4 ms·

Warren Buffett No. 2′s “Inside Trade” Wasn’t Illegal

7 points by JacobIrwin 16y ago

zzleeper 16y ago
I'm not so convinced: 1) "didn't hurt anyone": Sokol learned about Lubrizol while on his duties at Berkshire. After all, that's what Berkshire pays him for, to research interesting investment opportunities. By buying before Berkshire, he front-runned the firm using Berkshire's private information (aka, what he knew as #2 in the firm). 2) "trading laws should be abolished... insider trading helps.. individual investors" There are some academics that think so, but the academic consensus is in the other way. For instance, several studies have shown that on the days were insider trading is less likely to ocurr, bid-ask spreads are lower.
- Yzupnick 16y ago
  Do you mind linking to these studies? I am genuinely interested in reading them.
  - zzleeper 16y ago
    Sure: The bid-ask spread paper: "the black period is associated with a bid-ask spread narrower by about 2 bps" http://scholar.google.com/scholar?q=related:bZ0CEWMhg4YJ:scholar.google.com/&hl=en&as_sdt=0,34 http://scholar.google.com/scholar?q=related:bZ0CEWMhg4YJ:sch... http://www.cib.espol.edu.ec/Digipath/D_Papers/38570.pdf http://www.cib.espol.edu.ec/Digipath/D_Papers/38570.pdf Another well cited but controversial paper: http://foba.lakeheadu.ca/gradojevic/5079/meulbroek(1992)_insider.pdf http://foba.lakeheadu.ca/gradojevic/5079/meulbroek(1992)_ins... http://scholar.google.com/scholar?cites=3127308622037385070&as_sdt=5,34&sciodt=0,34&hl=en http://scholar.google.com/scholar?cites=3127308622037385070&... From those two, you can build your way up to the more current papers using the "Cited by" feature. For more quality, focus on papers written on the more known journals (eg: journal of finance, journal of financial economcs, RFS, and so on). Also, see the 1997 SCOTUS ruling on insider trading: http://en.wikipedia.org/wiki/Insider_trading#Court_decisions http://en.wikipedia.org/wiki/Insider_trading#Court_decisions http://www.law.cornell.edu/supct/html/96-842.ZO.html http://www.law.cornell.edu/supct/html/96-842.ZO.html IANAL, but their "misappropiation" argument can arguably apply in this case. Cheers
monochromatic 16y ago
Here's the key to this article: > Tamny believes that insider trading laws should be abolished, on the grounds that they are vague and inconsistent. Tamny also believes that insider trading helps, rather than hurts, individual investors, because it results in information more quickly being factored into stock prices. There's no argument here for why Sokol's actions don't constitute insider trading, and there's only a conclusory statement that they didn't harm anyone. I don't really see why it wouldn't be considered insider trading, and I think there's a good argument that he's breached his duty of loyalty to Berkshire.
RuadhanMc 16y ago
Headline is somewhat misleading. This guy doesn't think that insider trading laws should exist ergo it wasn't illegal.
ChuckMcM 16y ago
If I could, I would vote 'east' (not hackerish) [1] on this news. [1] http://news.ycombinator.com/item?id=2403696 http://news.ycombinator.com/item?id=2403696

7 points by JacobIrwin 16y ago

I'm not so convinced: 1) "didn't hurt anyone": Sokol learned about Lubrizol while on his duties at Berkshire. After all, that's what Berkshire pays him for, to research interesting investment opportunities. By buying before Berkshire, he front-runned the firm using Berkshire's private information (aka, what he knew as #2 in the firm). 2) "trading laws should be abolished... insider trading helps.. individual investors" There are some academics that think so, but the academic consensus is in the other way. For instance, several studies have shown that on the days were insider trading is less likely to ocurr, bid-ask spreads are lower.

Yzupnick 16y ago
Do you mind linking to these studies? I am genuinely interested in reading them.
- zzleeper 16y ago
  Sure: The bid-ask spread paper: "the black period is associated with a bid-ask spread narrower by about 2 bps" http://scholar.google.com/scholar?q=related:bZ0CEWMhg4YJ:scholar.google.com/&hl=en&as_sdt=0,34 http://scholar.google.com/scholar?q=related:bZ0CEWMhg4YJ:sch... http://www.cib.espol.edu.ec/Digipath/D_Papers/38570.pdf http://www.cib.espol.edu.ec/Digipath/D_Papers/38570.pdf Another well cited but controversial paper: http://foba.lakeheadu.ca/gradojevic/5079/meulbroek(1992)_insider.pdf http://foba.lakeheadu.ca/gradojevic/5079/meulbroek(1992)_ins... http://scholar.google.com/scholar?cites=3127308622037385070&as_sdt=5,34&sciodt=0,34&hl=en http://scholar.google.com/scholar?cites=3127308622037385070&... From those two, you can build your way up to the more current papers using the "Cited by" feature. For more quality, focus on papers written on the more known journals (eg: journal of finance, journal of financial economcs, RFS, and so on). Also, see the 1997 SCOTUS ruling on insider trading: http://en.wikipedia.org/wiki/Insider_trading#Court_decisions http://en.wikipedia.org/wiki/Insider_trading#Court_decisions http://www.law.cornell.edu/supct/html/96-842.ZO.html http://www.law.cornell.edu/supct/html/96-842.ZO.html IANAL, but their "misappropiation" argument can arguably apply in this case. Cheers

monochromatic 16y ago

Here's the key to this article: > Tamny believes that insider trading laws should be abolished, on the grounds that they are vague and inconsistent. Tamny also believes that insider trading helps, rather than hurts, individual investors, because it results in information more quickly being factored into stock prices. There's no argument here for why Sokol's actions don't constitute insider trading, and there's only a conclusory statement that they didn't harm anyone. I don't really see why it wouldn't be considered insider trading, and I think there's a good argument that he's breached his duty of loyalty to Berkshire.

RuadhanMc 16y ago

Headline is somewhat misleading. This guy doesn't think that insider trading laws should exist ergo it wasn't illegal.

ChuckMcM 16y ago

If I could, I would vote 'east' (not hackerish) [1] on this news. [1] http://news.ycombinator.com/item?id=2403696 http://news.ycombinator.com/item?id=2403696