The Securities and Exchange Commission appears across five episodes of The Bob Zadek Show, in treatments that range from the origins of the insider-trading prohibition to the agency’s administrative tribunals and its involvement with ESG criteria. Guests disagree about whether the agency’s core functions are legitimate.
Origins of the insider-trading prohibition
Don Boudreaux told Bob Zadek that insider trading was not illegal in the United States until about 1961, and that Congress never made it illegal. He traced the prohibition to a memorandum by William Cary, a Columbia University professor of law whom John Kennedy appointed to head the Securities and Exchange Commission, and whose view was that insider trading is bad. During the 1930s debates over the Securities Act and Securities Exchange Act, Boudreaux said, there were proposals to make insider trading illegal, but even that Congress did not do it; instead the Securities Exchange Act of 1934 contained Clause 10b, directed against securities fraud. Boudreaux described Cary’s theory as using that broad prohibition of securities fraud and getting it interpreted as a prohibition on insider trading. Congress, he said, is not the agency that came up with the prohibition on insider trading Legalize Insider Trading (2009).
Zadek characterized this as the SEC creating a new product, and Boudreaux agreed it was a bureaucrat at the SEC creating a new product, adding that Congress could have overturned it but did not, and that the courts have pretty much accepted it. Boudreaux noted that within his own lifetime insider trading had been perfectly legal in the United States Legalize Insider Trading (2009).
Insider non-trading and enforcement
Boudreaux argued that under the logic of the Securities and Exchange Commission, insider non-trading should be illegal, but cannot be prosecuted because the government cannot prove intent. He described a case in which an employee planning to buy 100 more shares of his company’s stock discovers inside information that the company is in worse financial shape than most people believe, cancels the purchase, and is thereby saved from a bad investment. Only active trades can even conceivably be prosecuted, he said, though inside information affects decisions not to trade no less than decisions to trade. Zadek observed that the government cannot prove you intended to do something and did not, and Boudreaux replied that you cannot put electrodes in people’s heads. Boudreaux framed this as a fundamental unfairness of the law itself: it is unfair to the person who actively trades on inside information and is prosecuted, because the person who used inside information not to trade cannot be punished Legalize Insider Trading (2009).
On politicized enforcement, Boudreaux said it is ludicrous to believe such prohibitions will not be used for political ends, and that unless an offense is widely agreed to be bad and harmful to society it has no business being prohibited by a bureaucracy, because bureaucracies play to the tune called by their political masters. Zadek raised Martha Stewart as an example, saying she ended up going to jail not because of insider trading, which was too hard to prove, but for lying to a federal investigator, and calling it a perfect example of using a vague statute to headline grab. Zadek described the SEC as having invented a new product for itself to work on and become the enforcer of a bureaucratically created body of quasi-criminal law, and said this causes stocks to not have their real value and produces phony stock prices Legalize Insider Trading (2009).
The administrative state and due process
Philip Hamburger, founder of the New Civil Liberties Alliance, told Zadek that one type of agency power his organization litigates is that of the Securities and Exchange Commission, which goes after people who do insider trading. Hamburger said that while he thinks people should not engage in insider trading and that he is not against regulating it, the SEC does so not just by an act of Congress but with its own rules that it invents and that are not law, prosecuting people in its own non-courts run by so-called administrative law judges who are not really judges, who do not give you a jury, who do not give you due process of law, and who are quite biased. He said the New Civil Liberties Alliance has litigated against these tribunals and that the SEC has now largely given up bringing its cases in front of the administrative law judges, forcing it into district court where it should be The New Civil Liberties Movement (2021).
Hamburger added that in district court the SEC wanted to use the Justice Department to go after a party for violating mere guidance, which he described as not even an interpretation but just the agency’s view of the law, and not even a rule. He said the judge in Spartan Securities v. SEC instructed the jury that guidance is not binding as law, and that the jury acquitted his client on 13 out of 14 charges, the fourteenth being small potatoes. Hamburger said the SEC cannot win in district court, and placed this in a larger strategy to take down administrative tribunals he called utterly unconstitutional The New Civil Liberties Movement (2021).
A defense of the agency’s creation
Bradford R. Kane, in a discussion of balance in government, cited the creation of the Securities and Exchange Commission as a response to predatory practices that existed prior to it, including monopoly and insider trading. Kane said libertarians do not like the idea of corporate CEOs with inside information selling stock and leaving normal shareholders facing huge losses while the CEO goes off and lives in the Bahamas with a billion dollars, and called this an example of why laws are necessary. He extended the argument to automobile safety and food inspection, saying that under an unfettered libertarian approach one relies on the good morals of food processing and distribution companies, and that an outbreak of toxins can kill people when some companies are scrupulous and others are more interested in driving up profits and did not bother to clean their equipment. Kane’s conclusion was that one does not want to be overly prescriptive but does want standards, and that laws are necessary; it is a question of balance Populism 201: Advanced Topics in American Democracy (2020).
ESG and the agency’s mandate
In an episode with former two-term SEC Commissioner Paul Atkins, Zadek framed the topic as financial regulation forcing the politics of ESG into financial markets, resulting in lower yields and a misallocation of capital, and asked Atkins to explain the role and statutory historical purpose of the SEC so the discussion could be understood in context The Political Pollution of Capital Markets (2022). The excerpt ends as Atkins begins his answer, so the excerpts do not state what he said the agency’s statutory purpose is.
Across episodes
The excerpts show no single developing argument but a recurring disagreement. In 2009 Don Boudreaux argued that the SEC’s insider-trading prohibition was a bureaucratic invention and that none of it should be illegal; in 2020 Bradford R. Kane, while acknowledging that libertarians dislike CEOs trading on inside information, treated the SEC’s creation as a necessary response to predatory practices and defended standards as a question of balance. In 2021 Philip Hamburger, who said he is not against regulating insider trading, shifted the attack from the substance of the prohibition to the SEC’s administrative tribunals and its use of non-binding guidance, reporting litigation success in Spartan Securities v. SEC. The 2022 episode with Paul Atkins turns to ESG and the agency’s mandate, but the excerpt breaks off before Atkins states the statutory purpose.
What the sources do not cover
The excerpts do not state the SEC’s founding date, the statute that created it, or the text or holding of any case beyond the jury instruction and acquittal Hamburger describes. They do not give the outcome of the Martha Stewart matter beyond Zadek’s statement that she went to jail for lying to a federal investigator, nor the disposition of the insider-trading prohibition in Congress after the 1960s. Atkins’s account of the agency’s statutory purpose is not present, because the excerpt ends as he begins to speak. The excerpts also do not describe the SEC’s current leadership, budget, or rulemaking beyond the ESG framing Zadek supplies.