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Insider trading is “alive and well,” according to Wharton accounting professor Daniel Taylor.
“A lot of people have been taught or learned that somehow all of this was stamped out in the ‘80s and the ‘90s. But [data] suggests that more than 50% of surveyed Americans feel the stock market is rigged and these sorts of things are going on in broad daylight on Wall Street,” he said during an interview with Wharton Business Daily on SiriusXM. (Listen to the podcast above.)
Taylor was featured in a recent Bloomberg article about the pervasiveness of insider trading, which is defined as the buying or selling of public stock by someone who has material, nonpublic information about the company. Despite its glorification in Hollywood films – like Wall Street’s Gordon Gekko devilishly declaring that “greed is good” — insider trading has led to the widespread perception of the stock market as a place where elitists line their pockets with impunity.
When it comes to high finance, perception is reality. Taylor referred to headlines about alleged insider trading and conflicts of interest by Federal Reserve officials, federal judges, and federal politicians accused of profiting off the coronavirus pandemic by dumping stocks just before the first wave hit.
“To date, there hasn’t really been any prosecution of those individuals. That could be because it’s really hard to make a case. Maybe they did something unethical but not illegal,” he told Wharton Business Daily.
Taylor, who is director of the Wharton Forensic Analytics Lab, said it’s important for the public to understand that there is no explicit law against insider trading, making it difficult to prove and prosecute. Instead, prosecutors often use anti-fraud and other statues to charge suspects in connection with insider trading. For example, Martha Stewart spent five months in prison after being convicted in 2004 of conspiracy, obstruction of justice, and lying to federal investigators in the ImClone stock scandal. A securities fraud charge against her was dropped because of a lack of evidence.
Taylor said legislative changes are needed because case law is a “particularly weak” pathway for the prosecution of wrongdoers. He exhorted politicians to appreciate that their constituents feel the stock market is rigged and white-collar crimes go unpunished.
Americans’ pessimistic view of the financial system didn’t come out of nowhere, he noted. They are watching and paying attention. “The fact that there are no consequences for these trades by Fed officials, federal justices, or Congress — which are at best gross ethical lapses — just feeds that narrative,” he said. Political candidates that hone their message as fighting against a “rigged system” have seen incredible success, he added.
“One would hope that once the scope of the issue is recognized and once the connection to the politics has been made, you would see politicians on both sides of the aisle calling for the laws to go on the books, calling for there to be reforms and more robust enforcement,” Taylor said.
What’s Changed Since the 1980s
Taylor was highlighted in the Bloomberg article because of his expertise on corporate governance and accounting fraud. He’s authored numerous papers and his research is cited across the industry. He’s been studying insider trading for years and acknowledge that it’s nothing new; however, big data has been a game-changer.
The digital age has ushered in reams of information about what stock traders are doing on a daily basis, making it easier for researchers and market-watchers to spot abnormal patterns in trading activity, like a person who keeps “getting lucky” and making a lot of money.
“[In the 1980s] you didn’t have the ability for external, nongovernment players to actually surveil the market. Now we do.” –Daniel Taylor
“We didn’t have that in the 1980s,” Taylor said. “You didn’t have the ability for external, nongovernment players to actually surveil the market. Now we do.”
Regulations now require executives who trade their own stock to disclose the activity within two business days. “As a consequence, there’s volumes of data, terabytes of data on the trades, the timing of the trades, and the prices they’re able to execute at.”
All that data not only helps researchers and regulators find fraud, it also shines a light on the scale of abuse. Bloomberg cited a TipRanks analysis that found purchases made by U.S. executives outperformed the S&P 500 by an average of five percentage points between 2015 and 2020.
“It’s taken time and journalists and researchers to bring it to the public’s attention,” Taylor said about insider trading. “And the hope is that by bringing it to people’s attention, those in power will take meaningful action to curtail it.”