There’s that stretch over the Christmas holidays when the days all blur together. You can't tell if it's December 27th or 28th. I passed the time with movies, starting with the Christmas classics (I was forced to sit through Muppet's Christmas Carol) before moving on to Oliver Stone's Wall Street. The film stars Michael Douglas, as the ruthless tycoon Gordon Gekko, and Charlie Sheen as Bud Fox, Gekko’s eager apprentice.
There’s that scene where Gekko needs share tips. Bud Fox produces some run-of-the-mill analysis. Gekko shoots back: ‘Come on, pal. Tell me something I don’t know… It’s my birthday!’ A bead of sweat drips down Bud's forehead as he searches the darker recesses of his mind, knowing that this is the point he should not cross.
‘Bluestar…’ Bud forces a response. ‘Bluestar Airlines! They just got a favourable ruling on a law suit. The decision would clear the way for new planes and route contracts.’
‘Well how do you know about it?’
Bud gulps. There is another stretch of silence as more sweat drips down his forehead. He can only muster, ‘I just know…’
Spoiler alert! Towards the end of the movie Bud is arrested. The information Bud passed on to Gekko was non-public, material information — ie. confidential information that would significantly move the share price. Bud and Gekko had engaged in insider trading, violating laws that ban the use of confidential information to gain an unfair advantage. Unfortunately, the movie is not pure fiction. The characters are based on real financiers. The events are based on real scandals.
Oliver Stone’s film was a piece of social commentary, suggesting that investing can be an unfair, corrupt game because some investors have significant informational advantages over others. Regulators work hard to ensure that price sensitive information about stocks is fairly disclosed. Nevertheless, there is an 'inner circle' with intimate knowledge of a company’s future prospects. Do investors need this intimate knowledge? Not necessarily. We don’t need to be part of an ‘inner circle’…
What if Gordon Gekko had to play fair?
Of course, white collar crimes do take place, but the game of investing is perhaps more fair than Oliver Stone's movie made it out to be. It’s true that information asymmetries will always exist. For instance, a CFO will have advanced knowledge of a company's financial performance. It is also legal for company directors to buy shares in…
