Thanks again to the Manhattan Institute for setting up this debate, which I've found interesting.

I don’t want to add much to this already lengthy discussion, and Moin’s last post provides little occasion to do so. He is still flatly wrong that the securities laws prohibit trading on non-misappropriated information. Moin cites the open-ended language of the applicable statute and rule but, incredibly, continues to ignore the Supreme Court’s interpretation of the statute.

(By the way, had Moin paid attention to the Court’s rulings, he might have fashioned an argument that a class action lawyer who is trading on litigation information is misappropriating information from his “client,” the class, which would provide a basis for regulation under current law. I have not analyzed that argument because Moin explicitly says in his initial post that in his view “who does the short selling is immaterial.”)

Moin also continues to assert that the market does not accurately value the litigation on which the plaintiff or his lawyer is trading. (This is relevant to my argument that dumping and suing can provide efficient incentives to plaintiffs and their lawyers.) But the well-known fact that markets reflect noise does not mean that they do not also reflect information, including information about litigation. For an analysis of the relationship between behavioral finance and market efficiency see my article, Fraud on a Noisy Market,

In the end, as I’ve said repeatedly, this debate has not been about whether there is a litigation problem, but about how to solve it. Dumping and suing alone is not the problem. At best it may provide incentives that produce higher-quality lawsuits. At worst, it reflects underlying problems with class actions. To the extent that it is accompanied by fraud and manipulation, we already have the necessary tools. It would be perverse and not a little ironic to try to deal with the problem of excessive litigation by adding a whole new area of securities regulation.