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Insider traders used to have it easy. They might suffer a slap on the wrist at a civil misconduct tribunal; at worst, a fine or a professional disqualification. Even when authorities won the right to pursue cases through criminal courts, prosecutions were exceptional events.
That is changing. Cases and convictions are mounting – the result of years of one-upmanship from market watchdogs, competing to prove they are the toughest of them all. Hedge fund GLG Partners just lost an appeal against the French market regulator for insider trading in Vivendi shares. The UK’s FSA has one criminal trial under way, with perhaps an further four to follow this year. Hong Kong this week saw its first criminal prosecution. An ex-BNP Paribas banker faces up to 10 years in jail – and a fine of up to $1.3m – for tipping off friends and family about an upcoming buy-out.
As the furore over bankers’ pay demonstrates, this is a good time to be pursuing white-collar scoundrels. But to what extent the increased zeal of regulators will create cleaner markets is debatable. Miscreants can still escape detection by lurking behind nominees, offshore companies and other proxies. Volatile markets can mask all kinds of skulduggery. Proving intent, beyond reasonable doubt, remains tough.
In theory, cleaner markets should bring down the cost of capital. But evidence that insider trading actually harms markets is equivocal. Before the tide of regulation was unleashed in the last century, trading by all kinds of insiders was studiously ignored. Milton Friedman even approved, on the grounds that it quickly introduced fresh information to the market. And rules are still riddled with ambiguity: at what stage does sounding out interest among institutional clients for a forthcoming financing turn sinister? Still, more heads on spikes will certainly discourage others.
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