The Irish Times – Saturday, May 21, 2011
CLIFFORD COONAN in Beijing
CHINA WAS linked to two very different cases of espionage yesterday as military prosecutors in Taiwan indicted a general on charges of providing military secrets to China, and a US navy sailor pleaded guilty to trying to sell classified documents to someone he believed was a Chinese intelligence officer.
Maj Gen Lo Hsien-che has been in detention since January and the case has transfixed Taiwan, as it is one of the most serious security breaches in modern Taiwanese history. Military prosecutors said they will seek a sentence of life in prison.
China considers breakaway Taiwan a renegade province, an inviolable part of its territory since Chiang Kai-shek’s Kuomintang lost the civil war with chairman Mao Zedong’s Communists and fled across the Strait of Taiwan in 1949. Both Taiwan and China regularly spy on each other.
Mr Lo “hurt the national interest and national security, and is a big blow to the reputation and morale of the army”, the military said in a statement.
Mr Lo wanted to sell the documents to the Chinese because he believed they would pay the most for them.
He is accused of collecting information related to United States arms sales, passing on military intelligence, spying and taking bribes. He leaked information about an integrated command, communications and control network that Taiwan is establishing with US infrastructure. Mr Lo is the highest-ranking member of the military to spy for China in half a century.
US petty officer 2nd class Bryan Minkyu Martin (22) faces a maximum sentence of life in prison after he pleaded guilty to four counts of attempted espionage.
At his court martial, the intelligence specialist who was stationed at Fort Bragg in North Carolina at the time, preparing for a deployment to Afghanistan, said he accepted $11,500 (€8,100) from an undercover FBI agent known to him only as “Mr Lee” in exchange for information, documents, photographs and images that were classified as secret or top secret.
The documents involved naval operations and intelligence assessments related to military operations in Afghanistan and Iraq. Authorities say the documents were delivered to the agent in November and December.
Mr Martin said he had spoken to the undercover agent by telephone, but had never seen him until their first meeting in a hotel lobby, saying he identified the mysterious “Mr Lee” because he was reading a Chinese newspaper.
In this unsealed document federal prosecutors said in 2006, Headley traveled to the FATA area with Pasha. “During the trip, Headley and Pasha were stopped and questioned by Pakistani authorities. Headley was questioned by an individual who identified himself as Major Ali. He told Ali about his training with LeT, Ali then asked Headley for his contact information.”
“Several days later, Headley was contacted by an individual who identified himself as Major Iqbal,” said the unsealed document.
“Over the next several years, as described in more detail below, Headley met with Major Iqbal and his associates many times. During these meetings, Headley was trained in various topics, including spotting and assessing people, recognising Indian military insignia and movements, dead drops and pick up points, and clandestine photography,” the unsealed documents said.
Image: NSG commandoes para-dive atop Nariman House in Mumbai during 26/11 terror strikes
May 17, 2011: Russia is holding a treason trial for Alexander Poteyev, one of its espionage officials. Poteyev is believed to be in the United States at the moment, as he disappeared from his SVR (Russian overseas intelligence) job late last year, just before he was found to be the one who told the United States about ten Russian spies operating in America. Poteyev is being tried for betraying the SVR, and is said to have done it for money (as much as $30,000). Actually, the United States will end up spending much more than that on Poteyev, who is apparently in the CIA’s own “witness protection program” for foreign spies who have fled to the United States. These men and women are given new identities, eased into life in some part of the United States, helped to find a job, and provided with any other assistance needed. This can be expensive, but it provides a major incentive for foreigners to spy for the United States. Cases like Poteyev’s demonstrate that the U.S. will get you out, if your espionage work is discovered, and take care of you and your family after that. The Russians believe that Poteyev was recruited by Sergei Tretyakov who also spied for the United States, and left Russia in 2000.
Late last year, Russian officials admitted that the ten Russian spies arrested in the United States last June were betrayed by an unidentified Russian espionage official in the SVR. The U.S. claimed they had been watching the ten sleepers for several years, which may indicate that Poteyev had revealed a lot more if he was on the American payroll all that time. Poteyev was in charge of the SVR sleeper cell operation. The Russians use military ranks in the police and intelligence services, and colonels are middle-management. There was political pressure on the head of SVR to resign, indicating that the damage was greater than anyone wants to admit. But the SVR honcho still has is job, indicating any number of things.
Last July, after Poteyev was safely in the U.S., American and Russian officials conducted a spy swap in Vienna, Austria. This was the largest such swap since the Cold War. Russia pardoned and freed four Russians, including two former intel officers who had revealed the identities of numerous Russian agents in the West. These two are believed to have more information and insights of value. The U.S. released the ten Russians who had, for the last decade, been trying to pass themselves off as Americans, and operate as “illegals” (spies without diplomatic cover and protection). As part of the deal, the ten Russians had to admit their guilt.
The FBI said that they caught on to this bunch early on, and have been watching them for years, trying to obtain more information on how Russian espionage operate in the United States. The FBI finally arrested these ten when it became apparent that the Russians had detected that they were being watched. Or because Poteyev believed his SVR bosses were on to him, or because the colonel believed it was time to retire to that secret condo in the United States. Russian government officials are indicating that SVR assassins have been sent to kill Poteyev. Russian intel officials are also insinuating that they had something to do with Sergei Tretyakov’s death a year ago (he choked on a piece of meat while in Florida).
The FBI said they were puzzled by how little useful information the ten Russians were able to obtain. As far as the FBI could tell, these ten spies never obtained anything important. But the Russians were eager to get them back, and avoid a trial in the United States. Russian state media said very little about the spy swap. The spy exchange was organized in less than a month, with the U.S. eager to get four valuable people back, and Russia equally intent on getting its ten embarrassing spies out of the news.
It’s unclear why Russia undertook such an inept operation, although Poteyev should know. If he did, that information has not gone public. There are indications that many other Russian espionage operations are similarly sloppy (and will be revealed when arrests are made). This is in sharp contrast to the Cold War when, after it was over, it was revealed that the Russians were much better at the spy game than their Western opponents. But those super spies appear to have moved on to more lucrative work in the civilian sector, or the government. In any event, the past masters are no longer running the show. It’s amateur hour now, and the Russians would rather not talk about it.
(AP)
MINNEAPOLIS – The mother of one of two American hikers held in Iran for nearly two years said Monday she’ll be up before dawn on Wednesday waiting for any news as her son and his friend go on trial on allegations of spying for the U.S.
Shane Bauer and Josh Fattal are due to go on trial in Tehran on Wednesday. Their families say the men were hiking in northern Iraq when they were arrested by Iranian soldiers on July 31, 2009. Bauer’s fiancDee, Sarah Shourd, was arrested with them but was released on bail in September and is back in the United States.
Iran has charged them with espionage, but U.S. authorities have repeatedly called for their release and denied that they were involved in spying.
“They’re absolutely not guilty of anything,” said Bauer’s mother, Cindy Hickey.
Bauer and Fattal pleaded not guilty in a first trial session in February, and Shourd pleaded not guilty in absentia. The three have said they did not realize they had crossed into Iran.
Hickey said the families have received no new information on how the 28-year-olds are doing since they received a Christmas card with a one-paragraph message from Bauer in December. Neither their Iranian lawyer nor Swiss diplomats who represent U.S. interests in Iran have been allowed to see them in prison recently, she said.
“It’s time to end the political games they’re playing with Shane and Josh,” Hickey said.
Their last diplomatic visit in prison was last fall not long after Shourd’s release. Hickey said diplomats have made daily requests to see Bauer and Fattal since then to no avail, while their Iranian lawyer, Masoud Shafii, keeps requesting meetings with them, too. She called Shafii “courageous” and expressed confidence he will fight hard for their freedom.
Shourd was freed on $500,000 bail for health reasons but has said she’s suffering from post-traumatic stress disorder because of her 14 months in solitary confinement and will not return to Iran for trial. The three became friends as students at the University of California at Berkeley and Bauer and Shourd became engaged in prison.
“She’s the one who can see the prison, smell the prison, feel the prison,” Hickey said.
Hickey said Shourd’s trauma makes the families especially worry about the well-being of Bauer, who grew up in Onamia, Minn., and Fattal, who grew up in suburban Philadelphia, because they’ve been held even longer. She said they don’t even know if they’re even being held in the same prison as before.
While the mothers of the three hikers were allowed to visit them last May, Hickey said they decided against going back for the trial.
“We really want them home. We don’t want a visit. We want this to end,” she said.
A major piece of financial news last week was billionaire Raj Rajaratnam’s conviction on 14 counts of securities fraud and conspiracy. Rajaratnam, founder of the hedge fund Galleon Group, was worth an estimated $1.8 billion in 2009. His conviction has pleased those who want the feds to crack down on “insider trading” and show the fat cats on Wall Street that they aren’t above the rules.
Although the public generally loves the fall of a ruthless and greedy financial titan — this, of course, is what made Oliver Stone’s original Wall Street such a hit — economists have argued for decades that the practice of “insider trading” can actually be beneficial. In practice, the government can use the amorphous “crime” to go after any successful trader it wants. In a free society, there would be no such thing as laws against so-called insider trading.
The Facts of the Case
To argue that “insider trading” is a bogus offense, and that laws against it only give the government the power to interfere with economically beneficial activity, is not to suggest that Rajaratnam was an innocent babe in the woods. Indeed, some of the episodes being used to shock the general public would probably also be criminal in a genuinely free market.
For example, in 2008, Rajat Gupta, a board member at Goldman Sachs, apparently told Rajaratnam that Warren Buffet was about to invest $5 billion in Goldman. Rajaratnam bought millions of dollars worth of the stock before the market closed, and then he profited handsomely when the news broke and the stock jumped the next day. Later in the year, after a board meeting, Gupta apparently told Rajaratnam that Goldman would report earnings well below expectations. Rajaratnam dumped the stock, getting out before the earnings news became public and pushed down Goldman’s share price.
Now this type of activity — let alone the breaking and entering that Charlie Sheen’s character performed for Gordon Gekko in the movie Wall Street — would probably be criminal even in a purely laissez-faire world. Specifically, when the shareholders of a corporation appointed board members, they would presumably have standard confidentiality clauses in the contracts prohibiting this type of behavior. The same thing would hold for a law firm; it’s not good business if clients know that their lawyers can phone tips to their buddies on Wall Street while working on a sensitive case, and so a major law firm would insist that its employees sign contracts prohibiting such things.
We Want People Trading on Unique Knowledge
To understand the social benefits of insider trading, we have to first realize that stock prices mean something. They reflect real facts about the world, such as the assets and liabilities of a particular corporation and how effectively its current management is using resources to satisfy customers.
If a computer glitch suddenly swapped the prices randomly on all corporate stocks, the result would be disastrous, and it would affect “Main Street” as much as Wall Street. For an exaggerated example, if the share price of Microsoft fell from its current level of around $25 down to $1, a “corporate raider” might find it very profitable to borrow money, buy a controlling share in the company, and sell off all company assets to the highest bidders. The high price of $25 per share fends off such efforts to break up the successful company. The assets currently owned by the Microsoft Corporation are best deployed by Microsoft, rather than being integrated into different organizations around the world.
In general, speculators perform a useful social service when they are profitable. By buying low and selling high (or by short-selling high and covering low), stock speculators actually speed up price adjustments and make stock prices less volatile than they otherwise would be.
In this context, we can see the absurdity of the general view of “insider trading.” There is a whole literature on the economic analysis of the subject, and economist Alex Padilla’s 2003 dissertation defended the practice from a specifically Austrian angle. In a nutshell, insider trading is beneficial because it moves market prices closer to where they ought to be. Those profiting from “inside knowledge” actually share that knowledge with the rest of the world through their buying and selling.
Insider Trading: Who Is the Victim?
Above, we acknowledged the fact that obtaining information in illegal ways obviously had actual victims. But the mystique behind “insider trading” suggests that somehow if a person financially profits from special knowledge, that he or she is bilking the general public.
In general, this analysis doesn’t hold up, as Murray Rothbard has pointed out. For example, suppose a Wall Street trader is at the bar and overhears an executive on his cell phone discussing some good news for the Acme Corporation. The trader then rushes to buy 1,000 shares of the stock, which is currently selling for $10. When the news becomes public, the stock jumps to $15, and the trader closes out his position for a handsome gain of $5,000. Who is the supposed victim in all of this? From whom was this $5,000 profit taken?
The $5,000 wasn’t taken from the people who sold the shares to the trader. They were trying to sell anyway, and would have sold it to somebody else had the trader not entered the market. In fact, by snatching the 1,000 shares at the current price of $10, the trader’s demand may have held the price higher than it otherwise would have been. In other words, had the trader not entered the market, the people trying to sell 1,000 shares may have had to settle for, say, $9.75 per share rather than the $10.00 they actually received. So we see that the people dumping their stock either were not hurt or actually benefited from the action of the trader.
The people who held the stock beforehand, and retained it throughout the trader’s speculative activities, were not directly affected either. Once the news became public, the stock went to its new level. Their wealth wasn’t influenced by the inside trader.
In fact, the only people who demonstrably lost out were those who were trying to buy shares of the stock just when the trader did so, before the news became public. By entering the market and acquiring 1,000 shares (temporarily), the trader either reduced the number of Acme shares other potential buyers acquired, or he forced them to pay a higher price than they otherwise would have. When the news then hit and the share prices jumped, this meant that this select group (who also acquired new shares of Acme in the short interval in question) made less total profit than they otherwise would have.
Once we cast things in this light, it’s not so obvious that our trader has committed a horrible deed. He didn’t bilk “the public”; he merely used his superior knowledge to wrest some of the potential gains that otherwise would have accrued as dumb luck to a small group of other investors.
To repeat, stock-market speculation is not a zero-sum activity. Even though we can look at any particular transaction and tally up the “winners” and “losers,” the presence of speculators enhances the overall functioning of the stock market. For example, the market for any particular security is more liquid when there are rich speculators who will quickly pounce on a perceived mistake in pricing. If an institutional investor (such as a firm managing pensions) suddenly has a cash crunch and needs to dump its holdings, speculators will swoop in and put a floor under the fire-sale price. This is good for the beleaguered pension fund, and for the stock market in general.
Laws against Insider Trading Give the Government Arbitrary Power
Crackdowns on insider trading are harmful because they chill the cultivation of superior knowledge and speculative correction of market prices. Beyond this loss of general economic efficiency, insider-trading laws are insidious because of the arbitrary power they give to government officials.
In the specific case of Rajaratnam, prosecutors for the first time relied extensively on wiretaps to prove their allegations of insider trading. Legal experts predict that the government will expand its eavesdropping on the financial community in light of this courtroom “success.”
More generally, Murray Rothbard argued that every firm on Wall Street is technically engaging in “insider trading.” If they literally relied only on information that was available to the public, how could they make any money? Thus, the government has the statutory authority to harass or even shut down anybody in the financial sector who doesn’t play ball. In Making Economic Sense, Rothbard declared,
There is another critical aspect to the current Reign of Terror over Wall Street. Freedom of speech, and the right of privacy, particularly cherished possessions of man, have disappeared. Wall Streeters are literally afraid to talk to one another, because muttering over a martini that “Hey, Jim, it looks like XYZ will merge,” or even, “Arbus is coming out soon with a hot new product,” might well mean indictment, heavy fines, and jail terms. And where are the intrepid guardians of the First Amendment in all this?
But of course, it is literally impossible to stamp out insider trading, or Wall Streeters talking to another, just as even the Soviet Union, with all its awesome powers of enforcement, has been unable to stamp out dissent or “black (free) market” currency trading. But what the outlawry of insider trading (or of “currency smuggling,” the latest investment banker offense to be indicted) does is to give the federal government a hunting license to go after any person or firm who may be out of power in the financial-political struggles among our power elites. (Just as outlawing food would give a hunting license to get after people out of power who are caught eating.) It is surely no accident that the indictments have been centered in groups of investment bankers who are now out of power.
To drive home just how arbitrary and non-criminal “insider trading” really is, consider this scenario: Suppose someone had been planning on buying shares of Acme, but just before doing so, he caught wind of a bad earnings report. In light of the new information (which was not yet public), the person refrained from his intended purchase. Should this person be prosecuted for insider non-trading?
Conclusion
Raj Rajaratnam and (even more likely) some of his collaborators may indeed have violated genuine contractual obligations and fiduciary duties to their clients. To the extent that is true, some of their activity might have been illegal even in a truly free-market society.
In general, however, the practice of “insider trading” would not be a criminal offense, because it is impossible to define the concept in a way that wouldn’t bar legitimate speculative research and trading. In practice, these laws give the government a very blunt club with which to knock down any profitable firm it wishes.
Robert Murphy is an adjunct scholar of the Mises Institute,
where he teaches at the Mises Academy. He runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, the Human Action Study Guide, The Politically Incorrect Guide to the Great Depression and the New Deal, and his newest book, Lessons for the Young Economist.
Send him mail.
See Robert P. Murphy’s article archives.
Comment on the blog.
You can subscribe to future articles by Robert P. Murphy via this RSS feed.
