BloombergView’s Matt Levine reflects on an SEC insider trading case involving noneother than Texas Attorney General Ken Paxton.  Please follow along ...

If I tell you to buy a stock, just as a friend, and I neglect to mention that I'm getting a 10% commission from the company, is that fraud? The answer is no! (Not legal advice.) I suppose that is counterintuitive. Here's Peter Henning on a SEC case against Texas Attorney General Ken Paxton:

In rejecting the SEC’s claims, Judge Mazzant wrote that the “case is not about whether Paxton had a moral obligation to disclose his financial arrangement with Servergy to potential investors.” Instead, the judge concluded that he “did not have a legal obligation” to do so, which meant there was no fraud.

One might hope that a friend, or a member of an investment club, would take care to disclose important information like receiving a commission for lining up new investors. The law, however, does not impose such a duty generally in the absence of evidence that the person assumed control over the investments of others or occupied a position as an investment adviser or broker.

We talk all the time around here about the gap between general perceptions of good honest sales practices, and what the law actually requires. You want to befriend some naive customers and sell them risky derivatives that they don't quite understand at a fat markup? You can do that. It's rude, but it's not illegal. You want to sell bonds to customers and lie about the price you paid for them? Probably don't do that - that's probably illegal - but it's a grayer area than you might expect.

The disconnect between public expectations and the law ... seems like a problem, no? One reason that we don't mind too much when used car salespeople say "you're killing me, I'm giving you this car for less than what I paid for it," but we do mind when bond salespeople do that, is just that everyone expects used car salespeople to lie a bit. The used car salesman is proverbial. But if we expect  financial salespeople to be fiduciaries, to keep our best interests in mind and tell us about any conflicts of interest that they might have, then we will often be disappointed. So, over time, the law will probably move closer to our expectations.