Financial Regulation: The Eddie Murphy Rule
In its 2300 pages of financial regulation, Dodd-Frank has an Eddie Murphy Rule.
Do you remember the end of Trading Places? Having bribed someone to get a USDA orange crop report before it was publicly released, the Duke brothers start buying frozen concentrate orange juice futures because they expect prices to rise. Their objective? Buy low and then sell at a higher price.
The problem for the Duke Brothers is that their USDA report was a fake. Created by Eddie Murphy and Dan Aykroyd, the fake report contains bad news about the crop. Expecting orange shortages, the Dukes and traders who copy them propel prices skyward. At a high of $1.42, Murphy and Aykroyd start selling contracts. When the real report is released, prices plunge, and at 29 cents they buy.
Murphy and Aykroyd were shorting frozen orange juice concentrate futures. Shorting means your goal is first to sell high and then later to buy at a lower price to cover your obligations from the original sale. Although the order is reversed, still you can profit because you buy low and sell high.
Until the Eddie Murphy provision (Section 746) in Dodd-Frank, trading on inside information in commodities markets was not illegal. As a result, none of the Trading Places protagonists was breaking the law; it was okay to base trades on crop information before it was released.
Responding, Commodity Futures Trading Commission Chairman Gary Gensler tells Congress:
“…To protect our markets, we have recommended what we call the “Eddie Murphy” rule to ban insider trading using nonpublic information misappropriated from a government source.”
Perhaps equal to the Trading Places scam, in 1905, a USDA statistician used his window shade to signal a cotton speculator stationed outside. Pulling the shade higher for bearish news, down for bullish and midway for as-expected data during the afternoon before the report was released, he enabled his partner to trade on the information and make hundreds of thousands of dollars.
Reportedly, window treatment at the USDA now has metal rods that secure their position and lead fibers that prevent electronic communication.
As for Dodd-Frank progress, its implementation is way behind schedule. With many of its provisions requiring specific rules, according to the law firm Davis Polk, as of mid-July, only 38.4% of the rule making requirement deadlines have been met.
Sources and resources: With Trading Places celebrating its 30th birthday this year and the Eddie Murphy rule receiving publicity, NPR‘s Planet Money recorded an excellent podcast on the movie’s financial accuracy, NPR had a news report on the final scene and this blog took a detailed look back. Meanwhile, legal blogs have been commenting on the Eddie Murphy rule and on Dodd-Frank. and here is Dodd-Frank’s Section 746, the Eddie Murphy Rule. Finally, I recommend this agricultural journal description of security at the USDA and that 1905 cotton market story.