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Summer 1988




Harvard University




The quickest way to become famous is often to become infamous, as arbitrageur Ivan Boesky has recently discovered. Prior to November 1986, Mr. Boesky was well-known within the financial community, but largely unknown outside it. That changed dramatically following revelations that he and Dennis Levine, a merger specialist with the investment banking firm of Drexel Burnham Lambert, Inc., had made tens of millions of dollars in the stock market by using Mr. Levine's advance knowledge of impending takeovers by Drexel clients. Today, after disgorging $50 million in profits, paying $50 million in penalties, and receiving a jail sentence,' Mr. Boesky is a living symbol of one of the least admired, and least understood, financial practices in America: insider stock trading. Legal and moral condemnation is heaped upon insider trading with uncommon hostility,2 and often with little discrimination: Legal prosecution and social opprobrium await both the corporate manager caught trading on information about his own firm and the investment banker caught trading on information regarding his clients. In recent years, the Securities and Exchange Commission has cast an increasingly broad net for persons trading on nonpublic information,3 and there are no signs that its enthusiasm or moral fervor are dampening.4 While other forms of business conduct, such as price fixing, are also subject to both criminal prosecution and widespread public disapproval, none seem to raise moral hackles in quite the same way as insider stock trading. A systematic treatment of the moral issues that arise, or have been thought to arise, from insider trading may therefore prove useful in understanding and evaluating this phenomenon.

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