With Europe falling apart but Obama v. Romney quiet at the moment, it is not clear whether the media is going to fill its air time with the story of Alnoor Ebrahim. If this story does take top headlines—or better, get featured as a punchline on The Daily Show—hopefully it can move beyond the old hat debates about insider trading as policy and focus more on the complex ways in which different people view insider trading.
Let's start with what we know of this story: Alnoor Ebrahim is a former AT&T executive and he admits that he was paid to give information about cell phone sales to particular hedge funds looking into whether or not to invest in the likes of Apple, RIM, and perhaps AT&T itself. According to BizJournal and AP: "federal authorities said Ebrahim was paid more than $180,000 to serve as a consultant for employees of Manhattan-based investment firms."
We've made it pretty clear on this blog before that we tend to stand with the "let insiders trade" side of this debate. Insider trading is about as illegal in a universal justice sense as getting called for a blocking foul (when you throw your body in front of another player's path) in basketball. It is an arbitrary law set up to try and create a greater sense of fairness. Here is a sterilized break down of what happened.
- Potential investor in Apple seeks information about the success of Apple products
- Potential investor reads industry reports, looks at publicly available data, analyzes news reports, pays to attend conferences where Apple executives are presenting their products, pays to fly out and visit Apple production sites, pays assistants to gather intelligence from their friends on how much they like the product.
- Potential investor then pays an AT&T executive for data about the sales of Apple products.
- Potential investor uses all of this information to make a decision.
So, what was the illegal activity here? The law says that investors should have a level playing field, they should have the same opportunities. It is obvious that not every potential investor in Apple has the same resources. They can all technically attend the conferences, and spend time reading the reports, and pay some recent graduates to survey their friends (even if in reality few people have those resources), but they can't all have the same AT&T friend and pay him for special information.
Step three is what we've declared illegal. Now, I could get into semantic arguments about how there are logistical problems with items in step 2 that, by the same logic is making insider trading illegal should make them illegal, but that is the old debate. We probably should still make those points to keep the flag in the sand established. But what new could we consider?
How about thinking on reasons why we have the divide? Often times in this debate (as nearly every other) it seems as if people have made their decision whether they think this should be illegal and then justify it some how. Many justifications for keeping insider trading illegal are flimsy and disprovable concerns—like "its not fair to trade if you have special knowledge" even though that is basically what professional investors do for a living... trade on special knowledge. Some are based in very sound reasoning that are balanced on a single point of debate from which different opinions must necessarily diverge—like "insiders are part owners in a company who have a fiduciary responsibility to their fellow owners and should not seek to gain special financial privilege by selling the group's information" where the debate rests on whether owners should have equal financial outcomes from a business and whether all insiders have fiduciary responsibilities.
The roots of people's justifications here rest on where their values and morals have evolved to place emphasis. As Jonathan Haidt wrote about in the May 2012 issue of Reason, there are six clusters of moral concern that all political cultures and movement base their moral appeals: "care/harm, fairness/cheating, liberty/oppression, loyalty/betrayal, authority/subversion, and sanctity/degradation." We would need to do a psych study (or if one has been done, please forward me the information) on exactly how individuals with particular value sets would fall in this matrix, but my hypothesis is that individuals who place a heavy value on fairness and care are those seeking to maintain insider trading rules. The more liberty focused would come up with justifications for making it legal.
We'll have to wait for more details on Mr. Ebrahim's case to come forward. Perhaps he is owning up to this so he can get his name in the papers like Rajan Gupta. Perhaps he has come to see his own activities as illegal. Perhaps he's just trapped with no way out. In any case, this story really should be about Ebrahim. Rather we should take this as an opportunity to understand why there are differences on insider trading, identify the root source concerns, and then many figure out if there is a way we can reform the rule which is nearly impossible to defend and restricts the rights of individuals to pursue life, liberty, and happiness.