Insider Trading in Jewish Ethics

Insider trading--using privileged knowledge for profit in the stock market--violates many Jewish principles.

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Some acts are clearly forms of theft, but what about the borderline cases? An expert applies Jewish law on theft to some workplace scenarios and shows its theological underpinnings. "Insider trading" refers to the practice of taking unfair advantage of knowledge about a company's inner workings not available to the general public by trading in the company's shares or in bonds it has issued. Reprinted with permission from The Challenge of Wealth: A Jewish Perspective on Earning and Spending Money (Jason Aronson).

What is commonly known as insider trading is in effect the use of information regarding the present or future prospects of activities of a corporation. Business information falls, broadly speaking, into two groups. One is perfectly legitimate, but legislation prevents the use of the other. There is no argument, legal or moral, against entrepreneurs gathering information regarding economic trends in the market or in regard to a specific corporation and then operating in accordance with such information. All business activity requires the collection of data, and all decisions will be made in the light of such data.

insider tradingThe problem arises only when such information is gathered from sources only available to some, either on the basis of their positions or as a result of their special relationships with the source of the information. This insider information places all the other participants in the market at a disadvantage, which they cannot overcome by their own efficiency or efforts.

Regulating Insider Trading

In order to provide protection against such unfair practices, some countries have legislated against the use of insider trading. Others, in view of the difficulties involved in distinguishing between insider information and legitimate forms of information, have ignored the issue. Implied in such a policy is the assumption that anyone engaged in the stock market should be able to discern the use of such information and protect himself against its misuse. "If you cannot stand the heat, keep out of the kitchen"or "let the buyer beware" would seem to be the basis for this assumption.

In those countries where legislation exists forbidding the use of insider trading, its use becomes halakhically [in the eyes of Jewish law] illegal. This flows from the rule of dina d’malkhuta dina -- literally, "the law of the land is the law"--through which halakhic sanction is given to legislation in economic and financial matters, provided it does not contradict Jewish law. Such legislation becomes binding and can be used in litigation before a rabbinic court. The injured party can claim that he assumed that the law of the land was observed, and therefore is entitled to restitution for any loss suffered as a result of an act made illegal by the secular or non-Jewish legislator.

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Dr. Meir Tamari

Dr. Meir Tamari, former chief economist in the office of the Governor of the Bank of Israel, is director of the Center for Business Ethics at the Jerusalem College of Technology. His books include Al Chet: Sins in the Marketplace (Jason Aronson) and Jewish Values in Our Open Society: A Weekly Torah Commentary (Jason Aronson).