Do as I say, not as I do

So, you want to take advantage of some information you obtained as a result of your position to make some money in the stock market? Some information that ordinary members of the public are privy to?

If you work in the private sector, just pack your toothbrush if you do because los federales will throw the book at you. Nevermind that markets operate on imperfect information and those who make money do so because they're able to take advantage of the information gap.

We can't have corporate executives taking advantage of their inside information to turn a buck on Wall Street, can we? Putting their own financial interest above that of the company they were hired to run - that just won't do.

But, if you are a sitting member of Congress, by all means, trade away. Gather up all the information you can at that subcommittee meeting. Take notes when that guy from Treasury gives you a briefing. Figure out who's going to win, and who's going to lose, under the terms of that proposed bill.

It's all okay.

After all, the rules that apply to the rest of us don't apply to the 535 men and women in Congress. Or, if they do, they sure as hell aren't applied the same way.

Take insider trading, for instance. There is no statute that makes trading on inside information illegal. Rather, when los federales charge someone with securities fraud, the allegation is generally either that the defendant breached a duty to the source of the information or to the person he traded with.

Of course congressmen have a duty, too. It's a fiduciary duty to act in the best interest of the United States of America - not in the best interests of the representative from some little town in Iowa. But when congressmen trade on the basis of information they've received solely because they're in Congress, they are violating that duty.



Now, thanks to a recent piece on 60 Minutes, the tide is turning. With congressional popularity at an all-time low, there really was no other choice. Now, for the first time since legislation was introduced in 2006, Congress looks to be on the verge of passing legislation that will ban members from trading on information obtained through their role as congressmen.

Eleven years for what?

Can someone please explain to me exactly what Raj Rajaratnam did to merit a sentence of 11 years in federal prison?

I understand he was convicted of insider trading. I understand that he made an obscene amount of money - some of which may have been due to his having access to information that other folks didn't have.

But why is what he was accused of doing bad? Why is it a crime? Who is the victim?

Mr. Rajaratnam received information from corporate insiders that he used to buy and sell securities for his hedge fund. If he was buying it was a good bet that the price of the security was rising. If the price of the security was rising then anyone else who held shares was making money. If he was selling it was a good bet that the price was headed downward. But his sale of shares didn't harm other shareholders - the price was going down regardless of whether he sold or not.

We're all looking for someone who has access to inside information. Defense attorneys who used to be prosecutors want every potential client know that they used to work on the other side. Why? Because someone might think that attorney has access to certain deals that no one else does.

Looking to get into the stock market? I bet you're going to look for a broker who claims to have knowledge that no one else does. Maybe it's because of the hours he spends poring over earnings reports (doubtful). Maybe it's because of the software he has that analyzes technical trends in the market. Maybe it's because he knows people who know people.

Mr. Rajaratnam didn't manipulate the market. He didn't run a Ponzi scheme. He made trades based on the information he was given. How does that differ from the person researching Company A to see what makes it a better buy that Company B?

No, we don't all have access to the same information. But for those who invested in Mr. Rajaratnam's hedge fund, they had access to it. They made money. He delivered exactly what he promised to them.

Equity markets have never been about everyone having the same information. Prices move up and down because of inefficiencies caused by imperfect information. Someone is always going to know something that you don't. If that weren't the case, share prices would never fluctuate.

Mr. Rajaratnam broke the law. That's what a jury said. But did anyone in that courtroom question why what he did was a crime?

When the rules don't apply to the rulers

Dennis Levine.
Ivan Boesky.
Raj Rajaratnam.

All charged with and convicted of insider trading.

But what about our elected representatives in Washington, D.C.? You know, the ones who sit on committees that draft and pass legislation that affects every sector of our economy. The ones who know what legislation is coming down the pipe and the likely effect it will have on various sectors of the economy, or even particular companies.

You know, those men and women who prostitute themselves for campaign contributions 24/7. The ones who takes piles of cash from PACs representing trade associations and companies.

They have investments. They buy and sell stocks and bonds and other investment vehicles at the same time they are debating legislation.

Here's a bill regulating greenhouse emissions. Here's a bill regulating offshore drilling. Here's a bill regulating fuel economy in cars. Here's a bill authorizing the building of a dam or a highway. Here's a bill raising the minimum wage. Here's a bill mandating certain health benefits in standard insurance policies. Here's a bill authorizing tax credits for certain investments.

Guess who's trading on that information? Guess who's making trades that outperform the market?

It ain't Mr. Smith.

So it's against the law for an individual to make trades based upon information he obtained that was not available to every other potential investor, but it's perfectly okay for a congressman sitting on a committee regulating a particular industry to make trades based upon legislation that is up for consideration.