Archives: 12/2014

Second Circuit Slams Feds on Insider Trading Prosecutions

For years the U.S. Department of Justice and Securities and Exchange Commission have been on a crusade to prosecute “insider trading,” even though it’s far from clear that activity should be criminal to begin with. Lately, those efforts have been led by Preet Bharara, U.S. Attorney for the Southern District of New York, who has obtained more than 80 convictions and plea deals, ruining countless careers and fortunes along the way.

On Wednesday, things changed. A three-judge panel of the New York-based Second Circuit U.S. Court of Appeals—the most influential lower court on questions of financial regulation—unanimously threw out Bharara’s high-profile conviction of hedge funders Todd Newman and Anthony Chiasson, directing that charges against them be dropped. It’s a “huge blow” to Bharara’s campaign, notes the New York Post, while Bloomberg Media calls it a “harsh rebuke” that “is likely to have far-reaching effects.” Alison Frankel of Reuters describes the ruling as “emphatic” and its conclusion “momentous.” The opinion is here.

Yale law professor Jonathan Macey, writing in the WSJ:

[The SEC and Bharara] prefer that the law exalt vague conceptions of “fairness” above the more concrete goals of having robust, liquid and efficient securities markets.

The new opinion is a game-changer. It signals to prosecutors that they cannot bring flawed cases and then hide behind the excuse that the law is vague. The Court of Appeals admonished that “the Supreme Court was quite clear” in previous cases about what is required to establish illegal insider trading.

Specifically, the Supreme Court and the lower federal courts have been explicit in saying that trading on an informational advantage is not necessarily illegal. To be illegal, the courts have said, trading by insiders must involve breaching a duty of trust and confidence. Courts have been clear, as the Supreme Court noted in Chiarella v. U.S. (1980) and again in U.S. v. O’Hagan (1997), that there is no “general duty between all participants in market transactions to forgo actions based on material, nonpublic information” because it is possible to acquire such information legitimately.

Tellingly, the Court of Appeals pointed out “the doctrinal novelty” of the government’s “recent insider trading prosecutions, which are increasingly targeted at remote tippees many levels removed from corporate insiders.”

Leveling the Playing Field?

Sen. Sherrod Brown (D-OH) introduced a bill on Wednesday called the “Leveling the Playing Field Act.” According to the accompanying press release, the proposal would “restore strength to antidumping and countervailing duty laws” via a “crack down on unfair foreign competition.” The bill includes several provisions relating to practices used by the Department of Commerce to determine dumping and subsidy margins (i.e., the extent to which imported products are unfairly underpriced). It also contains modest changes to procedures used by the U.S. International Trade Commission (ITC) in deciding whether domestic industries have been “materially injured” by imports.

Since I have had only indirect exposure to the role of Commerce in antidumping and countervailing duty (AD/CVD) investigations, I will leave analysis of those proposed changes to others. However, my 10 years of experience as chairman and commissioner at the ITC provide a reasonable basis for commenting on the bill’s suggested modifications to the injury determination.

The existing AD/CVD statutes instruct the ITC to “evaluate all relevant economic factors” that relate to the effects of imports on the industry under consideration. A number of those factors are specifically mentioned, including the industry’s profits. Not being satisfied with just having the commission examine profits in general, the Brown bill adds, “gross profits, operating profits, net profits, [and] ability to service debt.” As a practical matter, the commission already looks in detail at an industry’s profitability and its ability to repay debts, so this additional wording would contribute nothing of substance.

The Brown bill would add a provision to the effect that an improvement in the industry’s performance over the period of investigation (normally about three years) should not preclude a finding that the industry has been materially injured by imports. Yes, there can be circumstances in which an industry’s results are strengthening, yet it is still being held back by import competition. However, the commission’s existing practice already considers this possibility, so the new language would not really change anything.

The bill also adds a section addressing the possible effects of a recession on the ITC’s injury analysis. It states that the commission may extend its period of investigation to begin at least a year before the recession started, which would allow before and after comparisons of how the domestic industry has performed. The ITC already has authority to adjust the period of investigation under special circumstances, but it relatively seldom does so.

Naomi Klein vs. the Climate

Liberal activist Naomi Klein has a new book out provocatively subtitled “Capitalism vs. the Climate.” (For those of you who don’t want to buy her book, an essay she wrote a couple years ago with the same title is here.)

What amuses me about her attempt to pit capitalism and the climate against each other is that I came across an excerpt from the book in the Toronto Globe and Mail in which, unwittingly, she advocated policies that, even accepting the debate on her terms, can’t be good for the climate.

Not surprisingly, she supports subsidies for renewable energy. It’s hard to have renewable energy without those. But what struck me was that she also argued for tying those subsidies to the use of local content. For example, there is a government program in Ontario that subsidizes solar energy, but only if the energy suppliers use a certain percentage of labor and materials that are made in Ontario.

There are two obvious and related problems with such a requirement. First, by requiring local inputs, you make your product more expensive (especially when local means high-cost Canada). If your goal is cheaper renewable energy, raising the price of inputs doesn’t make a whole lot of sense.

Second, the idea that each sub-federal government should promote local production of a particular product is absurd. Imagine if that happened worldwide: there would be thousands of producers of these products! I can’t think of a more inefficient and energy-wasting approach to manufacturing.

Just to be clear, I know many strong supporters of taking action against climate change who do not believe in this kind of protectionist approach. They recognize that local content requirements are economically harmful and shouldn’t be part of these policies. For reasons that are difficult to understand, Klein seems to have missed this pretty obvious point. (I did tweet it at her, but I’m not expecting much from that!)

Future Taxi Deregulation Will Not Look Familiar

Those who have argued for the deregulation of the taxi industry will be familiar with the claim that taxi deregulation was tried in the U.S. and that the results were so undesirable that regulation was introduced. In a recent Washington Post article about ridesharing and taxi regulation, Catherine Rampell states that prices rose in deregulated taxi markets and that the latest calls for deregulation are only the latest in a familiar cycle. However, future taxi deregulation will be different from past deregulation schemes thanks to relatively new changes in technology that allow passengers to overcome knowledge problems that led to price increases in deregulated taxi markets.

Rampell’s article includes some interesting historical insights. Regulations and licensing laws for passenger transport vehicles are nothing new. In the 17th century, Charles I tried to limit the number of horse-drawn carriages in London by passing an order which was ignored. During the Great Depression, some unemployed Americans found a source of income in the unlicensed taxi industry. By the 1990s much of the American taxi industry had been subjected to re-regulation following a wave of deregulation in roughly two dozen cities beginning in the 1960s.

Today, there are calls for the taxi industry to be deregulated amid the growth of ridesharing companies such as Uber, Lyft, and Sidecar. Some argue that taxis cannot fairly compete with ridesharing companies because they are hampered by outdated regulations, and that if taxis were deregulated they would be better suited to compete with rideshare companies. Rampell warns against deregulation, saying that we have “Been there, done that.”

While it is the case that the taxi industry in a number of American cities was re-regulated after a period of deregulation, many of the pricing problems cited as justification for taxi re-regulation are not applicable today thanks to technological advances.

In her article, Rampell links to a 1996 paper on taxi regulation written by Paul Dempsey, a law professor at McGill. The paper highlights an interesting problem that taxi customers face: a lack of good information.

A Far-Out Cato Unbound

This month at Cato Unbound, we’re talking about the Search for Extra-Terrestrial Intelligence, or SETI.

Why’s that, you ask?

Several reasons, really. First, although it’s not exactly a hot public policy topic, it will certainly become one if we ever actually find anything. But that’s hardly where the importance of the topic ends.

Much more interesting to me at least is that SETI can serve as a springboard for discussing all kinds of important concepts in public policy. Our contributors this month - David Brin, Robin Hanson, Jerome H. Barkow, and Douglas Vakoch - have talked about the open societycost-benefit analysisevolutionary psychology, the hubris of experts, the narcissim of small differences, and even Pascal’s Wager (and what’s wrong with it)

So… lots of interesting stuff, particularly for libertarians who are interested in public policy.

KGB’s Old Lubyanka Headquarters Glowers at New Russia

MOSCOW—Red Square is one of the world’s most iconic locales. Even during the worst of the U.S.S.R. the square was more symbolic than threatening. 

Very different, however, is Lubyanka, just a short walk away. 

In the late 19th century 15 insurance companies congregated on Great Lubyanka Street.  The Rossia agency, one of Russia’s largest, completed its office building in 1900. 

But in 1917 the Bolsheviks seized power.  They took the Rossia building for the new secret police, known as the All-Russian Extraordinary Commission for Combating Counter-Revolution and Sabotage, or Cheka.

The first Cheka head was Felix Dzerzhinsky.  He conducted the infamous “Red Terror,” what he called a “fight to the finish” against the Bolsheviks’ political opponents. 

After his death in 1926 Grand Lubyanka Street was renamed Dzerzhinsky Street.  A great statue of Dzerzhinsky, weighing 15 tons, was erected in a circle in front of the Cheka headquarters. 

After the KGB was dissolved the building went to the Border Guard Service, later absorbed by the Federal Security Service (FSB), responsible for foreign intelligence. Today Lubyanka looks non-threatening, a yellowish color and architectural style less severe than the harshly grandiose Stalinist architecture seen throughout the city.

The KGB faced its greatest challenge in the Gorbachev era.  Demands for reform raced beyond Mikhail Gorbachev’s and the KGB’s control.  In August 1991 KGB head Vladimir Kryuchkov helped plan the coup against Gorbachev. 

After the coup’s collapse a crowd gathered in front of Lubyanka and attempted to pull down the Dzerzhinsky monument.  City officials used a crane to finish the job.

Journalist Yevgenia Albats wrote:  “If either Gorbachev or [Boris] Yeltsin had been bold enough to dismantle the KGB during the autumn of 1991, he would have met little resistance.”  However, these two reformers attempted to fix rather than eliminate the agency.

And the KGB effectively ended up taking over Russia.  Yeltsin named Chekists, or members of the “siloviki” (or power agents), to important government positions, most importantly Vladimir Putin, who headed the FSB and then became prime minister—and Yeltsin’s successor as president when the latter resigned.

The Terrible, Horrible, No Good, Very Bad Falling Gas Prices

A left-coast writer named Mark Morford thinks that gas prices falling to $2 a gallon would be the worst thing to happen to America. After all, he says, the wrong people would profit: oil companies (why would oil companies profit from lower gas prices?), auto makers, and internet retailers like Amazon that offer free shipping.

If falling gas prices are the worst for America, then the best, Morford goes on to say, would be to raise gas taxes by $6 a gallon and dedicate all of the revenue to boondoggles “alternative energy and transport, environmental protections, our busted educational system, our multi-trillion debt.” After all, government has proven itself so capable of finding the most cost-effective solutions to any problem in the past, and there’s no better way to reduce the debt than to tax the economy to death.

Morford is right in line with progressives like Naomi Klein, who thinks climate change is a grand opportunity to make war on capitalism. Despite doubts cast by other leftists, Klein insists that “responding to climate change could be the catalyst for a positive social and economic transformation”–by which she means government control of transportation, housing, and just about everything else.

These advocates of central planning remind me of University of Washington international studies professor Daniel Chirot assessment of the fall of the Soviet empire. From the time of Lenin, noted Chirot, soviet planners considered western industrial systems of the late nineteenth century their model for an ideal economy. By the 1980s, after decades of hard work, they had developed “the most advanced industries of the late 19th and early 20th centuries–polluting, wasteful, energy intensive, massive, inflexible–in short, giant rust belts.”

Morford and Klein want to do the same to the United States, using climate change as their excuse, and the golden age they wish to return to is around 1920, when streetcars and intercity passenger trains were at their peak (not counting the WWII era). Sure, there were cars, but only a few compared with today.