Alas poor Soros!
"Insider Trading" should be no crime

George Soros will not, at 72, miss the £1.4m fine imposed on him by the French Courts, for insider dealing in 1988 - he is reported to be "worth" $6.9bn, which makes him the 37th richest man in the world - see The Guardian.  But the idea that "insider dealing" should be treated as a crime betrays the mess that the global corporate sector is in. 

Let's de-construct.  To this day, company law makes little provision for share-dealing.  Certainly, every Memorandum & Articles (effectively, the legal "constitution" of each company) makes arrangements to manage the transfer of shares from one shareholder to another.  Nor did the founding-fathers of the company system ever imagine the emergence of today's mass markets in shares - indeed, the various legal systems in place for the transfer of shares are slow-moving and elephantine, compared with the requirements of sharedealing "markets".  The dealers have had to invent all sorts of devices (agencies, nominee holdings, and so on) to fill the gaps in company law, just to make markets work.  Shareholders were originally conceived (1870>) as wealthy individuals who would use "company shares" to manage their investments, and who understood what they were doing.

Mass share-dealing, involving ordinary people as punters, started to develop in the United States from 1900 onwards, later in London - and has only recently got going on the European Continent.  Then in 1929, the whole American system collapsed, dragging London down with it.  The legal structure was unable to sustain the institutional and financial weight being placed upon it. - the computer of capitalism simply crashed. And America was in the vanguard of putting it together again, with the radical reforms of the 1930s, including pioneering "anti-trust" law, outlawing cartels.  The blow to the expectations of ordinary citizens had been so severe, that Government had to step in, to re-write the ground-rules.   But it was not only - or even principally - the work of "Government": the New York Stock Exchange authorities became the toughest market-regulators in the world - and still remain so.  Then, just as now, they were keenly aware of the awful consequences of "loss of confidence"...

But mass share-dealing, this "democratisation of investment" generated further problems.  As Stock Markets revived (1960s>) it became clear that ordinary (so-called) "retail investors", the private citizen of Chipping Sodbury or Baton Rouge, was at a massive disadvantage vis-a-vis the insider in the City or in Wall Street, who spent all day reading the corporate runes, meeting the managers, following the gossip.  A new trade of share tipster emerged (commonly called financial "analyst"...), who advised the benighted investor what to do - Sell?  Buy?  But that did not solve the problem: insiders continued to make money with suspicious regularity, while investors lost it.  And from the political point of view, investors had more votes.

So Governments decided to intervene, again.  But instead of tackling the problem at its source (which is the endemic secrecy of the corporate sector) they went in with the heavy boots of prohibition, and made "insider dealing" a criminal offence.  All "western" governments did the same, following the US in copycat mode.  Only the Japanese (bless 'em) refused to follow suit - they simply did not understand the logic of excluding from "the market" the very people who knew what was going on!  The failure of the Japanese Government to take action "against" insider dealers was a long-running source of dispute with the Americans and ourselves.

The right political solution  is to throw open all the doors, to remove the absolute right of secrecy from all Stock Market companies, to let in the light of publicity, and to let everyone know what is going on...  The systems of company law were never designed for mass participation, and are they legally unsuited to it - radical change is essential. That would get rid of fraudulent share tipsters and analysts, popularise "capitalism" in radical new ways, and greatly increase public confidence in the investment markets.  Then abolish the ridiculous crime of insider dealing...

What do you think?  Drop me a line

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581    2002   

Who’s to blame for blaming?

Actuaries are a funny lot.  I have

Do you agree with me?  Or do you think I am too complacent?

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