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Insider Trading: Legalize It?


If one only has a 33.12% chance of getting arrested, maybe that's why so many people do it.

Editors at The Wall Street Journal knew about Rupert Murdoch's $5 billion bid for Dow Jones (DJ) at least a week before any other news organization.

The New York Times reports today that Paul E. Steiger, Managing Editor of the Journal, made the decision to hold off on publishing anything about it.

They were ultimately scooped on the story by CNBC last Tuesday-an item that drove Dow Jones' stock up more than 50% for the day, to $58.47.

The New York State attorney general and the SEC are now making inquiries into unusually heavy Dow Jones options activity on April 30, the day before Murdoch's offer was made public.

There were scores of insiders who knew about the impending announcement, of course. Editors at the Journal, management at Dow Jones, officials at News Corp. (NWS), the Bancroft family, and advisers at the investment banks and law firms hired by both sides to advise them were all part of the information stream.

I am certainly not implying that any of these people traded on this information. After the recent (and ongoing) spate of high-profile arrests, prosecutions, and convictions of people on fraud and insider trading charges, who would be brazen enough to engage in illegal activity that is more closely monitored than almost any other?

Well, former Morgan Stanley (MS) compliance lawyer Randi Collotta and her husband Christopher, also an attorney (in the field of employment law), seem to have gotten themselves into a bit of hot water.

In court filings made public yesterday, the couple will enter guilty pleas on Thursday in response to the charge that Mrs. Collotta leaked confidential information on merger deals that were in the works at Morgan to her husband. The SEC alleges the existence of a multi-layered system, with thirteen people charged, including day traders, a portfolio manager at a Bear Stearns (BS) hedge fund, and a research sales executive at UBS (UBS).

Randi Collotta leaving court

The Collottas, et al, got caught. How many white collar criminals don't?

(For more on insider trading and how members of Congress -- and their staff members -- are exempt from insider trading laws, CLICK HERE)

I began by taking a look at a report from the FBI's Criminal Justice Information Services Division, written by Cynthia Barnett. The Bureau's Uniform Crime Reports classify insider trading as fraud. According to their statistics, only 33.12% of those cases are ever cleared. (In simple terms, the FBI considers a crime to be cleared when agencies make an arrest or there is evidence to support that the investigation will never lead to an arrest because of circumstances beyond the control of law enforcement.) Bribery and embezzlement have the highest clearance rate of the UCR's white collar offenses, with 61.78% and 38.37%, respectively, and counterfeiting has the lowest, with 29.83%.

So, if one only has a 33.12% chance of getting arrested, maybe that's why so many people do it.

Would more money help put an end to it?

For FY 2008, the Bush administration is seeking $905.3 million for the SEC, up from $877.1 million in FY 2007. Of that $905.3 million, $321 million, roughly a third, would go to the SEC's enforcement division.

The SEC has only 1,100 employees in the enforcement division. Between October 1, 2004, and September 30, 2005, the Commission filed 630 total cases. Last year, the number was just shy of 600. Even if you were to double those figures and assume the SEC could ramp up to 1,200 cases, it's still miniscule in comparison to the number of transactions being performed in any given year.

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No positions in stocks mentioned.
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