Insider Trading in Jewish Ethics

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

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Applying Jewish Law

The Jewish issue of the use of privileged information only becomes acute in those countries in which preventative legislation does not exist or in the case of Israel, if one wanted to conduct a stock exchange on the basis of halakhah. Halakhically, insider trading has to be viewed from a number of perspectives. It is important in all of these to remember that the share being bought or sold represents, after all, ownership of part of the assets of the corporation. All the concepts regarding truth in trading [discussed elsewhere in the book from which this is excerpted--sanctifying God’s name by dealing honestly, going beyond the letter of the law to be fair, and not "placing a stumbling block before the blind"] apply therefore to the share, just as they would if all the assets were being sold.

1. Halakhic sources do not recognize the Roman concept of "let the buyer beware" and place the onus, both legal and moral, on the seller to make sure that the buyer has full information regarding the nature and quality of the goods sold. If this is not done, he is guilty of genevat da'at [direct deception]; the transaction is a mekah ta'ut -- an erroneous sale--and may be canceled. On these grounds it may be argued that the sale or purchase of stock that is not what it appears to be, in view of the information available to all the participants in the market, would be geneivat da'at and a mekah ta'ut.

2. Alternatively, since the price of the stock with public knowledge of the information held by the insider trader would be higher than that of the market price prevailing, the seller could claim protection of ona'ah, the Jewish just-price concept. Since full disclosure is an integral part of the concept of ona'ah, it seems that the use of insider trading, which prevents the market from [gaining] access to [knowledge of] the real value of the stock, would not be permitted in halakhah even if there were no external legislation.

3. An important principle in Jewish law is the notion of custom, determining the rights and the obligations of the parties to market transactions. For example, if it is the local custom for the employer to provide workers with certain benefits, then all workers in that area are automatically entitled to these benefits even if their contracts do not specify them. It is assumed that both parties understood this obligation and accepted it unless there exists proof of the contrary.

In those countries in which legislation prevents the use of insider trading, one who suffered a financial loss from such use [i.e., as a result of insider trading by others] could claim compensation in a rabbinic court on the grounds that he assumed the law or even the customary rules of trading were being observed. Since it became clear that this was not so, he could have redress in the bet din [rabbinic court], over and above any action initiated by the regulatory authorities for breach of the stock-exchange regulations.

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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).