INVESTORS ARE always asking me about inside information. What should we do about it? Is it rampant? Can we make money without it? How do we get it?
My answer is simple: Ignore it. Most of the problems with so-called insider trading result from too much government regulation already. More regulation will aggravate, not alleviate the problem. This is one instance where doing less will definitely be doing more.
The basic law governing the financial markets is the Securities Exchange Act of 1934. This act, designed to protect investors, has anti-fraud provisions, anti-manipulation provisions, etcetera, but it has no provision against insider trading. In fact, insider trading is not even mentioned, much less made illegal.
In 1984 Congress passed the Insider Trader Sanctions Act, which establishes penalties for anyone who does "it," but never defines what "it" is.
Part of the problem is that it is impossible to define inside information. It cannot be done without destroying the securities markets as we know them, because any attempt to describe in the broad terms that the law demands for definition inevitably will make illegal what most agree are proper and legal activities.
In fact, none of this ever came up until the Texas Gulf Sulphur case in the 1960s. Texas Gulf Sulphur discovered a new deposit and several executives bought the company's stock before the find was announced. The Supreme Court made them give up their profits because they failed to meet the law's requirement that they disclose fully what they knew about significant developments that could affect the company. The court never defined insider trading or said that it was illegal. It just upheld the laws on full disclosure.
It was about this time that the term "inside information" entered the legal arena. History shows that the problem hardly existed before the '60s. In fact, it was the passage of federal legislation that largely caused the insider information problem as it is understood today.
The Williams Act was a response to the last round of corporate takeovers abd mergers in the late 1960s. It requires, among other things, reporting of share accumulations of more than 5 percent of a company's stock. The Williams Act was passed not to protect investors, but to protect the jobs, perks and power of corporate managers. Congress ignored the legitimate rights of the people who owned companies: the stockholders, who stood to gain by takeovers. The Williams Act has since been expanded by the Scott-Rodino Act, other laws, and myriad Securities and Exchange Commission regulations.
But that is precisely the cause of the problem with so-called insider information. If I wanted to take over a company in the old days -- before Williams and Scott-Rodino -- I would meet with my banker and my lawyer on a Friday afternoon. If the deal looked good, I would announce my takeover on Monday -- no announcements of anything before I was prepared to act, no filings, no permission and no time for leaks -- and the deal would either sink or swim. As the potential buyer, it was certainly in my interest to keep it a secret.
Now, with all the regulations, I have to call in a bevy of lawyers, bankers, public-relations agents, proxy solicitors, even printers well in advance of acting. Scores of people will learn of my plans over an extended period of time. Of course there will be leaks; greed is a natural instinct. None of this helps the investors who own the companies, by the way. It helps only the corporate chieftains and, of course, the bevy of lawyers, bankers, public-relations agents, proxy solicitors, printers, etcetera. Forget the shareholders who own the company.
The solution to this madness is to repeal the Williams Act, Scott-Rodino and the tangle of regulations. We will then abolish corporate takeover insider trading. If there had been no Williams Act, there would have been no Levine or Boesky. They would not have had the opportunity to steal the information. The myriad restrictions on capital gives shysters the opportunity to figure out a way to cheat.
But what should we do with the Boeskys and Levines of the world? There is certainly a crying need to prevent Boesky-type activity. I submit that the law is already on the books: Thou Shalt Not Steal. The law already requires full disclosure. It's illegal for anyone to enrich himself by acting on what he knows about the secret intentions of others. If you first steal information about what I intend to do and then act on it, you first deprive me of property by driving up the price and you deprive current shareholders of a greater gain by taking their stock without telling them what you know is going to happen.
Let those who invest on superior information based on good analysis of publicly available information get rich and let those who trade on stolen information go to jail. Do not slap them on the wrist. Send them to jail for long periods; Boesky, Levine and the rest should certainly go to jail for much longer than most thieves and crooks. It is infuriating, outrageous, and demoralizing that many people work long and hard at the investment business while some want to take the easy shortcuts. Nail the latter and give us a level playing field.
The situation now is that we have a crime that has never been defined by Congress, or anyone else, that is virtually impossible to enforce, and that is based on a law that should not be there in the first place. None of this is helping investors.
The answer to protecting investors is to ensure that all stockholders are treated equally. If a company offers to buy its stock, require that the offer be made to everyone equally or else require stockholder approval if premiums are to be paid to one holder. Likewise, require stockholder approval of all poison pills and other devices designed to protect managers instead of owners. Requiring equal treatment of stockholders would elimate greenmail, illegitimate raiders, and inside trading on takeovers.
Congress is in a frenzy over what to do to protect investors. But they're looking in the wrong place. The answer is very simple. Repeal the Williams Act. Enforce the laws on full disclosure. Enforce the laws on theft. Fewer laws will help solve the problem; adding new ones could make it worse.
Jim Rogers sold his ownership position in an investment fund for a substantial profit in 1980 and now is a professor of finance at Columbia University's Graduate School of Business.