Great column by my Bloomberg guy Matt Levine:
Quote:
Bribes
We talk a lot around here about insider trading. One thing that I often say is that insider trading is not about fairness, it is about theft. Whenever an insider trading case is announced, the prosecutors will make a little speech about how financial markets have to be a level playing field, and how the insider traders are cheaters who got the answers before they took the test, but it is all nonsense. Financial markets are not a level playing field; some people will always have faster computers or better resources or more money to spend on research than others, and they should have incentives to find out information that other people don’t have. But more important, the level-playing-field stuff is just not the law. The law doesn’t say that any time you trade on material nonpublic information it’s illegal. The law, to oversimplify a complicated area, makes it illegal to trade on material nonpublic information that you obtained in violation of a duty to someone: It’s illegal for corporate executives to trade on corporate information for their private gain, or to give that information to their buddies in exchange for a personal benefit, or for outsiders to obtain information in confidence and then betray that confidence by trading on it. The real issue is never[1] whether the trading was unfair to the people on the other side; it’s whether the information was misappropriated from its rightful owners.
People continually find this odd, but it is not really an oddity of insider trading law. It’s pretty normal. The deep point here is that the law is pretty good at protecting property interests, but not so good at protecting fairness. If there’s a thing, and someone owns it, and you take it, the law can deal with that: It’s relatively straightforward to figure out what happened and explain why it was wrong and identify the victim and assign blame to the perpetrator and so forth. Fairness is a much harder concept to pin down and enforce; my “unfair advantage” might be your “deserved reward for hard work and innate skill.” What’s odd is not that insider trading law is about theft; what’s odd is that it almost looks like it might be about fairness, and that people think it is.
Yesterday federal prosecutors brought a big criminal case against a bunch of wealthy people accused of paying bribes to get their children into colleges. They were clients of a college counselor named William Rick Singer, whose services included (1) bribing SAT and ACT exam administrators to let someone else take the kids’ exams for them and (2) bribing coaches and administrators “to facilitate the admission of students to elite universities under the guise of being recruited as athletes.” The clients would give money either to the coaches personally or to their athletic programs, all disguised as donations to Singer’s fake charity, and in exchange the coaches would pretend to want the clients’ kids on their teams and pull strings to get them admitted. The FBI investigation was code-named “Operation Varsity Blues.”
Here is one thing that U.S. Attorney Andrew Lelling said in announcing the charges:
“There can be no separate college admissions system for the wealthy, and I'll add that there will not be a separate criminal justice system either.”
Level playing field! Here is another thing he said less than a minute later:
“We’re not talking about donating a building so that a school’s more likely to take your son or your daughter. We’re talking about deception and fraud.”
There can be no separate college admissions system for the wealthy, except for the extremely well-known one where you donate a building in exchange for getting your kid in! “Lol just donate a building like a real rich person,” the U.S. Attorney almost said. Josh Barro’s analysis on Twitter is exactly right:
The admissions slots were stolen from the colleges and resold on the black market. Which is a crime, for good reason. We don’t have to act like there wasn’t a legal, primary market for the admissions slots already.
I think the key is not to understand this as a crime against other applicants, or the public, or “fairness.” It’s a crime against the schools.
It is not about fairness; it is about theft. Selective colleges have admissions spots that they want to award in particular ways. They want to award some based on academic factors; they want to award others based on athletic skill; they want to award others in exchange for cash, but—and this is crucial—really a whole lot of cash. Buildings are not cheap. Here’s education journalist Dana Goldstein on Twitter:
A few months ago I was interviewing a college admissions coach who told me the following about how big of a donation it takes to get a child into an Ivy no questions asked: "There’s a certain magic number. It’s way higher than people think: $10 million.”
The numbers in the criminal complaint are way lower than that—generally hundreds of thousands of dollars[2]—and of course they went to corrupt coaches and test proctors and counselors, not to the schools themselves. Also, even when colleges award admissions spots in exchange for cash, they’ll never say they’re doing that; the parent’s generous financial support is one input into a holistic evaluation of etc. etc. etc., not a direct quid pro quo. Like so many things, it is an aristocratic economy of gifts and relationships, not a grubby transaction. The bribery scheme devalued the asset not only by stealing it and re-selling it for less than it was worth, but also by being so explicitly commercial.
Or here’s how Singer described it to one parent:
Okay, so, who we are-- what we do is we help the wealthiest families in the U.S. get their kids into school …. Every year there are-- is a group of families, especially where I am right now in the Bay Area, Palo Alto, I just flew in. That they want guarantees, they want this thing done. They don’t want to be messing around with this thing. And so they want in at certain schools. So I did 761 what I would call, “side doors.” There is a front door which means you get in on your own. The back door is through institutional advancement, which is ten times as much money. And I’ve created this side door in. Because the back door, when you go through institutional advancement, as you know, everybody’s got a friend of a friend, who knows somebody who knows somebody but there’s no guarantee, they’re just gonna give you a second look. My families want a guarantee.
The back door—“institutional advancement,” i.e., giving colleges tons of money—is fine, not because it is “fair,” but because the owner of the asset gets to decide the conditions of its sale. (The fairness of the front door is debatable too, by the way.) The side door is wire fraud, not because it is “unfair”—Singer says here that it’s one-tenth the price of the back door, which kind of seems fairer—but because consultants and coaches are misappropriating the asset and selling it for their own benefit. The law doesn’t protect fairness; it protects property.
Anyway the complaint against the parents is 204 pages long and consistently hilarious and horrifying; the FBI tapped Singer’s phone and eventually got him to cooperate, meaning that there are just so many tapes. This might be the worst, with a prominent lawyer (!) named Gordon Caplan (“CW-1” is Singer):
CAPLAN It’s just you and me. Is that kosher? I mean, can we?
CW-1 Absolutely, I do it all the time man. I do it all the time for families and then we take college classes for kids, you know, online to raise their GPA. Because again, it’s not, nobody knows who you are ’cause you’re, you don’t take a, there is nothing that, you know, is filmed when you take your test and everything, that’s what’s so great about it. So that’s why I asked.
CAPLAN Is, let me put it differently, if somebody catches this, what happens?
CW-1 The only one who can catch it is if you guys tell somebody.
CAPLAN I am not going to tell anybody.
CW-1 Well (laughing)
CAPLAN (laughing)
CW-1 Neither am I. And, neither am I.
Yeah you know who will tell someone? The FBI agent listening to that wiretap. (Laughing.) Also pretty bad is that, once Singer started cooperating, the FBI had him go back and call all his old customers and recap their crimes to them on tape:
CW-1 Okay. Excuse me. So my-- so my foundation is getting audited now.
E. HENRIQUEZ Oh.
CW-1 Uh--
E. HENRIQUEZ Well, that sucks.
CW-1 Right. And they’re going back, like they always do.
E. HENRIQUEZ Yeah.
CW-1 Pretty normal. So they’re taking a look at all my payments. So they asked me about the large sums of money that came in from you guys.
E. HENRIQUEZ Okay.
CW-1 And so, essentially—
E. HENRIQUEZ For all the good deeds that you do.
CW-1 Absolutely. So, of course, I didn’t say anything-- you know, I’m not gonna tell the IRS that, you know, [CW-2] took the test for [your eldest daughter] or that Gordie—
E. HENRIQUEZ Right. Yeah.
CW-1 --or that Gordie-- you know, we paid—
E. HENRIQUEZ Like-- Yeah.
CW-1 --Gordie to help her get into Georgetown,right?
E. HENRIQUEZ Right.
CW-1 So I just want to make sure that you and I are on the same page—
E. HENRIQUEZ Okay.
CW-1 --in case they were to call.
E. HENRIQUEZ So what’s your story?
CW-1 So my story is, essentially, that you gave your money to our foundation to help underserved kids.
E. HENRIQUEZ You-- Of course.
CW-1 And—
E. HENRIQUEZ Those kids have to go to school.
CW-1 Absolutely.
So, one, never do a call like this. As Ken White tweeted: “WHEN SOMEONE CALLS AND SAYS ‘OH HAI REMEMBER THAT FRAUD WE DID LAST YEAR SHALL WE DO IT AGAIN’ YOU HANG UP.”[3] But also, the way that Singer’s scheme worked was that the bribes were paid to his fake charitable foundation, which had the benefit not only of disguising what was going on but also of letting the parents take tax deductions for their bribes.[4] I suppose this is objectionable, but it’s worth pointing out that if you donate a building to a college that is also tax-deductible. You did it out of pure philanthropy and no goods or services were exchanged for the donation. Certainly there was no transaction involved.
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To IkeSouth, bigfan wrote:
Are you stoned or pissed off, or both, when you create these postings?
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