The Final Step to Insider Trading Reform: Answering the 'It's Just Not Right!' Objection

Abstract

One of the most often quoted passages in Henry Manne’s seminal book, Insider Trading and the Stock Market, occurs where Manne lumps together arguments against insider trading that turn on considerations of ethics or fairness as “it’s just not right” propositions. In a footnote, Manne explains that this “expression originated with an anonymous lady law student, who, during a classroom discussion of the subject, stamped her foot and angrily declaimed, “I don’t care; it’s just not right.”

For Manne, if repetition of such moral exhortations “were a form of scientific proof, undoubtedly the case against insider trading would long ago have been proved.” Such cynicism concerning ethical justification in the law can be traced back to the early legal realists, but has been particularly pronounced among members of the modern law and economics movement, of which Manne was, of course, a founder. The criticism seems to be that, by comparison to economic analysis, ethical justification is insufficiently “rigorous” or “scientific” to determine clear and effective legal principles.

Indeed, Manne (like many other leaders of the law and economics school) was of the opinion that most, if not all, first-order ethical propositions ultimately rest on economic justifications — that what is right can usually be cashed out in terms of what is efficient. I think this view is mistaken. But more important for the topic at hand, I think this view is counterproductive to those of us who share the opinion that the current insider-trading enforcement regime is in desperate need of liberalization and reform.

The problem is that, despite the fact that the economic analysis of Manne, Jonathan Macey, Dennis Carlton & Daniel Fischel, Todd Henderson, and others have been successful in showing that the current insider trading enforcement regime is highly inefficient, most academics, politicians, regulators, and journalists continue to justify it in ethical terms. With the principals to the debate speaking at cross-purposes, the result is a standoff that favors the status quo and precludes reform. This reality has led most commentators, even those of an economic bent, to reach the conclusion that the current insider trading enforcement regime “is doubtless here to stay.” This is a serious problem because, in addition to being inefficient, the current insider trading enforcement regime is unjust, incoherent, and irrational.

This Article proceeds as follows: Section I sets the table by dismissing the notion that economic analysis of law should enjoy some privileged status (as more precise, rigorous, or scientific) over ethical analysis of law. Rather, it is suggested that economic and ethical reasons are best understood as different tools suited for different roles in legal reform. It is then argued that, given the current climate, ethical reasoning is the best tool for overcoming the remaining obstacles to insider trading reform in the United States. Section II begins the ethical analysis by arguing that even if it were admitted that insider trading harms society and is morally wrong, the current enforcement regime would still be unjust, incoherent, irrational, and in desperate need of reform. Section III proposes the legalization of issuer-licensed insider trading as one effective means of reforming the current regime, but anticipates the “it’s just not right” objection. Section IV confronts the “it’s just not right” objection on its own ethical terms and demonstrates that, while it is true that some forms of insider trading are not morally permissible on either consequentialist or deontological grounds, issuer-licensed insider trading is morally permissible. Nevertheless, some object to insider trading, not on consequentialist or deontological moral grounds, but because it reflects the vice of greed. Section V closes by addressing this ethical concern. It is argued that criminalizing issuer-licensed insider trading is not only a poor means of combating the character flaw of greed, but that criminalization on such grounds would be moralistic (like laws against sodomy or same-sex marriage) and would therefore conflict with our society’s increasingly shared repugnance toward such laws. Finally, if our criminalization of issuer-licensed insider trading cannot be justified on moral or ethical grounds, it must be explained. Some have suggested that society’s envy of those who earn “easy money” offers the explanation. But envy is perhaps the worst of all vices, and the Article closes by cautioning against its seduction.

Keywords: Law and Economics, Ethics, Insider Trading, Manne, Reform, Kant, Utilitarianism, Deontology, White Collar Crime, Securities