Columbia law professor shreds the ‘don’t ask, don’t tell’ code of insider trading in NYT op-ed

Columbia Law School professor John C. Coffee Jr. wrote a blunt condemnation of US laws around insider trading.

In the editorial, published on Monday in The New York Times, Coffee says that the US has “overly complex and burdensome” laws, which impede the ability to properly prosecute some of the main actors involved in insider trading.

He writes:

Another lurid case of insider trading has been uncovered: The former chairman of Dean Foods has admitted giving insider information to a well-known professional sports bettor … a second beneficiary of stock tips was the professional golfer Phil Mickelson, who had gambling debts of his own.

Neither the United States attorney nor the S.E.C. is prosecuting other people who benefited from the stock tips, including Mr. Mickelson. Why not? A serious shortfall in our law has hampered prosecutors and allowed insider traders — particularly those further down the chain of information — to dance around the rules.

Coffee says that US law values market efficiency, which encourages companies and individuals to find information about businesses through legitimate research. As such, Coffee argues, trading on unknown facts ends up being illegal when it’s only been “wrongfully obtained or used.”

That leads to a “don’t ask, don’t tell” code, Coffee writes, where traders understand that they can’t be prosecuted as long as they’re unaware of any personal gain to be made from the information.

In Mickelson’s case, he allegedly received tips from Las Vegas sports bettor Billy Walters about Dean Foods. Mickelson bought stocks in the company and made about $1 million on the deal. Dean Foods’ former chairman, Thomas Davis, admitted to giving the information to Walters, who made an estimated $43 million over five years, according to Coffee.

The US Securities and Exchange Committee has named only Mickelson as a relief defendant, meaning that while he profited from the information, he wasn’t aware of the scheme between Walters and Thomas.

That scenario, in Coffee’s eyes, can and should be avoided in the future with stricter legislation around insider trading.

“If a presidential candidate of either party wants to show that he or she has not been ‘captured’ by Wall Street, the best signal would be support for insider trading legislation and a promise to prod Congress to enact it,” Coffee writes. “If Washington can ever agree on anything, Washington can agree on that.”

Read his full op-ed here »