Manne: The law determines when these disclosures can be made. Now the poor guy out there who doesn't have the information -- he's in the market whether or not anything else has happened, his allowing insider trading doesn't speed up the time the actual disclosure will occur. . . . Do you think it's unfair that they make money? . . . I do know that in the competitive market, no one will continue to make abnormal returns without somebody coming in and competing away those profits. That's how the market works.
Elder: Ken's argument is, let's say there's a pharmaceutical company that applied for FDA approval. . . . The news media thinks they're going to get the approval, but the company gets the bad news: They don't get the approval, so they short-sell the stock.
Manne: Same thing. Short-sales will have the same impact on market price, and you want it to go down. You want that information into the capital markets just as fast as you possibly can get it there.
Elder: There are professionals who look at what the insiders in a company do, whether they buy . . . sell . . . short-sell, that's what they do for a living. They sit there and monitor the tape and when they see a bunch of people short-selling, they then react to that.
Manne: That's right. That's fortuitous. You can also say, well, they're not producing anything socially valuable . . . they're just leeches. The world is full of that kind of accident . . . people do make money by trading on their knowledge that insiders are trading.
Elder: And finally, worldwide, is insider trading pretty much banned at virtually every other stock exchange? I think I read that insider trading was legal in Japan. Am I wrong?
Manne: It's not legal on the books, but they have never had an enforcement action. Effectively, it's still legal there. And that's true in every country in the world that has these laws. I maintain that it's true in the U.S., but nobody can really notice it because you get these enormous headlines -- Martha Stewart and ImClone and problems like that -- and you think, oh, boy, the securities policemen are really doing they're job -- they're doing nothing. They're making headlines. They're not making enforcement of that law, because it's really impossible to do.
For more information, read Henry Manne's book, Insider Trading and the Stock Market.