How to really stop (some) insider trading

FORTUNE -- When it comes to insider trading and executives, the market has always responded with a wink and a nod. By definition, every time an executive buys or sells a stock it's insider trading. Do CEOs have information that no one else has about their company? You betcha. Do they trade on that information? Too many of them seem to.

And this is no secret. There is a whole school of investing devoted to watching the trades of executives -- it's viewed by some investors as legitimate insider trading.

So it's no surprise that the Wall Street Journal was able to round up a number of questionable examples of insider trading by executives. The WSJ's study itself, as others have pointed out, was flawed. It was set up in a way that was the data equivalent of entrapment.

But those who are harping on that are missing the point. The WSJ didn't need to do its own study. In the past two years, the Securities and Exchange Commission has nabbed an alarming number of hedge funders for insider trading, some with the help of top executives. The SEC seems to be building a case against top hedge fund manager Steven Cohen of SAC Capital -- it recently charged one of Cohen's former traders with one of the biggest insider trading schemes in history. What's more, there are plenty of studies out there already that show insiders routinely beat the market, something very few full-time professional investors are able to replicate.

MORE: A who's who of Steven Cohen's web

A decade ago, the SEC came up with a system it thought would limit or eliminate executives from profiting from insider information. The agency encouraged executives, but didn't require them, to lock in dates well in advance for when they would buy or, more often, sell their companies' shares. If stock sales were planned for months, and were routine, then there would be no ability to cheat. Right?

Not exactly. The plans proved to be more flexible than the SEC envisioned. But that's not their biggest weakness. In most instances of apparent insider trading by an executive, a CEO miraculously appears to be able to dump a big chunk of their stock holdings right before the company reports bad news, like the quarter was worse than expected, saving them hundreds of thousands, maybe millions of dollars. Other shareholders, not in the know, take the hit.

But a pre-set stock plan won't stop that. That's because a CEO has the ability within some reason to decide when to let the market know that his business has taken a turn for the worse. Seems natural to release news that will be bad for shares on a day when you are holding less of those said shares.

MORE: Blackrock's new bond plan

Alan Jagolinzer, a business professor at the University of Colorado Boulder who has studied these plans, says there is a lot of variation in the way the plans are set up, but there isn't any evidence to suggest that executives are kept in the dark as to when their pre-set sales will occur. Indeed, a recent study of executive stock option plans found that companies were more likely to announce bad news in the days after a stock grant expired than before.

So given that preventing insiders from acting on private information is very, very hard, what can we do about it? First off, executives who lock in stock sales in advance shouldn't be able to know when the actual sales will occur. Blind trusts aren't perfect, but they are better than the alternative.

MORE: Who needs a blind trust?

Second, executives should only be allowed to sell after earnings releases, not before. The point of stock options is to align executives with shareholders. They should be forced to share the pain when their company fumbles, not be able to sidestep it by selling in advance.

There actually is one silver bullet that would end 90% of all illicit insider trading by executives: Ban stock options, or otherwise paying top executives in stock. Unfortunately, that's probably not going to happen. Not just because of a widely held, but not really proven, belief that executives who are paid in shares are better for shareholders. The reason options and stock grants aren't going away is because of accounting.

By current rules, paying executives in stock appears on the books to be costless. Shareholders, too, share in the benefit of the accounting illusion. But it's not costless. Until the market is willing to give that up, there will always be executives who are able to cash in by knowing before others that they have screwed up, leaving regular shareholders to take the hit.

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Does Powerball really boost the economy?

Lottery players in Tiverton, R.I. line up to buy Powerball tickets.

NEW YORK (CNNMoney) -- Millions of Americans are buying tickets for Wednesday's $500 million Powerball lottery, and you'd think that would mean a big economic boost for the 43 states participating.

That's not a sure bet.

Americans spent $65.5 billion on lottery tickets in the last fiscal year, up almost 10% from the year before. And lottery ticket sales have increased every year since the first state lottery in 1965 -- even during the Great Recession, when the sale of most other items declined.

About 25% of the money taken in by lotteries goes to state governments, funding everything from schools to construction and even programs to help problem gamblers.

That's a big infusion for state coffers. But some experts wonder if state economies would get more of a boost if consumers bought goods and services instead of lottery tickets. The research makes it pretty clear that the answer to that question is a resounding "yes," according to Victor Matheson, economics professor at College of the Holy Cross.

"People spend disposable income on lottery tickets rather than buying a coffee at Starbucks or some gizmo at Best Buy," he said.

Related: Powerball jackpot hits $425 million

Matheson argues that spending money with businesses helps spur much more economic activity than gambling on the lottery. While a quarter of Powerball revenue goes to the 43 states plus Washington D.C. that participate in it, about 60% of the money spent on tickets is paid out in the form of winnings. The retailers who sell the tickets get about 5% to 6% of ticket sales as commission, meaning they get only $10 to $12 for every 100 Powerball chances they sell. The remaining 9% or so goes toward administrative costs and advertising spending.

Related: Other giant jackpots

Lottery tickets have become a significant source of funds for states, with just over $16 billion flowing through to state coffers in the most recent year. That's about 2% to 3% of their total budgets, said Matheson, which doesn't sound like much. But he said that given the difficulty states have raising tax revenue in the current economic and political environment, those funds would be difficult to replace.

"[There's] an aversion to raising taxes," said Matheson. "It's difficult to see how you would eliminate that much of state budgets and be able to come up with money elsewhere."

Related: New hit to state budgets

A big jackpot like this week's Powerball jackpot can be a mixed blessing for retailers selling tickets said Jeff Lenard, spokesman for National Association of Convenience Stores. While the retailers appreciate the extra traffic the lottery brings in, it can also chase away their regular customers who might have otherwise have been spending money on products with better profit margins.

"Convenience stores sell convenience," he said. "You don't want to chase away someone from buying a cup of coffee."

Still, Lenard said many shop owners are happy for the chance to reach new customers. He said the busiest days on record for convenience stores were back in March of this year, when the competing Mega Millions lottery had a record $656 million jackpot.

First Published: November 27, 2012: 5:27 AM ET

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