In May 2017, a federal jury convicted Doug DeCinces of insider trading for scoring nearly $1.3 million from a stock tip about a pending corporate acquisition. The tip came from a close friend who happened to be CEO of the target firm. DeCinces has already agreed to pay $2.5 million to settle the civil complaint with the Securities and Exchange Commission (SEC) and now faces up to 280 years in prison. This story is common; between 2002 and 2016, the SEC pursued 740 insider-trading cases against 1,572 defendants/respondents. What is unusual is this defendant’s prior career––DeCinces spent 15 years playing third base for the Baltimore Orioles and California Angels. Congress created the modern legal framework for regulating securities markets in 1933 and 1934. The SEC defines insider trading as trading a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. The integrity of securities markets is important to the overall economy because growth in income and jobs depends on scarce investor funds flowing to those firms with the best prospects. When securities markets are efficient, prices send clear signals about the best place to invest. The SEC prosecutes insider trading to ensure a fair, level playing field for all investors. Were the public to see securities markets as profitable only to insiders, they might shy away. And without large numbers of active buyers and sellers, markets would send distorted price signals, and economic growth would suffer. Interestingly, many finance and law professors believe insider trading should be legal. Perhaps the most famous proponent is Henry Manne, who has argued that SEC efforts to stop insider trading have proved as ineffective as Prohibition in deterring bootlegging. Manne and others have also emphasized efficient allocation of investor funds depends on securities prices reflecting all relevant information, not just what happens to be public. Finally, they express skepticism at the idea that insider trading will drive the public away from securities––noting many markets (such as the ones for professional athletes, real estate, and used cars) function well despite unequal distributions of information. However, the scholar most closely associated with the idea of efficient markets, Nobel Prize winner Eugene Fama, does not believe that insider trading should be allowed, based on concerns that doing so would create an incentive for managers to hold back information about the firms they manage for reasons of personal gain. In the end, the question of whether to decriminalize insider trading comes down to a tradeoff––the social cost of security price signals potentially distorted by fewer buyers/ sellers against the social benefit of signals reflecting all relevant information. SEC enforcement policies may unintentionally acknowledge thistradeoff––prosecutions are  comparatively rare, but convictions lead to severe punishment. The 740 insider-trading cases since 2002 translate into an average of just 49 per year, compared with billions of U.S. securities transactions. But, as Doug DeCinces found out, when caught, the SEC can be a stern umpire. 

Suppose insider trading were legal. Would it still present an ethical issue for insiders wishing to trade on non-public information?