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The Moral Content of “White Collar” Crime: Insider Trading, “Cheating” & The Tsutsumi Case [ Volume 1 – 2011 ]

6 December 2011

1. 000

Insider trading – the trading of publicly listed securities based on material, non-public information – has long been the source of controversy and debate amongst Anglo-American criminal law scholars. On the one hand, are those who regard the criminal sanction as being necessary and appropriate on the grounds that such transactions are (i) economically harmful (mainly because they undermine investor confidence in the integrity of the securities market and hence have a “chilling effect” on potential investors) and/or (ii) morally wrongful (in that they are unfair and violate a duty owed either to the shareholder from whom the stock is purchased or the source of the confidential information). Although there are alternatives to the criminal law, such as the imposition of some form of administrative sanction, a preference for criminal liability remains the dominant view of those jurisdictions in which the major capital markets are located.

On the other hand, however, are those legal scholars such as Henry Manne who subscribe to Nobel Prize winning economist Milton Friedman’s view that “what is needed is more insider trading and not less”, and have advocated the repeal of this kind of securities fraud statute.[1] Advocates of decriminalization suggest that insider trading is economically desirable because (i) such transactions make securities markets more efficient by causing market prices to reflect more complete and accurate information about the real value of securities, and (ii) that the benefits of such transactions are a legitimate form of executive compensation that enhances corporate decision-making and performance. Given the positive economic consequences of such transactions, proponents of insider trading regard it is as somewhat churlish to think of it as morally wrong.

This paper does not intend to offer an in-depth examination of this well-trodden debate. Rather, it will instead focus on critically evaluating a recent and original contribution to the discussion, namely Stuart Green’s book Lying, Cheating & Stealing: A Moral Theory of White-Collar Crime (Oxford University Press, 2006, hereinafter LCS). Specifically, this paper will address Green’s argument that insider trading is morally wrong and that this moral wrongfulness is best conceptualized as a form of cheating. From the outset, it is worth emphasizing that the scope of LCS is much broader than insider trading. The chapter on insider trading is brief and offered as an illustration of a more general argument rather than a fully developed contribution to discussion on securities fraud. The main focus of LCS is rather to investigate the moral foundations of those parts of the criminal law that regulate “white-collar crime”, e.g. fraud, false statements, obstruction of justice, perjury, extortion, blackmail, tax evasion, and insider trading. More specifically, Green explores the complex relationship that exists between white-collar criminal law and everyday moral norms. The central contention of LCS is that criminal law norms both as a matter of fact, do, and, as a matter of policy, should, closely track everyday moral norms, such as lying, cheating and stealing. Section 2 of this paper offers an overview of Green’s general argument and a discussion of its application to insider trading.

One of the stated aims of LCS is to provide practical guidance in determining the legitimate scope of the criminal law, particularly in so-called “hard cases”. Debates on insider trading are littered with examples of these hard cases, most obviously the “moral luck” cases (i.e. cases where the non-public information is obtained purely by chance) or the “dedicated broker cases” (where a resourceful broker receives non-public information via a “tip off” that she then confirms though her own skill and effort). Rather than assess Green’s theory based on its ability to satisfactorily resolve these formulaic insider trading cases (which anyway can be found in LCS), this paper will instead consider a recent, high profile Japanese case, namely the 2005 conviction of Yoshiaki Tsutsumi, former head of the Seibu corporation, and (at least according to Forbes magazine) the holder of the dubious distinction of being the “world’s richest man” for the period from 1987-1990.[2] Section 3 will introduce the main facts of the Tsutsumi case and the legislative framework in Japan.

The facts of the Tsutsumi case are a little unusual, at least compared with cases discussed in the English language literature on insider trading, and it will be suggested that it represents a “hard case”, albeit of a different kind to those mentioned above. As such, Section 4 of the paper will seek to ask whether Green’s framework can advance our understanding of the Tsutsumi case or whether the Tsutsumi case exposes difficulties in Green’s account of insider trading as cheating? The paper will not offer a comprehensive critique of LCS, but will instead focus one problem that can be usefully illustrated via of discussion of the Tsutsumi case.

Before proceeding to the substantive discussion, it is worth pausing to reflect on one possible objection to this paper, namely the choice of Japanese law and a Japanese case in the context of an evaluation of a book ostensibly focusing on Anglo-American law. Of relevance here is the general level at which Green himself frames his argument. He points out in the Introduction that the book’s focus on US and English law should be viewed as a “starting point” and that: “[t]he attempt is to find, to the extent possible, a more universal conception of these key white-collar crime offenses, or least to identify where different systems define them differently” (my emphasis).[3] As such, Green seems to invite research that focuses on white-collar crime in other jurisdictions. Having said that, the principle intention of this paper is not to advance our understanding of Japanese law, but to use the Tsutsumi case for an evaluation of Green’s argument that the everyday norm of cheating can help us identify what is morally wrong with insider trading.

2. STUART GREEN ON THE MORAL CONTENT OF WHITE COLLAR CRIME

2.1. Background to LCS

LCS is a comprehensive and thought provoking examination of the “moral foundations” of white-collar criminal law. The book is to be welcomed for various reasons, not least because it is the first time that one of the “major players” in contemporary Anglo-American criminal law theory has devoted significant attention to the issue of white-collar crime.[4] As such, it is not surprising that the book has been well received by academic commentators. Rather more unusual, however, is the attention of the mainstream media: LCS achieved the rare distinction for an academic criminal law text of a Wall Street Journal review.[5] In part, this reflects the timeliness of the book’s publication. In the wake of recent political and corporate scandals, public perceptions of crime are no longer exclusively dominated by images of an urban underclass but increasingly involve the illegal activities of corporate executives, managers and political elites. The collapse of Enron, for example, provided a compelling narrative of managerial greed and injurious loss that captivated global public attention and came to symbolize the problem of corporate crime in the United States. High profile white-collar crime cases have also occurred in many other countries, for example, the Livedoor securities fraud case in Japan, and the Lee Ming Tee case in Hong Kong. It is clear that LCS taps into the renewed global interest that currently surrounds white-collar crime and corporate wrongdoing, more generally.

2.2. Overview of the main arguments of LCS
2.2.1. Defining white-collar crime

The term “white-collar crime” was first used by Edwin Sutherland in his December 27th 1939 presidential address to the American Sociological Association. Sutherland spoke of “crimes committed by a person of respectability and high social status in the course of his occupation”, and castigated social scientists and legislators for their neglect of the wrongs of the powerful. And yet, as Green points out, almost seventy years later there is still widespread disagreement and uncertainty among sociologists, criminologists, legal professionals, and legal scholars regarding the precise meaning of this often used concept. LCS begins with a brief overview of these definitional debates.[6]

Green suggests that the debate is framed by three questions: first, whether the term white-collar crime should be limited to crime only or should include non-legal forms of immoral behavior? (The definition of crime debate); second, whether it should be defined by reference to characteristics of defendants or the acts they commit? (The act or actors debate), and third, if the latter, what factors should determine which criminal acts quality? (The quality of the act debate). In answering each of these questions, Green defends (contra Sutherland) a legalistic approach arguing that white-collar crime should be limited to crimes as defined in the criminal law, excluding other kinds of illegality or wrongdoing. Green also rejects definitions that focus on offenders’ rather than offences as such an approach would clash with “deeply rooted equal protection type norms”.[7] He then considers existing act-centered definitions that seek to precisely delimit white-collar offences but he concludes that they are mostly unhelpful. This is because such definitions seek to provide an all-encompassing list of conditions that all white-collar crimes must satisfy. Green suggests that “we are bound to be disappointed” if we conceptualize white-collar crime in this way.[8]

Equally, Green does not believe that such an “evocative” and “indispensable” term should be abandoned (although he is little unclear as to why exactly other than the fact that most US law schools offer J.D. courses on white-collar crime). Instead, he proposes what he calls a “family-resemblance” approach in which white-collar offenses are “loosely defined” by an overlapping web of similarities (and differences). These similarities include (but are not limited) to the fact that such offences involve non-violent means; incorporeal, non-specific harms that may be difficult to identify and are often indistinguishable from harm caused by lawful conduct; they affect victims who it may be hard to identify; they can be committed by corporate entities as well as real persons; they are often not criminalized in general criminal code but special statutes; and they tend to involve well-resourced and highly motivated defendants. Although he never offers a definitive list of white-collar offenses, Green seems to be referring to fraud, false statements, obstruction of justice, perjury, extortion, blackmail, corruption, tax evasion, securities fraud, and various regulatory offenses. Green covers many issues in the short first chapter but his “family resemblance” approach represents an interesting contribution to the conceptual debate on white-collar crime.

2.2.2. Moral ambiguities of white-collar crime

According to Green, one of the most important characteristics (“family resemblances”) that distinguish white-collar offenses from other crimes is doubt as to the moral character of the criminalized conduct and a concomitant uncertainty as to whether the criminal law is appropriate in such cases. As Green puts it: “what is interesting and distinctive about white-collar crime . . . is that in a surprisingly large number of cases there is genuine doubt as to whether the defendant was alleged to have done was in fact morally wrong”. There is a “widely felt . . moral uncertainty that distinguishes it [white-collar crime] from that which governs more familiar core cases of crime”.[9] Green doesn’t offer any empirical evidence for his claims about public attitudes to white-collar offenders, but his point is clear: the image of crime that has traditionally dominated both public debate, as well as the criminological literature, is one of clear wrong doing involving manifestly harmful acts, such as murder, theft and rape (so-called “street crime”). That is to say, acts which are self-evidently worthy of moral condemnation. According to Green, understandings of white-collar crime, in contrast, are pervaded by various moral ambiguities. Debates on insider trading mentioned above provide an obvious illustration of this point: well-informed commentators cannot agree on whether such transactions should be prohibited or the reasons for doing so.

Green argues that this is problematic because there exits a broad consensus within the modern literature on criminal law that the imposition of punishment by the state is the existence of moral fault. Punishment without fault or, alternatively, punishment that is disproportionate to the quantity of fault is correctly regarded as inappropriate and unjust. A consequence of this is that establishing the existence and degree of moral fault is a necessary pre-condition for the application of the criminal sanction if the law is to retain its normative legitimacy, coherence and authority. According to Green, in the context of white-collar crime it is often difficult to identify in an analytically precise manner whether sufficient fault exists to justify criminalizing the conduct (as opposed to imposing alternative forms of legal liability or sanction) in the first place and, perhaps more frequently, what degree of fault exists and what punishment should be applied. Given the high stakes (i.e. the moral authority of the criminal law), Green contends that we need to develop a “more precise method for assessing the moral content of white collar offenses than we currently have”.[10] The main objective of LCS, therefore, is to develop such a framework.

2.2.3. Everyday norms and white-collar criminal law

Green begins this task by asking what it is that makes certain acts morally wrongful? Although he acknowledges the importance of harm, he draws upon the recent work of UK-based writers like John Gardner, Stephen Shute and Jeremy Horder to argue that “the concept of harm fails to capture all that is interesting or rationally significant, about the seriousness of various offenses; that we need to focus on the way in which harm is brought about; on how various criminal acts are wrongful.”[11] The central contention of LCS is that everyday moral norms, such as lying, cheating and stealing, provide the key to understanding this aspect of wrongfulness. Green suggests that “every civilized person” has some “rudimentary understanding” of what is morally wrong.[12] Moreover, legal definitions of white-collar criminal offenses (and presumably other types of offense as well) “closely track” these everyday judgments of common sense morality.[13] For Green, this is both a descriptive and a normative claim: bribery is (and should be) criminalized because it instantiates the moral wrong of disloyalty; fraud and perjury do (and should) be criminalized because they instantiate various moral norms against misleading and lying; and, as we shall examine in detail, insider trading is (and should be) criminalized because it instantiates the moral wrong of cheating.

Green’s method in developing this bold claim is, in Part II of LCS, to define certain everyday norms relevant to white-collar crime. The norms he discusses are cheating, stealing, coercion, exploitation, disloyalty, promise breaking, and disobedience. It is a somewhat arbitrary list, why for example is “covering up” not given a chapter, particularly given its obvious importance for obstruction of justice? Green characterizes Part II of LCS as an exercise in “descriptive moral theory” in which he attempts to identify the necessary elements of each of these everyday norms. Green’s approach is to regard such norms as conceptually distinct and “law-like” in their form, offering clear and mutually exclusive definitions of those norms that interest him. As such, Green might be criticized for failing to acknowledge the way that our everyday moral discourse employs concepts that do not always have common properties or clear boundaries (the so-called “fuzzy norms” problem). It is a curious feature of LCS that having adopted a “family resemblance” approach to defining white-collar crime, he persists with a conventional approach to everyday norms. Unfortunately, Green never explicitly addresses this point or offers justification for what is a crucial methodological decision. Presumably, however, he is aware that a “family resemblance” conception of everyday norms might complicate his efforts to overcome the moral ambiguities of white-collar crime and provide the criminal law with sound normative foundations.

In Part III, Green then seeks to establish the “doctrinal relevance” of everyday norms by examining US and English law on ten white-collar offences (perjury, fraud, false statements, obstruction of justice, bribery, extortion and blackmail, insider trading, tax evasion & regulatory offenses) and shows how fine-grained distinctions in the criminal law are “a reflection of equally fine grained distinctions in our moral thinking”.[14] A crucial feature of his argument is that distinct everyday norms stand in a one-on-one relation with legal norms, i.e. bribery instantiates disloyalty, insider-trading instantiates cheating etc. In many ways, however, Part III is the most interesting part of the book. Green possesses a deep knowledge of the relevant statutory framework and case law, as well as the good sense to draw upon recent high profile cases (such as the Bill Clinton, Martha Stewart & Scooter Libby cases) to add a bit of flavor to the narrative and to illustrate key points.

Throughout the book, Green defines the relationship between everyday and legal norms in subtly different ways, e.g. the criminal law “closely tracks” everyday norms[15]; the law is “thoroughly dependent on subtle everyday moral judgments”[16]; moral wrongfulness “shapes the contours” of legal doctrine[17]; and, legal norms are “consistent” with “deeply held moral intuitions”.[18] On occasion, Green goes even further and suggests that legal norms have an important influence over everyday norms: “ostensibly baffling everyday distinctions” can be traced to distinctions “that first appeared in the criminal law”.[19] However, this is an argument that is never fully developed. Although there may well be differences in each of these formulations, the basic point is clear: moral wrongfulness is a necessary condition for the imposition of the criminal sanction and that everyday morality provides the best source for these moral judgments.

The intimate connection between law and everyday morality is important for Green since it provides the criminal law with an important ground for legitimacy in morally pluralistic societies. According to Green, it is socially desirable that our legal doctrines correspond to distinct moral norms.[20] Although on various specific points the law may be in need of revision to more accurately and completely reflect everyday moral judgments, Green is, in general, fairly optimistic about the current state of the criminal law and its instantiation of everyday norms. In this light, he suggests that many of the above-mentioned concerns about the moral ambiguities of white-collar crime are largely misplaced and reflect a lack of understanding of the moral foundations of law. Close examination of this issue reveals that white-collar criminal law corresponds rather well to the claims of everyday morality and that greater public education on legal doctrines would result in these ambiguities dissolving away.

In order to highlight the distinctiveness of LCS it is worth briefly contrasting the argument with a number of possible alternative accounts of the actual and desirable moral structure of the criminal law. One competing account might argue that criminal offences needn’t be justified by reference to moral wrongs at all, but instead should focus on purely consequentialist concerns, most obviously harm prevention. According to this view, (one that in an Anglo-American context is usually associated with the liberal tradition and J.S. Mill, H. L. A. Hart & Joel Feinberg) democratic states are not entitled to enforce moral standards for their own sake (so-called “legal moralism”). With the exception of certain special cases where paternalistic legislation may be justified, the state should respect individual freedom, intervening only to prevent or punish the commission of tangible harms. Green insists that he is not a legal moralist and that he is not suggesting that the criminal law be used solely to enforce morality. Rather, he argues that “moral wrongfulness should be viewed along with harmfulness and culpability” as minimum necessary conditions for criminalizing certain conduct (emphasis in original).[21] As such, his account is different from legal moralists (i.e. in that he insists upon harm) and pure consequentialists) i.e. (in that he insists upon wrongfulness).

A third competing account might agree with Green that the creation of a criminal offense can only be justified as a means to prohibit a moral wrong, but once we have made the decision to prohibit a certain class of acts the precise legal definition of the offence is and should be influenced by the particular needs and values of the criminal justice system or other policy interests. This type of approach suggests either that it is desirable that law departs from everyday morality or, alternatively, that as a matter of fact it does do so. The kind of systemic needs and values that may justify this divergence between law and everyday norms might include the desire to reduce the number of false convictions or to minimize socially costly over-deterrence, for example. On Green’s account, such pragmatic considerations should be excluded on the grounds that they compromise the moral integrity of the criminal law.

Another view might suggest that as a matter of fact, such divergence between law and everyday norms is inevitable given the structural differences in the form of legal as opposed to moral reasoning. Whereas legal reasoning is deliberative, institutionalized and involves the considered deployment of formalistic rules and principles, moral reasoning is, informal, unsystematic, situational and involves intuitions, emotions and perceptions that are not easily formulated in a precise manner. From this perspective, Green could be accused of being insufficiently attentive to the way that everyday moral norms are transformed when they become part of the criminal law. Green seems to avoid this issue by treating everyday norms as “law-like” phenomena. His definitions of various everyday norms, for example, resemble statutory provisions and, on a critical view, the distinctive form and style of moral reasoning is obscured. Nevertheless, LCS represents a provocative and distinct position within academic debate in criminal law theory.

2.3. LCS on insider trading

It is in the context of the above general framework that Green introduces his discussion of insider trading. The basic US prohibition on insider trading, as formulated by the Securities Exchange Commission in 1943, and developed by the SEC and Federal Court decisions is that certain classes of trades involving individuals (paradigmatically but not limited to corporate insiders) who possess non-public information that bears materially on a given transaction must either disclose the information or abstain from trading.[22] As mentioned above, the so-called “disclose-or-abstain rule” is famously controversial, particularly (and not surprisingly) amongst those who think that such transactions improve market efficiency.

Green’s starting point is the suggestion that “the question whether insider trading is harmful” has been over-emphasized in the insider trading literature. This emphasis is unfortunate because the question of harm is “not the most important issue”, at least for lawyers.[23] According to Green, the more interesting question “is exactly why insider trading is morally wrongful”.[24] The leading answers to that question – at least in a Common Law context – are that insider trading is wrongful either because it is in some way unfair and that it involves a breach of a duty to either the shareholder from whom the security was purchased or sold (the classical view), or to the source of the information (so-called misappropriation theory).[25] Green criticizes these theories principally on the grounds that duty-based theories do a “poor job of reflecting our moral intuitions about what’s wrong with insider trading” and accounts based on fairness lack analytical precision.[26] The details of these arguments needn’t concern us here, although the basic claim is that existing theories don’t provide us with helpful guidance in borderline cases and that these theories don’t focus on “what matters” in such cases, namely the fact that the inside trader seems to exploit an unreasonable informational advantage enjoyed over other traders.[27] Green therefore attempts to develop an alternative framework that argues that insider trading is wrongful because it entails cheating.

Green’s discussion of cheating is interesting, not least because it is original. There seems to be little written on the subject either within the philosophical, sociological, economical or psychological literature, at least in the English language. Starting with a blank canvas, Green seeks to identify the formal elements that characterize cheating. He settles on just two: “in order for us to say that X has cheated, X must (1) violate a fair and fairly enforced rule, (2) with the intent to obtain an advantage over a party with whom she is in a cooperative, rule-bound relationship”.[28] It is interesting to note what Green excludes from this definition, namely deception. In doing so, Green takes a different approach to that found in English language dictionary definitions of cheating, all of which include some degree of covertness in their definitions.[29] Green seems to want to maintain a clear distinction between cheating, on the one hand, and lying, on the other, and such a distinction might be blurred by the inclusion of deception in his concept of cheating. To justify this decision he points to examples from everyday moral discourse, e.g. he offers an example of a driver using the emergency lane of a highway in order to circumvent traffic jam. Such an act is not deceptive – after all, everyone can see what happens – but Green says we would still label this cheating. Ergo, deception is not a necessary condition of cheating. This argument, based as it is on one example, is unpersuasive or, at least, inconclusive, and is a point we will return to later.

Having defined cheating-in-general, Green then applies the concept to insider trading and suggests that such trades are morally wrong because they involve cheating. This is because “the trader (i) violates the SEC rule that they must either disclose material non-public information or abstain from trading, and does so (ii) with the intent to obtain an advantage over a second party with whom she is in a cooperative, rule-governed relationship”.[30] According to this view, securities markets are a highly formalistic, rule-governed “game”. The rules are designed to give participants and potential participants confidence that the game is being played in a fair and even-handed way. In the case of insider trading, the trader gains an unfair advantage over the uninformed party with who she is dealing by exploiting information the other party had no way of knowing at the time the transaction was completed. The prohibition of such trades is a clear instantiation of the prohibition on cheating that exists in everyday life.

Green thinks a cheating approach does a better job than existing theories in describing what troubles people about insider trading. Most people seem to think there is something “unfair” about it, but the concept fairness in this context seems too imprecise to be of much analytical value. Green contends that his concept of cheating captures this sense of unfairness whilst at the same time providing clear criteria for deciding difficult cases. For example, cheating provides us with grounds for not criminalizing “lucky” traders or “skillful” traders, something that the alternative theories fail to provide. In the case of the “moral luck” cases, Green suggests that exploiting a piece of good fortune would not normally be considered cheating in everyday life, in contrast, to an action that intentionally created an advantageous situation. Consequently, he thinks there is nothing morally wrong with trading on a piece of confidential information that is acquired by chance. Equally, in the case of a diligent trader, Green suggests that in everyday life we would not normally label someone a cheat who exploits their naturally given or hard-earned talents to their own advantage. Applied to insider trading, Green suggests that informational inequality is not in itself a problem, what is problematic, however, is someone trading on information that is simply unavailable to the other party, irrespective of their skill as an investor or research efforts. Green offers an original and provocative account of insider trading that utilizes the everyday norm of cheating to identify what is morally wrongful about trading on non-public, material information. A detailed assessment of this approach will be offered after we have first introduced the facts of the Tsutsumi case and the relevant provisions of Japanese law.

3. THE YOSHIAKI TSUTSUMI INSIDER TRADING CASE

3.1. Background: Yoshiaki Tsutsumi & Seibu

Yoshikai Tsutsumi is a potent symbol of Japan’s remarkable post-war economic reconstruction and, more recent, economical woes. He transformed Seibu into one of the biggest corporations in Japan, becoming in the process the richest man in the world, through a combination of talent, charisma, political maneuvering and, as it turns out, a systematic disregard of the law. The original Seibu was a local railway operator founded in 1894 that fell under the control of Yoshiaki’s father, Yasujiro Tsutsumi in the mid-1940s. Tsutsumi was born in 1934, the youngest of three brothers. He joined Seibu immediately after graduation from Waseda University when he was appointed President of Kokudo Corporation, a key part of the Seibu Group (Kokudo was one of the major shareholders in Seibu). After the death of Yasujiro in 1964 there was an acrimonious battle between the sons for control of the business empire that Yoshiaki Tsutsumi ultimately won. Since 1973, when he became President of Seibu, Tsutsumi aggressively sought to expand the businesses by creating a vast chain of hotels, golf courses, ski resorts and shopping centers. At the height of the “Bubble” economy in the late 1980s, Seibu’s appreciation brought about by the rising value of real estate in Japan was estimated at thirteen trillion yen making Tsutsumi the world’s wealthiest individual with a personal fortune estimated at over US$20 billion. However, soon after the economic meltdown of the mid-1990s, Seibu’s value shrunk to one trillion yen leaving the company saddled with crippling debts and Tsutsumi’s personal wealth degraded to merely a few billion US$. Earlier this year, he faced the ultimate indignity of being removed from the Forbes billionaires list altogether. Famous for his fiery temper, womanizing, and autocratic management style, “urban myths” about Tsutsumi abound: for example, it was reported in the Japanese media that Seibu didn’t hold a board meeting for seven years from the late 1980s such was his absolute control over the company and his disregard for the niceties of corporate governance. When describing what he looked for in a potential executive, he is quoted as saying, “I don’t want a person with intelligence. I make all of the decisions myself”.

3.2. Facts of the Tsutsumi insider trading case

It is not difficult to see how Tsutsumi’s fall from grace was widely regarded in the Japanese media as marking the end of an era, specifically the passing of an antiquated business model. The events that led to his conviction can be traced back to April 2004 when Seibu’s long-alleged connections to organized crime became the subject of a police investigation that resulted in thesubsequent prosecution and conviction of three Seibu executives. Tsutsumi stepped down as President ofSeibu, a position he had held for over thirty years, to take “moral responsibility”, although he was not indicted. Seibu’s statutory required auditors resigned and new auditors were appointed. Moreover, Seibu found itself subject to a greater degree of public scrutiny than had previously been the case.

In June 2004 Tsutsumi conspired with Terumasa Koyanagi (the newly appointed Seibu President) to have Seibu submit falsified claims in Seibu’s statutorily required stock ownership reports. It seems Seibu had long engaged in the practice of concealing the true distribution of stock ownership. The reports submitted in 2004 declared inter alia that Kokudo owned 43.16% of Seibu stock when in fact they owned 64.83%. The apparent motive for doing this was to conceal the fact that Seibu was, and had been for decades, in violation of Tokyo Stock Exchange (hereinafter TSE) concentrated ownership rules that required more than ten persons to own at least 80% of the stock in any given corporation. The sanction for violating TSE rules on this point is de-listing. The concealing of this information had been facilitated by the use of “name-lending” in which stocks were nominally held in the name of one person (in this case, former Kokudo employees loyal to Tsutsumi) on behalf of another person who receives the dividend payments (in this case Kokudo who received all dividend payments) and controlled the right to transfer ownership. Now prohibited, name-lending was lawful, at that time, for certain categories of stock, including the Sebu stock in this case.

In August 2004, the newly appointed Seibu auditors discovered the full extent of Kokudo’s ownership of Seibu and threatened to disclose the information to the TSE or the Securities Exchange Commission. To head off a crisis, Tsutsumi promised to dilute Kokudo’s ownership to comply with TSE rules and avoid possible de-listing. He personally approached around twenty companies (many of whom were corporate clients of Seibu) and offered them Seibu stock explaining that he wished to promote “mutual stock ownership” and to deepen business ties. The Tokyo District Court subsequently found that these companies were unaware of either (i) the false statements or (ii) Tsutsumi’s true motive for off-loading the stock. Between September 9th and 28th 2004 in a series of block transactions Kokudo sold 18 million Seibu shares for 21.8 billion yen to ten companies. These transactions brought Seibu into compliance with the concentrated ownership rules (i.e. greater than 10 companies now owned more than 80% of the stock). However, a whistleblower (allegedly Tsutsumi’s brother or someone close to him) informed authorities of the summer’s events and this information was leaked to the news media. At a press conference on October 13th 2004, Tsutsumi admitted concealing losses of Seibu and using “name lending” to violate TSE rules. The markets responded to this news and Seibu’s share price started to slide rapidly. On November 10th 2004 they hit a record low of 414 yen per share in expectation of de-listing. Less than one month earlier (just prior to Tsutsumi’s press conference admitting wrongdoing) the price had been 1100 yen per share.

On November 16th 2004, the TSE de-listed Seibu for submitting false financial reports and for the violation of ownership rules. Koyanagi was removed as President and new management was installed. On February 19th 2005, Koyanagi was found dead in a hotel room after apparently committing suicide hours after being released by the Tokyo District Public Prosecutor. On March 3rd 2005 Tsutsumi was arrested by police in Tokyo. After being detained for twenty days Tsutsumi, Seibu & Kokudo were indicted for (i) false reporting & (ii) insider trading. he was subsequently released on bail for 100 million yen. The trial started in Tokyo District Court on June 17th and on Oct. 27th, after sitting for only three sessions, the Court found all defendants guilty and sentenced Tsutsumi to 30 months in prison (suspended for four years) and a 5 million yen fine; Seibu to 200 million yen fine, and Kokudo to 150 million yen fine. In the meantime, Seibu’s interim management chose Cerberus a US investment firm to be the largest shareholders in the newly created entity, Seibu Holdings. Yuji and Seiji Tsutsumi (brothers – and bitter rivals – of Yoshiaki) had their bid to take control rejected. The era of the Tsutsumi family dominating Seibu had finally ended.

3.3. Legal framework: The Securities Exchange Law & the prohibition on insider trading

In the decades after the Meiji Restoration, capital markets in Japan were not important either as a means of capitalizing corporations or as an investment opportunity. Economic development was driven by zaibatsu, large family controlled business conglomerates that dominated the economy. Within this model, conglomerate affiliated banks provided the principle source of finance and not securities markets. A key aim of the US occupation was to “democratize” the economy (i.e. to dismantle the zaibatsu) and the construction of a US-style securities market-investment model represented the obvious means to achieve this objective. Under the directing hand of GHQ, therefore, the Japanese Diet enacted the Securities Exchange Law 1948 (hereinafter SEL) a law that is similar in content to the US Securities Act 1933 and the US Securities Exchange Act 1934. One similarity relates to the laws relating to insider trading: Article 157 of the SEL is very much like Rule 10b-5, the US prohibition on insider trading.

For various reasons, however, the criminal law provisions of the new securities law were, for much of the post-war period, never enforced. In part, this reflected the lack of normative force of the SEL as a whole in a Japanese context. On the one hand, government (notably the Ministry of Finance) was more concerned to coordinate the reconstruction of the economy and not act as a market regulator, and, on the other hand, corporations were happy to engage in long-term, stable cross-shareholding arrangements that meant there was limited liquidity in securities markets. Also of relevance, particularly in the immediate post-war period, was a significant change in the attitude of the US government. The Korean War and heightened tensions with China and the Soviet Union meant that preserving Japan as a bulwark against communism in Asia took priority over concerns about “democratizing” the economy. In 1952, soon after the end of the occupation (and with the tacit approval of the departing occupying power) a series of amendments to the SEL were introduced, notably the abolition of strict disclosure rules and the absorption of the independent Japanese Securities Exchange Commission into a bureau of the Ministry of Finance. The result was that there was only one prosecution for insider trading in Japan between 1948-1988 (the Shokusan Jutaku case in 1974. And although there is rarely any evidence offered, it is widely believed that, during those years, insider trading was rampant in Japan, variously described as “insider heaven” or a “rigged casino”.

In 1988, a significant series of amendments to the SEL were enacted, including a new prohibition on insider trading trading. The 1988 amendment to the insider trading rules has been widely interpreted as the result of US pressure and concerns in the Reagan Administration that “international insider trading” was becoming a serious problem. Although Article 166 is much more explicit in its prohibition of insider trading, it is not at all obvious that it criminalized anything that wasn’t already prohibited by Article 157. Although Article 157 has never been repealed, most Japanese commentators on the SEL now regard it as “dead law”. Article 166 of the amended SEL prohibits any: (i) Securities transaction involving shares in a publicly listed company; (ii) by (a) any party connected to that company (i.e. a so-called “corporate insider”) who is in possession of “material facts” about that company, or (b) Any other person (i.e. a “corporate outsider”) who learns the material facts from a corporate insider; (iii) prior to the material facts becoming public. The law defines “corporate insiders” broadly, so as to include any employee (part-time, full-time, or temporary); recently (“within one year”) retired employees; shareholders; anyone who has a business or legal relationship with the company; or government regulator. Equally, “material facts” are defined very broadly. The law enumerates various classes of fact that would fall within this category but various “catch-all” provisions – “any fact that may significantly effect the investment decisions of investors” – are also included. Finally, the law provides a precise definition of “becoming public”: publication of the material fact in two “media outlets” plus 12 hours, or the relevant government agency becoming aware of the material fact plus 12 hours.

The Tokyo District Court convicted Tsutsumi under Article 166 of the SEL. As recently retired President of Seibu (therefore as a “corporate insider”) he had, in his capacity as Chairman of Kokudo, sold Seibu stock to other parties with the non-public, material knowledge that the Seibu stock faced the possibility of being de-listed for falsifying stock ownership reports and violation of the liquidity rules (the “material fact”) prior to that information becoming public. The Tokyo District Court held that the purchasers were unaware of this fact and that had they been aware it would have significantly effected their decision to invest. Tsutsumi was sentenced to 30 months in prison (suspended for four years) and a 5 million yen fine.[31]

4. THE LIMITS OF A CHEATING APPROACH TO INSIDER TRADING: THE MORAL COMPLEXITY OF WHITE COLLAR CRIME

Although there are a number of criticisms that could be made against the LCS-cheating account of insider trading this section will focus one issue that can be developed via a discussion of the Tsutsumi case. In particular, it will be asked whether an everyday norm, in this case cheating, can completely describe the wrongfulness of a morally complex action such as insider trading. The intention of the discussion is not to reject out-of-hand Green’s characterization of insider trading as cheating but rather to (i) raise some doubts about the ability of a cheating-based approach to offer an exhaustive account of the wrongfulness associated with such transactions and (ii) explore the implications of such a failure for Green’s general argument about the moral content of white collar criminal law.

On Green’s account, the modern criminal justice system is an institutionalized system of morality. From this point of view, substantive criminal offenses should be consciously designed to encapsulate in their detailed specifications, the particular moral wrongs to be proscribed by law, thereby clearly advertising the limits of criminal liability. The criminal law should at least strive to communicate sound and comprehensible moral judgments to offenders, victims, and society at large. Green’s contention is that the best means for facilitating effective communication of law’s moral content is to build common sense moral distinctions and intuitions into the structural design of criminal offenses. As a normative ideal, this is a persuasive. Moreover, for many categories of offense (most obviously, “street crime”) it is relatively unproblematic for the law to reflect particular and distinct everyday norms. The problem with LCS, however, is that Green fails to acknowledge the limits of such an approach, i.e. that it may not always be possible for a particular everyday norm to encapsulate all that is morally significant about complex acts. Recourse to everyday norms, at least in the form proposed by Green, may have the paradoxical effect of excluding certain common sense intuitions as to what is morally problematic about the underlying conduct, something that may, in turn, damage the legitimacy of law. The desire to place the criminal law on firm normative foundations should not blind us to the moral complexities of certain classes of action.

The Tsutsumi case poses something of a dilemma: on the one hand, our intuitive sense is that his actions are wrongful, on the other hand, traditional theories of insider trading don’t seem to do a very good job of describing this wrongfulness. For example, breach-of-a-duty-to-shareholders only applies in cases where shares are being bought by corporate executives and not sold as in this case, and breach-of-a-duty-to-the-source of the information doesn’t seem to apply given that Tsutsumi’s own actions provided the material, non-public information (i.e.. how could he breach a duty to himself). One is left with vague notions of unfairness or the idea that Tsutsumi perpetrated a wrong because he caused harm or damaged market integrity. None of these accounts seem entirely satisfactory, at least as the basis for the imposition of criminal liability. This section will therefore begin by asking whether LCS-cheating provides a better characterization of Tsutsumi’s actions than these standard theories, and more specifically, whether LCS-cheating assists us in identifying what is morally wrongful in the Tsutsumi case.

LCS cheating involves two elements, namely (i) violation of a fair rule and (ii) advantage seeking. Taking the issue of advantage seeking, Green makes the following observation: “when X cheats, she seeks an advantage by violating a rule that Y is believed to be obeying. Typically, X and Y will be competing over a limited resource and X’s gain will be Y’s loss”.[32] A simple example would be a person pushing in at the front of a queue at the supermarket checkout. In such a case, X has broken the rule that says one should wait one’s turn in line, and has done so to Y’s disadvantage. The result is that X spends less time in line and Y spends more time waiting at the checkout, i.e. X has gained something (time) at Y’s expense. A feature of this account is that advantage seeking is only cheating (and hence wrongful) when it involves the violation of a “fair rule”. Green is a little unclear on what constitutes a fair rule, his only (unhelpful) comment being that such rules would need to be “just”.[33] But on a critical view this merely defers the question of wrongfulness to a consideration of the content of the “justness” or otherwise of the rule. The concept of cheating, by itself can never tell us whether something is wrongful or not. One would first need to consider the content of the rule and only then ascertain whether there has been a violation of the rule and advantage seeking. In the case of supermarket queues this is not perhaps an issue, but in the case of an inherently controversial rule such as the rule prohibiting insider trading this feature of his definition poses something of a problem. Cheating is presented as providing the answer to the question of why we need insider trading rules, but, on closer examination we are find that it can do not such thing.[34]

Moreover, the LCS-cheating concept of advantage seeking doesn’t obviously apply in the Tsutsumi case. In a “typical” case of insider trading one could reasonably conceive of the situation as one where the investors are “players” competing for a “limited resource” in a rule-governed “game-like” environment and that the “resource” the “players” compete over is economically valuable securities (i.e. securities that will maximize returns and minimize risks). One party, in violation of a rule prohibiting trades based on non-public knowledge seeks to gain something (either the security or the proceeds of the sale) at the direct expense of the other party. However, such a description does not seem to apply to the Tsutsumi case where the parties objectives cannot be conceived in this way. The companies that purchased Seibu stock from Kokudo were pursuing what they believed to be an economically desirable investment opportunity (and possibly a closer relationship with Seibu). In contrast, Tsutsumi’s motive was to bring the company into compliance with the TSE concentrated ownership rules and to remove the possibility of de-listing. Price was a consideration for Tsutsumi but only insofar as an artificially low price might have attracted the attention of regulators that something suspicious was occurring. Given that Seibu had been under recent criminal investigation this must have been a concern. Tsutstumi’s actions interfered with the decision making process of the trading partners, but to suggest (as Green would require) that both parties to the transaction were competing for the same resource and that Tsutsumi gained that resource at the expense of the trading partners doesn’t seem an appropriate description of the events in this case, if we accept – as the Court did – that the proceeds of the sale were not Tsutsumi’s principle concern. Rather, we would say the parties to the transaction were competing for different objectives that although related to one another were not directly connected.

This brings us to a related, more general point, namely that Tsutsumi’s purpose in concluding the transaction was to ensure Seibu complied with the TSE rules and not personal financial gain. Of course, Tsutsumi adopted illegal and dishonest means to achieve this goal of compliance. Moreover, by seeking to avoid the negative impact of Seibu being de-listed he was clearly engaging in an act designed to protect his personal fortune, which would have been (and subsequently was) significantly diminished as a result of Seibu’s de-listing. But is it appropriate to characterize a case where someone is seeking to bring themselves into compliance with the rules as advantage seeking and/or cheating?

An analogy with sport may be helpful on this issue. Imagine a professional cyclist who has been taking illegal performing enhancing drugs for a period of time. The cyclist becomes concerned that he may soon be caught as a result of a new testing regime and therefore decides to take an illegal pill that will remove all traces of the earlier drug use from his body. In everyday moral discourse, would we describe the act of taking such a pill as cheating? We would certainly characterize the earlier period of drug use as cheating, and it would fit within the LCS definition (rule violation and advantage-seeking at expense of others). But in the case of taking the pill, however, things are less clear. For a start, how does taking the pill involve gaining at the expense of others and what precisely is being gained? And although the cyclist may have avoided sanction by taking the pill, would it not be more precise to say that they sought to avoid disadvantage rather than to gain an advantage? We would, more usually, be inclined to describe such an action as bringing to an end a period of cheating or, perhaps more precisely, as one of attempting to cover up or conceal the earlier period of cheating. Either way, it would not, in itself, constitute an act of cheating. That is not to deny cheating occurred at the earlier stage, just to argue that two acts occurred – both of which may be immoral – but each of which possess a distinct character. Equally in the Tstusmi case, doesn’t it make more sense to characterize his, albeit illegal and morally dubious, act of insider trading as one of covering up or concealing wrongdoing rather than one of cheating?

Having raised some preliminary doubts about whether LCS-cheating can by itself either justify a ban on insider trading or provide a convincing characterization of the moral wrong in the Tsutsumi case, it might be helpful to consider some alternative everyday norms that play a role in our assessment of the wrongfulness of Tsutsumi’s actions. The aim of this exercise is not to identify replacements to LCS-cheating, rather it is to identify norms that plausibly describe an aspect of wrongfulness in the Tsutsumi case that is not encompassed by LCS-cheating. A possible implication of such an analysis, if successful, would be that one cannot reduce an analysis of what is wrong with insider trading to LCS-cheating,, and that Green’s attempt to do so, although well intended, merely serves to obscure the moral complexity of the underlying conduct. There are several alternative norms that are somehow connected to the Tsutsumi case, covering-up (which we have already alluded to), promise-breaking & loyalty, for example, all seem relevant to the facts of the case, and none of which are included in LCS-cheating. However, it may be more useful to pick a norm that has a more general relevance to “typical” insider trading cases, namely deception.

It will be recalled from the earlier discussion that Green excludes deception from his definition of cheating. This is motivated by a desire to maintain a clear distinction between different moral norms. But is the decision to exclude deception from cheating in this way appropriate given the centrality of deception to insider trading? Can any assessment of the wrongfulness of insider trading not incorporate consideration of the deception involved? If one considers the Tsutsumi case, for example, at the center of any evaluation of the wrongfulness or otherwise of his actions has to be the lie that he told the other parties to the transaction, namely that he was selling the Seibu shares to deepen corporate ties, when in reality he was seeking to dilute his ownership. Putting it bluntly, he deceived the other parties to the sale and they relied upon the lie and were induced to buy. Excluding this from an assessment of wrongfulness seems absurd. Presumably, Green would respond by arguing that Tsutsumi is not a typical insider trading case in that it (i) involved a face-to-face transaction negotiated between the parties in which (ii) one party made an obviously fraudulent misrepresentation that the other relied upon. This could be contrasted with an anonymous market-floor transaction more typical of securities deals in general and insider transactions in particular. In such a case, the only positive representation one party makes is the offer of a price to buy a certain number of shares, and even then it is mediated by a computer network or a trader on the market floor.

The Tsutsumi case is undoubtedly unusual in that it involved a face-to-face deal of this kind. However, the problem with this argument is that it misconstrues what is deceptive about Tsutsumi’s actions. On the facts of the Tsutsumi case, the deceit was, in part, the positive assertion that the purpose of the sale was to strengthen corporate ties. However, another way of describing the act of deception in this case would be say that the failure to disclose the true situation regarding the distribution of Seibu stock was also deceitful, given that the parties to the transaction had no independent means of discovering what for them would, presumably have been a crucial fact. This alternative description – that Tsutsumi perpetrated a deception by his failure to disclose – is important because (unlike the positive representation) it would appear to be a distinctive feature of all insider trading cases.

This is not the occasion for a discussion about the circumstances under which a person might reasonably be said to be under an obligation to disclose information. In ordinary life (as well as contract law), we would not normally censure someone for a failure to disclose information (in contrast to a misrepresentation or a misleading response). The classic example is the person who discovers a Picasso in the garage sale of a stranger and purchases it for $1 from the ignorant seller. However, it is wrong to conclude from cases such as this that we are never under a duty to disclose information. One can reasonably argue that in the context of the securities market “game” if you have no more right to material, non-public information than the person with whom you make an exchange (irrespective of whether you know who they are), and your using that information puts the other party at a disadvantage in making the exchange, then you wrong that person by using that information. Nothing should prevent people trading on informational advantage gained by talent, hard work and luck, but what shouldn’t be allowed is people trading on information which they have no more claim over than other players in the game. This is of course a large issue, but it places the question of deception and deceit at the centre of the debate, something that LCS cheating does not do.

Moreover, an advantage with a deception-based approach is that it connects the moral wrong of insider trading to the parties to the transaction and the fact that there is clear interference by one party with the autonomous choice of another. Deontological moral theories teach us that it is morally wrong to interfere with another persons autonomous decision making process and everyday morality would seem to require that we refrain from such interference. The LCS-cheating concept of advantage seeking does really capture this element of interference – the violation of the other’s autonomy – only the fact that one part gains at the expense of the other. At least in the context of the Tsutsumi case, interference seems to a more applicable description.

LCS cheating is undoubtedly a helpful and thought-provoking concept that makes an important contribution to the insider trading debate. However, Green is overly ambitious in claiming that by itself LCS cheating can capture all that is interesting and morally significant about the wrongfulness of such transactions or provide sufficient justification to ban such transactions. There are two aspects to this claim: firstly, the suggestion that Green’s definition of cheating fails to provide a compelling justification for prohibiting insider trading in the first place because of its assumption that such a rule is already in place, and secondly, based on the inadequacies that are revealed as a result of the application of LCS-cheating o the Tsutsumi case. The conclusion of the paper is that we need to exercise some caution before claiming that the wrongfulness of a morally complex offense like insider trading can be reduced to the violation of any one everyday norm, however sophisticated we are in attempting to define it.