The Boesky affair.

The Boesky Affair

AMID THE furor about the Boesky "insider-trading' case, some important points need to be made.

First, contrary to what the Securities and Exchange Commission claims, Ivan Boesky's main crime was not to trade on "inside information,' but to trade on stolen information. Boesky bribed Dennis Levine, then an employee of Drexel Burnham Lambert, to give him confidential information: the names of companies that Drexel Burnham's clients planned to take over.

Second, the SEC has not accurately identified the victims of Boesky's actions. True, some shareholders who sold stock to Boesky would otherwise have been able to sell for a higher price later. The SEC has correctly labeled such people as victims, and has required Boesky to pay $50 million into a fund for them. But what about the primary victims: the clients of Drexel Burnham from whom the information was stolen? Because Levine breached their confidentiality, these firms had to pay higher prices for their targets. Yet the SEC says nothing about requiring Boesky to reimburse them. Imagine our outrage if a judge found a thief guilty of stealing televisions from company A, forced him to compensate TV retailers B, C, and D for unfair competition, but didn't force him to make restitution to company A.

Third, why should there be a law against insider trading anyway? We have no idea whether insider trading is good or bad, just as we have no idea whether stock options for management are good or bad. We don't legislate the latter. Why the former? Why not, instead, let companies that go public include a prohibition of insider trading if their original owners want to? Such a prohibition would give any seller of the stock the right to sue anyone who buys it from him, if he thinks he can prove that the buyer acted on inside information. Similarly, anyone who bought the stock would, just by buying it, agree to let himself be sued. And the company would pay for the cost of enforcing this prohibition. There is no role for government action here since the only purpose in having the prohibition is to enhance the value of the stock in the first place.

How would we handle companies that are already public? By giving them one year to have shareholders vote on whether to prohibit insider trading. We have no idea how many companies would end up with such a prohibition. Neither does the SEC; nor do those who want laws against insider trading. Which is precisely the reason for not having such laws.

Finally, whatever one thinks about insider trading, the issue of mergers and takeovers is totally separate. Insider trading will occur when people have inside information. The information can be about an impending takeover or about anything else that affects the value of the stock. Takeovers can be good for stockholders and good for the economy. But that's another story.