect upon the best informed traders: which necessarily means that it slows the process of aggregating information -- the process of price discovery in the broadest sense, which is what the markets are for.
None of this, BTW, is to concede anything as to the facts in dispute on Mr. Mack's or Pequot's behalf, BTW. I of course have no authority to make any concession for them, and they have denied any insider trading.
In a statement in June 2006, Pequot said that it has $7 billion in assets under management, and that it had made some 136,000 trades during the period under review by the SEC. This allows for statistical cherry picking.
It is only natural that, because of the consequence of timing, some of those 136 thousand trades could be identified as possible insider trades by market surveillance. In other words, any trade that comnes just before a merger looks suspicious if seen in isolation, though the cherry was in fact only part of a much larger sundae.
Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.