Insider trading as an incentive for workers

As well as the economic argument for legalizing insider trading, Marine put forward another argument, which is that insider dealing should be used as an incentive for the personnel of conglomerates (McVea, 1993, p. 51). He believes that since managers and directors contribute to a great extent to the increase of the organization’s wealth, salaries are not adequate to reward them. He therefore believes that they ought to be able to take advantage of the information that they exclusively possess to trade in the company’s shares (ibid.). Otherwise ‘innovation’, which increases profits and is essential to any company’s success, would not be encouraged and therefore the company would be worse off (ibid.). This scheme of rewarding managers and directors, although it will increase their income quite substantially, will not necessarily boost the company’s performance. An insider can make use of both good and bad news. Use can be made of the good news by buying, and of the bad news by selling. Here a manager will benefit from generating bad news to the company by avoiding loss (ibid., p. 52). This means creating a kind of rewarding scheme that is not ‘commensurate with effort’, which should be the basis of any rewarding scheme (ibid.). Furthermore, using trading upon insider dealing as a perk or a scheme of rewarding is extremely unfair. This can be seen when considering that confidential information is provided to an employee as a result of his or her position regardless of his/her contribution to this information. For example, a manager who has been performing very badly is likely to come across price-sensitive information and trade upon it. At the same time, another employee who has been performing extremely well may be unable to access the same information. This means that employees will be rewarded according to their position and regardless of their actual performance. Again and for the above reasons, Marine’s argument cannot justify legalizing insider dealing.

The ‘impossibility’ of effective regulation of insider trading

Finally, the advocates of unregulated insider dealing argue that insider dealing cannot be regulated properly and it is impossible to have effective regulation, thus it should not be regulated. Insider trading is a very complex crime and detecting it can be impossible in some cases. For example, the defendant can claim that they did not know that the information was price-sensitive or they may argue that they would have traded even if they had not known about the information (Cole, 2007). This makes successful prosecution extremely difficult. Margaret Cole (2007), the director of enforcement at the FSA, conceded that prosecuting an insider is extremely challenging. She stated that not only proving the elements of the crime is difficult, but also ‘the practical challenges of presenting complex insider dealing cases to a jury are immense’ (ibid.). However, while Marine sees this obstacle s a justification to legalize insider dealing, Margaret Cole does not. McVea (1993, p. 57) summarized Marine’s argument as ‘anti-insider dealing law is unenforceable; unenforceable law is a bad law; bad law should not be on the statute books’. Then McVea (ibid.) criticized Marine’s argument by stating that ‘partial enforcement’ on undesirable actions such as insider dealing is better than not having any restrictions. McVea’s argument seems to suggest that even if it is impossible to control insider dealing, it is still an immoral activity and regulators should not approve of it by not criminalizing it. Furthermore, despite being a really difficult crime to detect, insider trading can be tackled. This will not be achieved by the capacity to prosecute every insider, rather it may be accomplished through preventing insider trading from occurring. In other words, a proactive approach may well be the remedy to this obstacle.

Date: 2016-01-05; view: 1161