Hold the line on insider trading

Larry Harris

Los Angeles Times

Don’t let anyone tell you we can do without insider trading laws, said Larry Harris. Hedge fund tycoon Raj Rajaratnam’s record prison sentence last week for profiting on illegal trading tips has given some people a renewed chance to argue that acting on inside information isn’t all that bad. It “makes prices more informative” of a stock’s true value, they like to say. The free market should run freely. And after all, “how do you draw the line between smart research and illegal information?” They even argue that insider trading wouldn’t “hurt shareholders in the long run” if it were considered a kind of employment benefit for executives that allowed corporations to pay them less.

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Fortunately, all of these arguments are readily rebutted. There is no doubt that “most people believe that insider trading is simply unfair.” But more importantly, insider trading gives those in the know incentives to hide information from corporate boards, and from the public, to maximize their own trading profits. The financial crisis uncovered devastating problems with financial disclosure and corporate governance. “Eliminating insider trading rules would only make them worse.”