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Insider Trading equals Theft

The Rise and Rise of Anti-Utilitarianism

Before finalizing Part VI of the Essay on Greed is not for the Greater Good, I decided to write about a topic much debated in the press lately. This would not have seen the light unless good friends in Singapore and the Middle East had raised the question. I appreciate their input and support on reviewing and challenging many of the issues I write about here, based on their backgrounds in financial markets and professional circles.

Let me start by quoting something by George Bernard Shaw, which will clarify how you may feel after reading this particular essay on Insider Trading.

"The reasonable man adapts himself to the world; the unreasonable one persists in trying
to adapt the world to him. Therefore all progress depends on the unreasonable man."

I started this new topic, due to my personal dissatisfaction with the way insider trading is perceived and understood publicly and by professionals who should know better. I hasten to add that it has now taken me the best part of a week to write in between projects and after hours, on the basis of research and lots of reflection and inputs from others. I am still identifying new angles as we go along, so it is definitely not an easy topic. The alternative explanation, that my brain has lost its gumption after many years of hard living, is something I would rather not consider, but due to the collective intellect that has pondered and challenged me consistently to date, I think we can assume this last alternative is not applicable.

This part of the growing essay was started based on the recent question why insider trading is morally wrong. Six months ago I was asked the question in Kuwait in more or less the same fashion and, through the uncomfortable demeanour of the Managing Director who asked me and was simultaneously unable to look me straight in the eye, it was clear that he and I were actually on the same wave length, albeit on opposite sides of the fence. With the hindsight that many similar concepts such as Conflict of Interest, Equity, Unconscionable behaviour and so forth were hardly understood in my office, I wanted to effectively put to bed the personal quandary on whether I had been too harsh in labelling insider trading as plain wrong. As you will see, it is the same as stealing and I don't think anyone would disagree that stealing is wrong.

Hand in hand with the disappearance of the Pillars of Society which will be the discussion of the next part VI of the Essay on "Greed is not for the Greater Good", we have seen a greater accommodation of society towards accepting the unacceptable, amongst which is the use of inside information to enrich oneself. According to financial traders, insider trading is rife and used with impunity. I use the word "Impunity" with care as it indicates there are unlikely to be any sanctions arising from doing it. I fear this has something to do with the historical connotations related to crimes committed in the office (white collar crime) versus those committed on the factory floor (blue collar crime). In themselves, the use of these two "collars" is essentially a psychological representation of how society views them in terms of gravity. I will use an example to clarify this.

If a common thief, most probably from the blue collar clans, snatches an object that belongs to someone else, we certainly see this crime for what it is in both a legal and moral sense and we call him a thief.

On the other hand, if someone snatches information that is confidential, we tend to call it nothing because it is not even considered a real issue if we possess such information and do nothing with it. There is a possibility that this is because the information can be shared and not lost whereas a tangible option is lost once it has been removed. I believe it is more likely that the social context has a role to play here however.

Now consider the scenarios above where both the first and the second person pass their information on for consideration. I use the term consideration in a legal sense, where the consideration would legally exist if it were in the form of a return favour from someone who received the stolen information or the stolen item.

In the first case, the person receiving the item would be called a receiver or a fence, and there are laws and regulations dealing with that action and that type of person. Hence, in pawn shops and second hand shops, the proprietors keep a book with all particulars of items, the person selling such items and the date, amongst others, to ensure that when the police comes calling they can prove they have undertaken appropriate steps to ascertain the origin of any items and to avoid falling foul of the laws.

In the second case, we do not have a name for the person receiving the information. There are also no clear requirements to keep a log of such information received with dates and the person (thief) who furnished the stolen information. But in essence, the person who received the information is a fence as much as the person in the first case and is therefore a criminal.

As usual an example will clarify what I am discussing here further. It pertains to a case in Canada where three Canadians have been brought to court by the SEC. The husband of an administrative assistant working at Merrill Lynch who made travel bookings for senior executives there apparently used that and other insider information obtained from his wife to assist his friends and himself to trade in shares ahead of merger and acquisition related announcements. The wife was unaware that her husband was doing so. The husband basically stole the information from his wife and the firm she worked for, Merrill Lynch, but it was never missing, as I explained above, because information can be replicated infinitely. Before we tut tut and shake our head, note that the financial gains by the husband of US$ 90,000 pale in comparison with the likely financial gains made by Merrill Lynch executives in Australia from their own insider information trading. See URL: http://story.canadastandard.com/index.php/ct/9/cid/3a8a80d6f705f8cc/id/507293/cs/1/

Regardless of the two scenarios I have outlined above and explanations I related to you, you will still rarely hear the word "thief" or "criminal" applied to these cases. The paradox is that Mr Madoff is a criminal and thief of the highest order but he is not treated that way. A strange case which leads me to believe that the technical nature and the level of society at which insider trading is committed have somehow confused us to the point where we no longer see the moral wrong in it. Who else but a very confused judge under influence would suggest that Madoff could reside at his own residence and take his own inventory of possessions for the purposes of establishing the value of his assets for the official administrator. I am suggesting his confusion may have been under influence as I fail to see how no one could imagine Madoff on the straight and narrow after trying to send expensive watches and cheques to family members as presents prior to his arraignment. Ah, I wish I had such a nice uncle, always very caring of the family.

On the contrary, I would argue that the punishment and resulting pain from insider trading, representing an essential tool in many financial trader's and many corporate executive's arsenals, as I will explain in this essay, is spread democratically across populations. The majority of the victims were not party to insider trading in the first place, although I may note later in this essay that not actively taking part may well be as bad as actually not recognizing it as a problem. In that way one should propose that the blue collar crime used as an example, affecting only two people, the thief and victim if you will, is much less damaging to society.

Utilitarianism used to be the main driver of human progress until at least the 1960's. It encompasses the phrase "For the Greater Good" which I refer to in the titles of each of the Parts of this essay. Insider trading is a symptom that describes and is part of exactly the opposite concept, which I would therefore call Anti Utilitarianism. In this case, paraphrasing John Stuart Mill, Anti Utilitarianism is defined as "the right thing to do is that which is likely to produce the greatest suffering for the greatest number of people". I don't know if this is the generally accepted definition of Anti Utilitarianism. I have looked up a couple of sites but could not find it written in this way. Check out "How to argue with an anti utilitarian" by RM Hare. The URL is www.utilitarian.net/hare/by/1981----.htm

Insider trading may never have started out with a particular or conscious Anti Utilitarian objective and I am sure many of you would raise your eyebrows at the thought that the issues could logically be connected. The concept of insider trading is in the first place a sometimes difficult to define and identify subject matter which has nevertheless been legislated and regulated against worldwide. In spite of the many regulations against insider trading, not many cases make it to court, as it is often difficult to determine the way the insider trading took place, and to find evidence of it. It is difficult to find evidence, for example, if a passing comment received by one person over a drink at a café was utilized to either buy or sell shares or take long or short positions. It is this nebulous nature that creates confusion over what is the right and the wrong treatment required where it concerns inside information.

Having been asked what is morally wrong with insider trading I did some thinking to explain the concept in more detail and discern what really is wrong with it, apart from the fact that if you get caught in many jurisdictions you could go to jail and pay enormous fines. The question which I am trying to answer here therefore relates to which facet of natural law is being broken, rather than which regulation or law is being broken. I have discussed the concept of Natural Law extensively in the article "The Origins of Equity" on our website. Insider trading legislation is well established in many jurisdictions, most strongly in the USA. The following contains my perspective on this topic, and it may stray from purely discussing the morality and touch on the impact on markets and our economies.

From my experience insider trading is considered to distort the market and move away from a perfect market, that hallowed principle of economics, in which all participants and potential participants have perfect information. So I think part of the reason why insider trading is so much defiled is that it provides a market advantage to some players, often insiders at companies, while it disadvantages outside shareholders and certainly minority shareholders in many cases, and could even include the public at large as I will show through several actual examples. That is, it somehow flies in the face of Utilitarianism on which basis most western economies originally developed their legal systems and regulations. This is not to say that I decry the existence of advantage based on better analysis or research which is a different topic. This essay is about the deliberate procurement of detailed information that is not available to the market at large to gain an economic advantage, in the process of which one or more legal, economic and moral codes are broken.

On that basis the argument is that if insider trading is not regulated against then it would create less confidence in the market, and possibly raise the cost of capital for companies, thereby reducing economic efficiency.

I also believe that insider trading and resulting regulations have their origins in the belief that in a democracy with a free market, all participants should have equal opportunity to progress financially and share in the Greater Good. This may have its origin in the trust busting efforts in the late 1800 's in the USA, when the large cartels, essentially large Insider Trading rackets, kept out other entrants to the market, and raised prices to the end consumer. It's interesting that one of the first common law cases in the USA occurred in 1909, at around the same time. In that case a director was held to act in breach of his fiduciary duty to his company's shareholders when he sold shares that he personally owned based on insider information that was not known to shareholders.

Insider trading is also frowned upon professionally, and usually controlled through confidentiality clauses contained in employment contracts of executives or Codes of Professional Ethics, for example those applying to accountants. Essentially, an executive of a company using insider information for personal gain or to benefit another party is likely to act against the principle of fiduciary duty owed to all shareholders as held in the 1909 case in the USA. For example, as per this example a CEO who sells his share holding prior to a major adverse announcement of the company towards a quarter end, is making profit at the expense of the shareholders, who will by and large not have the access to this information before the public announcement. Clearly, it would not be in the interest of the markets to have this happen, as it undermines the trust of shareholders in the executives of companies that are supposed to manage the organization in their best interest and it may also be a breach of their employment contract, a company's Code of Conduct or the charters of the Board of Directors.

An additional factor which I believe is necessary to explore further in our discussions, is the link between insider trading, the accelerating speed of investment or divestment decisions and bonuses. When I first attended my Accounting 101 classes, my professor showed us statistics about which profession is predominantly the best at share trading and investments. This was before the plethora of financial derivatives that were created in subsequent years. The predictable result was that accountants were the worst performers of the lot, and he explained that trading is not really that much driven by detailed financial analyses, but largely by psychology. This was in 1985, so I guess things may have changed somewhat, and clearly research and analysis are, or should be, an important part of any successful investment operation. However, and this is a refrain that will echo in other parts of this essay, it may be that many researchers are not able to analyze in detail financial statements, either due to a lack of time or due to a lack resource and/or training.

I have been getting my fair share of company analyses from some very reputable research houses lately, but I note some disturbing analyses that are not at all in line with the real world on the basic levels. Just one example discussing the potential for a real estate company based on its asset value was deficient in terms of not distinguishing between Gross Floor Area (GFA) or plot size, thereby possibly over or under stating the total construction area for sale (although whether the land bank was in sellable built up units of area or plots of land was also not clear), and thereby affecting the value of the land bank and hence the NAV of the shares. Not only was that part of the calculation deficient, but other issues, such as total sellable GFA (after adjustment for service areas) was not identified, and the per square foot sales price assumptions were not in line with the market.

Clearly, if you are a researcher on a number of counters and countries you certainly will have your work cut out to stay on top of developments at the companies that you are responsible for. Needless to say, the above report was definitely rubbish, especially the "buy" advice given. However, in many of the trades in shares and financial derivatives it is not really possible to second guess the information and perform your own due diligence. Assuming that many readers of the report neither have the time, the ability nor the interest to actually analyze the information, the fact that a reputable research house proposes it merits a Buy recommendation may make the market move. In tandem this would move the graphs, which would cause the chartists to ponder and spot the candlesticks, measure the angles and other matters, after which the Buy recommendation would prove to be a very sound piece of advice reflecting well on the research house. Can anyone help me and explain why we use the term "Candlestick" rather than "Dynamite", which is probably a much more apt description according to Wiley.

I have numerous other examples such as these. On the basis of that experience I have concluded that even without any insider trading, one should be able to make a lot of sense of a company through publicly available information. I have analyzed a company's financial statements for a government agency and for investment banks, to determine anything untoward. By looking at similar companies and financial ratios as well as historical trends I was able to identify certain red flags such as under investment in maintenance, materially lower than average gross margin and other factors, taken together, which gave some fairly accurate insights without resorting to obtaining information from the inside. This will however only work if one takes the time to get to know the market, the competitors and after a thorough analysis of the financial statements and historical performance.

I briefly refer to a great icon of the business world in New Zealand during the 1980's, Sir Ron Brierley. He started his career as a corporate raider in New Zealand by pouring over decades of old annual financial reports of companies to identify any assets that had been forgotten and overlooked during the long years of trading, depreciated to a fraction of their real value, and would then launch take over bids. After a successful take over, he would strip the undervalued assets and restructure the organization. In some quarters Sir Brierley was reviled but to me he did exactly the right thing with his inside information which was gained from the outside. I would call this Outside Inside information if you will. He applied his superior skills and accounting knowledge to identify opportunities on the basis of publicly available information, and then created greater shareholder value by pointing out the undervalued assets through his actions, thereby making a good profit for himself and other shareholders, and creating a more efficient market.

I have a feeling that this type of activity, coming up with insight and advice that emanates from the thorough process of research and analysis, is likely not practised much anymore. Instead we are faced with a very demanding schedule to add value to our customers to provide insight and advice and quickly react to market indicators. That leaves us in a quandary and squeezed for time. In this scenario it is not unreasonable to propose that insider trading, to provide the extra gravy to paying customers, or increase your company's and your own profile, is very tempting indeed. Add to this mix the year end bonuses which we all know are very substantial, and you start to see a potentially nasty picture emerging.

I only have to point at the sub prime market as a classical example where a combination of greed, lack of due diligence and critical analysis, has brought the world close to its knees. It really wasn't that difficult, in hindsight, to figure out that subprime mortgages, rolled into convenient tranches and mixed with lower risk mortgages, were a recipe for disaster. I don't think anyone would deny this. The environment, therefore, promotes insider trading. With a lack of real analysis we try and make sense of a risky investment and grasp at other indicators that will give us some sense of security without putting in the hard work to identify any red flags.

Not only that, insider information is hard to challenge, as it comes from a confidential and inside source in most cases, but could at the same time be very wrong. Imagine I deliberately floated information more positive than it really is, through trusted and reliable networks. Isn't that the principle on which Bernie Madoff made off with US$ 65 billion? High school friends, people he know from 40 years back, all attending the same schools, churches, similar senior positions in the private and public sector. On the other hand, your own research and analysis can be challenged, a risky adventure at best, where any wrong analysis or research could be held against you in terms of performance evaluations and quality or peer reviews. With a lack of real understanding of what insider trading constitutes and a possible reduction in ethics and morals generally, sliding towards Anti Utilitarianism, this would have been a major contributing factor to the collapse of the financial system, based as it was, on hot air and a complete lack of regard for the fundamentals. Madoff and others like him attest to the effect of this. I have written a real live example below describing a share ramping scheme which was very successful for the perpetrators who really believed that four wrongs squared etc would be a comprehensive and defensible basis on which to hoodwink the general public. Maybe they were right because so far no one has really figured it out and the participants by and large are completely ignorant of the fact that maybe they were up to no good, either morally or legally.

Source: Gary Larson - The Far Side

Having been through several insider trading cases I will give you a few examples. Let's say you investigate a company that has one large single shareholder, an investment company, and many minority shareholders. It makes rubber products and has signed a technical transfer contract. During this investigation you note that the company is in breach of a technical production contract and will likely be taken to court by the owner of the technical patents. In addition, this company is likely to be investigated by a major trading partner's department of justice because it has been misusing most favoured nation status to import textiles from a country that does not have MFN status, to then re-label the products as made in the country with MFN status, to be transported through a third country bordering the country of final destination to avoid import duties.

As a result you believe the company under investigation will probably go bankrupt once the news gets out. Knowing the major shareholder, the investment company, should you alert them, so that they may exit the investment at a fair price, leaving the minority shareholders to take the hit? This would be very tempting if I, as the professional investigator, were to sell this information for a flat fee. However, an opposite view and equally valid point of view was noted by a good friend of mine. His viewpoint is that one could argue that the minority shareholders, by virtue of putting less capital at risk, should therefore not complain if insider information was utilized by the majority shareholder to make a commercial decision, based on the greater risk taken. In this way risk and reward would be fairly balanced out. I might consider it to constitute theft as explained in the opening paragraphs. By selling on criminal information which was illegally obtained in the first place, to then allow the majority shareholder to sell their shares at a profit, before announcing the crimes committed at the company, I am essentially taking money out of the pockets of others, those who either bought my shares without the insider information, or the existing shareholders. This is in essence a major case of theft.

The above picture looks worse however, when we realize that the information obtained was truly inside. An internal executive was bribed and induced to provide all financial records and soft copies from the accounting department under a pretext that the investigator requesting the information was a representative of an investment house in the final stages of a decision to decide to inject badly needed financing into the company under investigation. Rather surprisingly, all publicly available information would have been sufficient to obtain evidence of wrong doing, so there was in fact never a need to obtain inside information, especially in the manner described above. I confirmed this by doing my own search and obtaining information in this manner, completely above board. Based on that approach I would have found sufficient hard evidence to stand up in a court of law.

This example is a clear case of gathering inside information for the sake of deriving a conclusion that is apparently based on sound professional effort, rather than obtaining it by thorough analysis based on detailed research, a more mundane but tried and tested approach. It is actually also not that much dissimilar to torturing a prisoner into confession as I have described in other articles. In all these examples the information obtained may be deficient, and in all examples given the recipients of the information obtained believed strongly in the validity of that information, with predictably aside, that the US Government is now concerned that Richard Cheney is somehow hoping for an attack on the USA, based on "insider information" to prove that the way he obtained it through water boarding was morally correct. See the link to URL: http://thestar.com.my/news/story.asp?file=/2009/6/15/worldupdates/2009-06-15T025838Z_01_NOOTR_RTRMDNC_0_India-403252-1&sec=worldupdates. Note also my article on Waterboarding, Watergate and Whistleblowing. The end does not justify the means.

Further, imagine you are responsible for a major public tender, as an MD at a professional services firm which I was until three months ago, based at Protiviti Kuwait. Now imagine that the tender is sensitive due to its public nature, as it concerns the sale of an asset by a government company. All bidders are provided a level playing field, with the same information and clarifications, to develop their commercial and financial bids. In this case, is it wrong for another partner in the firm to approach you for further inside information to provide to one of his clients, also a bidder, in return for future opportunities to win professional consulting contracts? This case is known as being a "Constructive Insider".

Adding some further facts to assist you make a decision. Let's say the inside information obtained possibly would indicate two things. One is that the asset to be acquired has been poorly managed and therefore has possibly operated uneconomically. The second fact relates to the possible provision of information on the financial offers by an insider at the professional firm, which allow you to increase your bid to just over the best next bid and win it. By having these two facts you are able to obtain greater certainty about the opportunity, to allow you to bid economically and profitably, and make greater profits than you may otherwise have been able to do. What's the harm in that you say? Well, the seller receiving a modified bid price could have possibly made a lot more from the sale of the asset, in turn benefiting the legal owners, the government, and therefore the public. Spread over the entire population, everyone is therefore out of pocket for the benefit achieved by one bidder. By my definition this is Anti Utilitarianism at its best.

Taking the argument one step further, the bidder benefiting from the inside information has now potentially an obligation to repay the favour either in cash or kind. Let's assume the "kind" option. During a tender for professional services the bidder will be obliged to engage the favoured professional services firm for the services even though they might not offer the best option or solution. The recommendations and value for money resulting from their investment are therefore possible suboptimal, flying in the face of conventional wisdom that the market knows best. Not only that, the company might be at risk of getting highly wrong advice which could lead to great troubles down the track, as, for example, a major risk might be overlooked. In any case, one can extrapolate the various possibilities ad nauseam and all of them will have an impact on the environment, either by virtue of making shareholders out of pocket, or in the worst case scenario a domino effect where one large institution can start the malaise for the whole market. Clearly, the idea that the insider trading action of one or two has an impact on a much larger parts of society is clearly established.

The two above examples show that insider trading reduces the confidence of market participants in a fair and transparent process, and may affect their confidence in the firms that are supposedly working on behalf of shareholders. In the first example, minority shareholders could lose big time. In the second the owners of the asset to be tendered publicly, as the final bidding prices will be distorted to their disadvantage, as well as other stakeholders impacted by the other factors arising from the insider trading. I add a caveat however, in repeating a comment from my colleagues that the markets are a jungle and that as long as there is risk they will continue to be so. As risk, in his opinion, is something of a natural given, the jungle will therefore also be here to stay, and jungle type behaviour is then something that we should learn to live with. Note an interesting article entitled "What is Morally right with Insider Trading by TR Machan, URL: http://mises.org/etexts/insidertrading.pdf.

I beg to differ based on the examples provided above. There is nothing morally acceptable in pretending to be something that you are not, essentially a misrepresentation or what some would call a lie. There is also nothing morally acceptable in the defalcation of money from the public through your actions, which constitutes theft on a grand scale. And there certainly is nothing morally acceptable in obtaining any contract based on who you know rather than on what you know if that affects any parties in any way negatively. And yes, the law of jungle is trying to ensure it remains in force based on our pea sized proto brain, but if there is anything I can do to stop it from happening I definitely will. You see, I just don't feel like hanging around in trees anymore as it is much too comfortable at home.

Now let's take a third scenario. You are a trader of shares and you recommend companies to your clients to either buy into or sell out off. If you are privy to inside information you may share it with some of your favourite clients, giving them an advantage over the others. If this was known, you would lose your clients, as they would not trust you. Or they might try and get on your special red book so they would be privy to inside information as well in future, another possibility. If you took a position to advantage yourself from the situation and then touted the opposite position to your clients, you are clearly not working ethically because you are misrepresenting the truth. The issue of insider trading in the course of ones work as a securities analyst or trader is one of the more challenging, as evidenced by legal cases and interpretations. As per the examples and article linked to above however, the question of right or wrong is not necessarily linked to insider trading but to the fact that you misrepresented the truth to your clients. In this example one should not overlook the issue of how any insider information was obtained to avoid acting in the capacity of a "fence", knowingly or suspecting that the information obtained has been provided in breach of certain contractual obligations using it for economic gain.

The reason I said above that it would be a difficult issue sometimes, is that there are many variants of the theme and many scenarios around insider trading as I have shown so far. In general it looks to me that insider trading is not an economically sound concept as it has the potential to damage markets and society extensively, but some feedback I have received in response to this article suggests there are other opinions. Distortions in one direction tend to be corrected by distortions the other way and we finally arrive at equilibrium, regardless of the arc of the swing, as some traders have been observing closely recently. Finally, the market is in some ways irrational, as it is often based on psychology rather than detailed research and analysis, as I have mentioned. Be that as it may, obtaining and using insider information is as much theft as the snatching of an item from another person.

I would also further analyze the movement of the pendulum's oscillation, as money is being made along its arc. Why is this necessary? In essence, the person with the insider information and some of his close friends and contacts are the first to be in the know and therefore should be able to make the most advantageous decisions related to trading shares. Once they enter the market in sufficient volume and the pendulum swings further, other traders without this information start to suspect something is up due to the material fluctuation that can be observed, once trading gains momentum. Others then enter the market, which creates further impetus. Somewhere along the line we will see a candlestick. During this time the first ones in the market, the inside traders, have definitely made more money from their trades than the later entrants, who have noted the distortion and equally take the risk but are more likely to lose their money, on the basis of a risk taken which is not in accordance with open market principles and in fact based on deceit.

Let's look at an example where this phenomenon is exploited through the process of insider trading. Some years ago in Malaysia two enterprising grease monkeys (mechanics in polite English) came into some money and jumped the bandwagon of rubber production, setting up a production plant and issuing shares for a new company called Rubber Duckie Bhd. This plant was in competition with the company in my example one, and promised better floating duckies in various professional designs, including the Duckie in the picture below, a luxury version of which, when pressed, will do the starting tones of YMCA by the Village People. Note it was obtained from www.plunderhere.com. I wonder why that wasn't the name our two heroes in this story used to name their company. Plunder Here Bhd has a nice ring to it. I digress. The two enterprising fellows, aware that there was more to issuing shares than just reinvesting into productive assets such as latex moulding machines and the like, decided to sally forth on some insider trading. They sold the shares at around US$ 3 issue price and through active insider trading stimulation by leaking promising and positive information, as well as by letting those in the inner circle know to hold the shares, they hit US$ 21 at which they advised their closest friends and family to exit the market en masse, leaving others outside the trusted circle holding the shares. Not long after two palatial residences were built in the neighbourhood. After around two years the Duckie company ran its course and out of money and the building contractors needed to be paid, and so did the missus as she maxed out the credit cards, so another round of share ramping was executed, this time raising the shares from an issue price of US$ 3 to US$ 12 before the general exit signal was given. I haven't seen a share issue lately, but can't wait to see if the two mechanics can be three times lucky duckies.

As an interim conclusion I would therefore suggest that what many perceive to be the wrongs of insider trading are related and connected issues such as stealing the information, breaching contractual confidentiality, breach of fiduciary trust and obligations and misrepresentation. Taken to its end conclusion insider trading may also be seen as financial theft. It is somewhat similar to walking around the public roads with an axe in your hands which is also not a moral issue in itself. We do recognize that once the axe ends up in my neighbour's head I will have committed a legal crime, as well as a moral one. The picture below in no way represents my neighbour as you may guess.

Utilitarianism in my garden

Why then should it be morally wrong, apart from my suggestion that it may economically be wrong, and the fact that it is clearly legally wrong in many jurisdictions? In my opinion, and this goes back to all those articles on Greed and the Greater Good I have been writing, serving ones own interests, especially when in the process certain fiduciary duties and unwritten standards are broken, is working for the Greater Greed rather than the Greater Good.

This assertion is in addition to the fact that insider trading is mostly based on information that has been stolen and fenced which makes it a moral offence in addition to a criminal one. I do not need to go into the detail why stealing is morally wrong do I?

One could argue that a personal advantage gained from building the right networks and obtaining advantageous information is a normal business practice, especially as a trader or analyst in securities. Nevertheless, in doing so a majority of people are disadvantaged for the sake of one or a few who make major gains. This affects the confidence in transparency and good governance, and eats at the basis of society, as we can all witness firsthand during this economic crisis. This is a recognition of the principle that others deserve fair treatment to avoid falling into a chaotic world ruled by the law of the jungle which I referred to before. Utilitarianism, it's a good one.

Why create certain rules and regulations to move us away from the jungle, as society has done during the past 10,000 years or so, creating certain standards but leaving other parts of the equation untouched? One could argue that, if the law of the jungle should apply in financial markets, we may also roll back other laws dealing with the rest of society and its structures and leave the law of the jungle to do its work as it is effectively doing in nature, as Darwin observed so well. Taking it to the furthest extent, are laws and regulations and related concepts then, often based on our concepts of morality, not aberrations that distort the market? Alan Greenspan says Hi, and five more minutes to the end of this article which is by now getting very long.

Insider Trading and the markets in some way fly in the face of all major religions and philosophies that espouse compassion towards other fellow human beings, ethical behaviour and morally reliable and consistent treatment of others, selfless rather than egotistic. In essence, these are the very natural laws contained in the holy books which were written as a guide to avert falling into a dog eat dog situation where might is right and the end justifies the means. These are the very same natural laws that are there to guide us away from the amygdale to the greater use of neo cortex.

The above hypothesis has been extensively examined and written about under the title of Utilitarianism. Some famous philosophers, including Jeremy Bentham and John Stuart Mill have discussed these concepts in detail in their books of this title, written in the 18th and 19th century. It is therefore no surprise that many of our laws lean in that direction. I revert to the words of John Stuart Mill who said that in any situation where there is a moral choice or dilemma, "the right thing to do is that which is likely to produce the greatest happiness for the greatest number of people". I also think it is the basis for such concepts as Zakat in Islam and the commands against usury (riba), and doing public works and performing charity in Christianity.

Off course you may not agree that you need to divide your happiness to multiply it, as Pythagoras fondly quoted according to my recollection of reading a public statue in the South of Holland about 35 years ago.

But I think the absence of such more utilitarian thinking would reduce the chances of the survival of homo sapiens, life being rather "nasty, brutish and short", a question we have in essence been discussing for the past month since we started exchanging emails on various related topics. In my belief the pendulum has swung too far and there needs to be some intervention to ensure it does not overwhelm the sum of achievements that we as humanity have made.

One only needs to look at the public reaction to financial scandal after scandal. I was taking part in a poll on whether Gordon Brown should remain as Prime Minister of the United Kingdom. Poll responses are represented on a graph with headings containing key issues. To my surprise not one of the headings talked about any moral or ethical failings on the part of the PM or his cabinet. It may therefore be the case that humanity has become inured to breaches of ethics and morality. This is a rather sad observation. Maybe the little gnome in the picture previously represents Utilitarianism.