It is alleged by the SEC that golfer Phil Mickelson is guilty of insider trading.  Mickelson profited $931,000 from a stock trade after supposedly receiving a tip from a sports gambler to whom Mickelson allegedly owed money.

Mickelson has avoided criminal charges and has agreed to pay back all of the gains, plus interest.

First, it is important to remember that just because he has agreed to pay back the money he made from the stock transactions, it does not mean he is guilty of anything.  We hear about plea deals all of the time, but it doesn’t mean the person is guilty.  The lawyers just know the risk of going to trial, even if their client is completely innocent.

In the case of Mickelson, he makes millions of dollars from his golf winnings.  He makes tens of millions more per year from his endorsement deals.  He would rather pay approximately one million dollars to the federal government rather than risk going to jail.  Even if his lawyer thought he had a 95% chance of escaping jail time, it would make sense to pay the money rather than risk the 5% chance of going to jail.

Second, it is important to distinguish between what is written in law (or federal regulations) versus what the law should actually be.  Just because there are insider trading laws, it does not mean that it should actually be illegal or even that it is immoral.

This is a point that was made by some libertarians when Martha Stewart went to jail.  She actually ended up going to jail for supposedly lying or obstructing justice.  But it all originated over allegations of insider trading.

Of course, politicians get away with insider trading all of the time.  They are writing the laws.  And we can be sure that bankers are getting a major advantage due to their inside knowledge.  And by the way, does anyone remember that Hillary Clinton made $100,000 trading cattle futures?  Is Hillary Clinton that much of an investment pro?

Insider trading should not be a crime.  As it stands now in the legal system, it is a victimless crime.  There is no victim.  Mickelson will pay the government about $1 million.  It isn’t going to anyone who was actually hurt by his actions.

When somebody acts on inside information, it is actually bringing information to the marketplace.  It means that stocks and other assets are more accurately priced given reality.  You could say that it hurt people who were selling the stock, but that isn’t even true.  They were going to sell anyway.  If anything, the insider trader is giving them a better price than what they would have sold for anyway.

It is also interesting to note that inside information doesn’t always work.  There are many people who act on tips where it turns out to be untrue.  Or, even if it was true, maybe the market didn’t react the way it was expected.  Someone could tell me what the Fed will do at its next meeting, but even with that information, I probably couldn’t tell you with any certainty how stocks would actually react.

The whole notion of insider trading is rather ridiculous because we all have unique knowledge.  Otherwise, what would be the point of reading about any companies or any economic news?

I may have had a bad experience shopping in a particular store.  From that, I may decide not to ever buy that company’s stock because I saw first-hand how it treats its customers.  Maybe this was just a rare experience for this store.  Maybe it is widespread.  But someone else may not have had that same experience and bought the company’s stock.  I didn’t buy the stock because I had “inside information”.

In terms of the financial industry, it tends to be self-regulating.  It is actually the presence of the SEC and other agencies that provide some moral hazard.  People think they are safer than they actually are because of these agencies.  Just think about the failure of the SEC in regards to the Bernie Madoff scandal.

Most companies don’t want a reputation of having their employees trading stocks based on inside information.  If I knew that someone was trading a stock before making trades for their clients for that same stock, then I would surely not do business with that company.  It is not because of government regulation that most companies run a tight ship in keeping their employees from trading individual stocks around the same time as making trades for clients.

Since there is no victim involved, insider trading should not be a crime.  I don’t believe it is immoral in many cases either, but that is for the marketplace to decide.

With regards to Mickelson, I will say that he was rather stupid for doing what he did.  He may have a gambling problem, but I really don’t know.  Still, the guy earns tens of millions of dollars per year.  He has absolutely no need to buy any individual stocks.  At most, he should buy an index fund as part of a well-balanced portfolio that would also include other asset classes.

But stupidity is not a crime.  Otherwise, most of us would be criminals.

I hope that Mickelson learns his lesson and stays away from trading individual stocks.  He received good advice from his lawyer in agreeing to pay back the money rather than face a criminal trial.

More so, I hope the American people stop listening to the media and start thinking for themselves.  They should demand an end to these victimless crimes and this injustice.