Charles Dickens was a keen observer of legal absurdities, and offered a memorable example in Oliver Twist, when the character Mr Bumble is told that the law of the time supposes that a wife has acted under the direction of her husband.
“If the law supposes that,” said Mr Bumble, squeezing his hat emphatically in both hands, “the law is a ass — a idiot. If that’s the eye of the law, the law is a bachelor; and the worst I wish the law is, that his eye may be opened by experience — by experience.”
Insider trading law is suffering from similar confusion.
Prosecutors, in the US at least, until recently seemed to be trending towards a Victorian interpretation of wrongdoing. Statutes governing insider trading are vaguely written, so authorities took it upon themselves to pursue cases where there were indications of malfeasance.
After repeated studies demonstrated that market prices were moving in advance of disclosure of material information, prosecutors began to cleave to the ancient legal doctrine that if it walks like a duck and quacks like a duck, it might well be a duck.
Aggressive gathering of phone and email records was combined with a muscular approach to potential witnesses in insider trading cases, with suspects offered a choice of substantial jail terms or leniency if they would incriminate their partners.
This resulted in a string of high-profile convictions in insider trading cases. Preet Bharara, US Attorney for the Southern District of New York and the highest profile prosecutor for financial crimes, has boasted that his office has secured 250 convictions for insider trading since 2009. Bharara has also seemed to be closing in on the biggest catch of all (at least since Michael Milken in 1990) in the form of Steve Cohen, the billionaire founder of hedge fund SAC.
But prosecutors have suffered a series of recent reverses.
Cohen had already almost escaped the legal dragnet, after SAC agreed to pay $1.8 billion but prosecutors failed to tie any of eight convicted former fund employees to knowledge of insider trading by Cohen himself.
In December a court reversed the convictions of two former managers of other funds, Anthony Chiasson and Todd Newman, on the grounds that the government did not demonstrate that they both knew that the source of their tips was both illegal and resulted in an explicit quid pro quo.
Related convictions of former SAC managers are also likely to be reversed on the same grounds and a fairly weak case against Cohen charging that he failed to supervise employees is also likely to fall through.
Cohen has recently seemed almost to mock the government, with the emergence of reports on elaborate steps to ensure that employees of his renamed fund – now structured as a family office called Point72 that manages his own money – will act like choirboys. Staff are reportedly being paid bonuses for demonstrating ethical behaviour and former law enforcement officers are being courted for well compensated compliance jobs. It has also emerged that Cohen’s fund increased by about $1.8 billion in 2014 – the same amount as the fine SAC paid at the end of 2013.
So it was festive year-end trebles all round for traders who must feel quite confident that they have put circuit breakers between themselves and the sources of any illicit information.
An obvious solution to the confusion around insider trading in the US would be to pass new laws clarifying what is permissible. That seems unlikely in the current political climate, however. So perhaps US authorities should look across the Atlantic for inspiration.
The UK’s Financial Conduct Authority has been criticized for its curious inability to find evidence of malpractice by figures with any seniority in the City of London. The lifetime ban recently delivered to Jonathan Paul Burrows, the former BlackRock rates strategist, for dodging rail fares, demonstrates that those days are over.
Neither ass nor bachelor, the law in England is clearly determined to return to its rightful state of awful majesty.