Insider trading, liberty, and the need for curbs on violations of trust

CATCHING up on the details of the Dennis Levine insider trading case last week, I couldn't help connecting it with all the talk about liberty just before the Fourth of July. It's ironic that just about all the regulation that business has to deal with came as a result of some kind of business abuse. Just as in our political life we have to relearn that vigilance is indeed the price of liberty, we need to learn even more that the freedom to carry on business American-style resides on a public perception that that freedom is being used for the benefit of all.

The present insider trading case is especially inopportune, because the world's financial and investment movers and shakers are in the process of developing global trading markets. London, New York, and Tokyo will probably emerge as the three main markets of the world, partly because they represent different continents and different time zones. But there will be competition among these three; perhaps one will emerge as the leader, perhaps not. Anything that interferes with the development of New York as a trading center will not be good for American interests.

This is also a time when major new financial instruments are being developed. To those who are used to buying only stocks or bonds, the new instruments may sound as unfamiliar as all the terminology about software and computers is to someone still typing on an old-style typewriter. But such things as financial futures and options are helping to make markets even more liquid, at the same time that their very newness for some makes them susceptible to misuse.

Virtually every law on the books that business finds onerous can in some way be linked to some past business abuse. The Pure Food and Drug Act came about because of shoddy products being sold at the turn of the century.

The antitrust laws, some parts of which are now archaic in a global business environment, arose because America's first generation of tycoons tried to monopolize and thus protect their business gains.

Most of the present securities laws were enacted in the 1930s because of securities industry abuses that were uncovered after the 1929 crash in the stock market.

The most recent wave of business regulation, the environmental and safety laws of the past 15 years or so, also came about from perceived abuses. The environmental laws have probably held back United States growth somewhat, but the public at large is solidly behind the results. Many of our cities are immeasurably cleaner, and rivers and lakes that were pronounced almost dead have returned to a healthy state faster than anticipated.

The Dennis Levine case may not lead directly to more legislation. The danger may be more that, if the Securities and Exchange Commission investigation uncovers a network of illegal doings, the whole market could get tarnished.

What is our protection against this kind of thing? Basically conduct that comes very close to the Golden Rule. We each need to ask ourselves if our conduct is such that, if carried out by all our competitors in whatever we are doing, it would be something productive and positive for our business.

If we all engaged in insider trading, confidence in the trading markets would quickly evaporate, and with it a good part of the market itself. What is obviously needed is a higher sense of ethics, which would result in group behavior patterns so strong that the weakest in the group would not deviate from them.

In a society where instant gratification and financial success are so highly valued, there are too many signs that we need to rediscover this sense of ethics.

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