In today’s New York Times, John C. Coffee Jr., the well known professor from Columbia Law School writes that our federal government should have a clearly defined crime of insider trading.

Currently, insider trading cases are prosecuted as offenses under various, more general crimes like securities fraud (the actual words in the statues are “use of … any manipulative or deceptive device or contrivance”) or theft, where the government would claim that the information itself was someone else’s property, and was stolen. Both of these theories are a bit indirect. In fact, the Supreme Court has ruled more-or-less that the government must prove that the user of inside information gave something of value to the person from whom he or she got the information. The problem is that in many recent cases, the information went through many steps of various people and the government could not prove that the accused trader had any connection (much less a financial connection) to the person who originally revealed the information improperly.

This reminds me of the scene in the movie Wall Street where Charlie Sheen is being sneaky, hanging around the airport watching where someone is going and making an investment decision based on that information. While the audience was clearly intended to think that this was a nefarious activity, I don’t think that doing that particular thing was breaking any law.

I agree with Professor Coffee. Congress should pass a law making a new clearly defined crime of “insider trading”. Since I am not a securities lawyer, I will leave the details up to Professor Coffee and other experts. While everyone agrees that insider trading is bad, reasonable people can disagree on exactly what we want to ban and what we want to allow.

The one point that I don’t fully agree to is in the very last paragraph:

If a presidential candidate of either party wants to show that he or she has not been “captured” by Wall Street, the best signal would be support for insider trading legislation and a promise to prod Congress to enact it.

While I agree that this is a much needed change, the Patriotic Millionaires have suggested that the litmus test for political corruption should be to close the carried interest tax loophole, an egregious policy that allows investment fund managers to pay a much lower tax rate than everyone else. No one on any side of politics has any legitimate reason to allow that loophole to remain. Supporting The Carried Interest Fairness Act, sponsored by Tammy Baldwin and Sandy Levin would provide a much better litmus test to determine if an elected official has been captured by Wall Street.