Turning Things Inside Out | Value Research SEBI’s sharper teeth could be more effective against insider trading, but perhaps only a contrarian approach is the real solution...
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Turning Things Inside Out

SEBI’s sharper teeth could be more effective against insider trading, but perhaps only a contrarian approach is the real solution...

In the US, the SEC and federal prosecutors have filed insider trading charges against SAC Capital, the storied hedge fund run by Stephen Cohen, reputed--at least till now--to be one of the brilliant hedge fund managers ever. Now, the US government’s charges suggest that the hedge fund’s track record was largely built on large-scale insider trading.

The case against SAC is the biggest step yet in an aggressive campaign against insider trading that started about three years ago. During the time, 81 Wall Streeters have been charged and some 90 per cent have either confessed or have been found guilty. Before Cohen, the most high profile case was the one involving hedge fund manager Raj Rajaratnam and former McKinsey head Rajat Gupta. Rajaratnam is currently serving an eleven year jail sentence while Gupta is free while his two year sentence is under appeal.

Needless to say, things are very different in India. Insider trading cases are rarely provable and the few that have been have just led to minor fines. Does this mean that there is very little insider trading in India? That’s not what investment professionals will tell you privately. Insider trading, as well as insider manipulation by promoters and brokers is supposed to be routine here. Interestingly, just last week the government has promulgated an ordinance which gives SEBI a much stronger ability to proactively investigate and gather evidence in insider trading and other types of cases. Hopefully, the regulator will eventually have some big examples that can be deterrents as these recent cases on Wall Street.

Interestingly, there’s also a contrarian stand that one can take on insider trading. It can be plausibly argued that even the toughest policing can but scratch the surface of insider trading. Uncontrolled leakage of information may be endemic in today’s world. Criminalising insider trading just drives this underground and it might actually be better for ordinary investors it were done openly. If every insider leaked information openly all the time, then we might actually end up with more transparency than even the most draconian crackdowns can bring.




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