Once upon a time, Doug DeCinces was known as the third baseman who bridged the gap (the words of the Society for American Baseball Research) between Orioles franchise icons. He succeeded Brooks Robinson until he was dealt to the Angels when the Orioles needed to make room for a franchise icon-in-waiting, Cal Ripken, Jr.
As an Angel, DeCinces was above average when healthy. But Angel fans can’t forget that it was he—batting with the bases loaded in the bottom of the ninth, Game Five, 1986 American League Championship Series, after Boston’s Dave Henderson ruined Donnie Moore with a home run when the Angels were a strike away from the pennant—who flied out to right to send the game to extra innings, where the Angels lost.
That erased DeCinces’s three doubles, home run, and three RBIs in the set, after he’d led the team with 26 homers on the regular season. And it was nothing compared to the denouement DeCinces now faces.
He’s been convicted of thirteen federal felonies, in a 2008 merger between two medical-related companies, one of whose owners, James Mazzo of Advanced Medical Optics, was said to have tipped DeCinces off about a coming merger with Abbott Laboratories. Mazzo and DeCinces were neighbours and friends in Laguna Beach, California.
“Abbott ultimately agreed to purchase Advanced Medical Optics at around four times the stock price at which it was trading,” the Orange County Register wrote in the story about DeCinces’s conviction.
“Stock trades at the time of the Abbott deal made DeCinces about $1.3 million, while [David] Parker and another half-dozen he was accused of tipping off made another $1.3 million,” the paper continued.
Attorneys for DeCinces, Mazzo and Parker flatly denied the charges, accusing the government of carrying out a shoddy investigation and relying on speculation and conjecture during the trial.
The defense attorneys told jurors there was no direct evidence Mazzo passed insider information to DeCinces, contending that the former ballplayer was instead buying Advanced Medical Optics stock on the advice of another friend, veteran trader Richard Pickup.
Before you hang your heads and lament that DeCinces committed a terrible crime for which he stands to spend “decades” behind bars, as more than a few news reports say, ponder if you will what “insider trading” actually means.
In 2002, when Martha Stewart was convicted in a case in which she sold her stock in ImClone Systems, a medically-related company, right before its stock dropped upon the news that the company was denied Food and Drug Administration approval for a cancer treatment, Reason‘s Brian Doherty wrote about the “heinous crime” of insider trading that shouldn’t, really, be a crime:
Insider-trading law can get pretty complicated — it’s designed, like most law, to be understood by trained professionals, not the citizens who have to live under it. But basically insider-trading law makes it a crime to make stock transactions, or help others make stock transactions, based on information you have ahead of the general public because of your special position within a company.
Trading based on information you have that everyone else doesn’t — isn’t this the very definition of a functioning stock market? The entire field of stock brokering is based on people gaining knowledge that others don’t have and then using it to profit for themselves or their clients.
If you analyze historic price/earnings ratios and decide that a stock is overvalued and then sell, you took advantage of knowledge that many others don’t have. That doesn’t make you a criminal; it makes you smart.
Doherty could also have written about one friend advising another friend, regardless of the first friend’s position, which is what Mazzo did with DeCinces. The trial jury hung on the issue of whether Mazzo provided DeCinces with “insider information” and the judge declared a mistrial in Mazzo’s case. You tell me what sounds weird about Mazzo getting a mistrial but DeCinces convicted on, essentially, the same information.
“Someone selling a stock in huge quantities because they know something will happen soon that will lower the stock’s value helps spread the knowledge that the price ought to be dropping,” Doherty wrote. “Such actions help insure that stock prices do reflect a more accurate assessment of all the relevant facts. That’s good in the long run for everyone in the stock market . . .
” . . . Spreading information about a company that might affect its stock price should not be considered any more inherently unfair, illegal, or bad for the economy than tipping someone off about a forthcoming job opening,” he continued. “Of course, if such information-spreading violates a contractual fiduciary duty to disclose, or not to disclose, that’s a problem. But that should be settled by tort law between the party and his employer, not through the FBI and a jail cell.”
There doesn’t seem to have been such a contractual duty in Mazzo’s case. In essence, a law misbegotten stands to send his friend DeCinces to prison for profiting on the counsel offered from a friend. And there are times when, if you deny you thus engaged in insider trading, you might face more arduous charges.
Stewart did. She knew nothing more than that ImClone stock dropped under heavy selling at the time she ordered her own stock in the company to be sold. She got bagged because, as another Reason writer, Michael McMenamin, observed in a 2003 issue showing Stewart on the magazine’s cover, “The SEC charged Stewart with insider trading because her broker told her the (family of ImClone Samuel Waksal) were selling, and the Department of Justice indicted her because she denied any culpability for insider trading.”
Think for a moment how absurd it must sound to prosecute someone for denying they committed a crime that shouldn’t even be a crime. If only the SEC were just as good at stopping its own workers from engaging in “insider trading.” The agency actually requires it, in a number of cases it investigates. Would the Justice Department indict any of them for denying it?
A Washington Post writer, Dylan Matthews, wrote in July 2013 that insider trading, so-called, “is actually an active good” that should be anything but illegal.
Markets work best when goods are priced accurately, which in the context of stocks means that firms’ stock prices should accurately reflect their strengths and weaknesses. If a firm is involved in a giant Enron-style scam, the price should be correspondingly lower. But, of course, until the Enron fiasco was unearthed, its stock price decidedly did not reflect that it was cooking the books. That wouldn’t have happened if insider trading had been legal. The many Enron insiders who knew what was going on would have sold their shares, the price would have corrected itself and disaster might have been averted.
Fat lot of good that does DeCinces now. Government illogic declares him a criminal. He was better off flying out to right with the bases loaded to send a should-have-won LCS game to extra innings. The government couldn’t prosecute him for that, no matter how Angels fans felt.