Pinstripe and prison stripe

“Blue horseshoe loves Anacott Steel.” Budding masters of the universe who were barely out of diapers when Charlie Sheen starred in the 1987 film Wall Street still parrot his famous line, a coded tip about an impending takeover.

The film’s appeal in today’s sterile, buttoned-down financial industry is clear: it is a time capsule, only slightly embellished, of a Wall Street that bore some resemblance to the Wild West.

The swaggering character wearing the black hat, Gordon Gekko (played by Michael Douglas), was based on real-life arbitrageur Ivan Boesky, who had been busted a year earlier for insider trading, further implicating other leading financiers.

Experts say insider trading has remained rampant in the ensuing 22 years. Until recently though, prosecutors have nabbed mostly mid-level losers dumb enough to get caught like the Goldman Sachs analyst who had his aunt, a retired Croatian seamstress without a computer, place massive options trades ahead of buy-outs.

The case that garnered the most media attention, Martha Stewart’s avoidance of a $45,673 loss after a tip-off, hardly shook Wall Street to its core.

Suddenly though, a cast of characters straight from central casting has appeared: Raj Rajaratnam, a corpulent Sri Lankan hedge fund billionaire, Zvi Goffer, a trader nicknamed “Octopussy” who allegedly supplied informants with bags of cash and untraceable cell phones, and senior executives from firms such as IBM – all are denying the insider trading charges.

But some are unimpressed by the new cast.

“Boesky was right out of a novel,” says author R. Foster Winans. “These guys today don’t seem interesting to me.”

Mr Winans himself was one of the more interesting people accused of insider trading in the 1980s. The writer of the Wall Street Journal’s influential Heard on the Street column admitted to tipping a trader about upcoming stories for cash but was only convicted of other charges.

Mr Winans says the uptick in prosecutions comes because regulators are more eager and informants more motivated these days.

“People want blood,” he says. “When Bernie Madoff is the poster boy, people suddenly come out of the woodwork.”

High-profile cases are capturing just a tiny fraction of insider trading though, says Mr Winans, which is akin to pulling over a flashy sports car to set an example when nearly everyone is speeding. Is it a wise use of resources?

Extensive investigations uncovered the recently exposed rings even as Ponzi fraudster Mr Madoff’s crimes were brought to the Securities and Exchange Commission on a silver platter and ignored.

Yet Mr Madoff inflicted notional losses more than 1,000 times greater than the gains by the accused traders and he had identifiable victims.

Injured parties from insider trading are diffuse while long-term investors suffer no financial losses.

Meanwhile, inconsistent enforcement blunts the impact of crackdowns.

It has long been known, for example, that corporate executives as a group outperform normal investors yet only egregious offenders such as Qwest’s Joseph Nacchio or Imclone’s Sam Waksal have been convicted.

Politicians’ remarkable investment acumen is equally bothersome. Members of Congress outperformed the market by an astounding 12 per cent a year from 1994 to 1998, according to a study by economist Alan Ziobrowski.

“This is a town that not only trades on but creates valuable information,” says Brian Baird, a congressman who has irked some colleagues by introducing legislation to restrict trading by legislators. “We should be held to at least as high standards as we hold others.”

Some libertarians argue that insider trading should not be a crime at all since it aids price discovery. This is naive as it would invite a return to the days when markets were a plaything of well-connected plutocrats.

There must be sanctions for releasing proprietary information. On the other hand, a witch-hunt could become stifling.

Many hedge funds glean insights from insiders either about their own industries or their customers. Their informed buying and selling sends signals to others who do not have the resources or contacts to conduct similar research. Where is the line between intelligence and an illegal tip?

While Mr Boesky clearly crossed it and prosecutors allege Octopussy did too, others are suddenly afraid of losing what they had considered a legitimate edge by dint of analysis or asking the right questions.

Speculation is a zero-sum game, so even those who have lost money believed they had an advantage at the time they made their investment. “The only reason to invest in the stock market is because you think you know something others don’t,” says Mr Winans.

spencer.jakab@ft.com