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Who Guards Economy From Ambitious Prosecutors?

Excuse me if I seem cynical, but the new SEC scandal about hedge funds reminds me a bit of the legal festivities of ambitious former New York A.G., later Governor, then "Client No. 9", Eliot Spitzer. The Wall Street Journal news story today (subscription may be required) suggests that the purposes of the "insider trading" investigations may include breaking new prosecutorial ground to "shake up stock research" customs. Call it "reform by other means."

First you terrorize a second level manager. Promise "leniency". Then you throw the book--a book you may be in the process of writing--at their bosses. Turn humorous emails of momentary interest into incriminating proclamations. Reconstruct phone conversations months after they were held. Make second hand opinions sound authoritative.

The Journal story points out that even in the past "insider trading has been difficult to prove to juries, since law enforcement agencies need to demonstrate the intent to defraud." That may be even harder in these cases.

The story goes on, "Some legal specialists say authorities appear to be seeking to criminalize typical market behavior, such as hedge funds seeking to gain an edge by gathering intelligence on a company from a wide range of sources," among them "consultants" and "networks."

Help me out here, Mr. Federal Government, but right now don't we need to encourage entrepreneurs and risk takers rather than stigmatizing and scaring them? Hedge funds are absolutely crucial to getting this dolorous economy up and moving again. Does it suggest anything to you that the stock market took a dive for two days (so far) upon this news of yours? Even having a story that an investment house is being investigated causes its stock value to plummet. Ordinary stockholders supposedly are being protected. But ordinary stockholders also, somehow, lose plenty when their stocks are savaged by sensational, officially generated publicity.

Quis custodiet ipsos custodes? When it comes to business and ordinary investors, who watches the watchmen?

You can email brucechapman@discovery.org

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