It seems likely that we will soon see a resolution of the government’s prosecution of Martha Stewart. Aside from the leaks from the negotiations regarding a possible plea deal, the most reliable of all possible omens has been sighted: Barbara Walters will conduct one of her patented powder-puff interviews with Martha.
From day one, I have been saying, based on my rusty recollections of securities law, that the feds have no case for insider trading against Martha because she is not an insider. I was delighted to read this article confirming my suspicion that the whole Martha Stewart thing has been an abuse of power by headline hungry New York lawyers and DC regulators.
You have regulators continuing to apply a legal theory on insider trading that has been repeatedly rejected by the courts, and which is ungrounded from any public policy other than class envy. You have prosecutors skipping over a whole raft of more culpable people to target Martha because they know they will get better headlines from attacking her.
It is interesting to note that, even under their rejected and discredited overbroad theory of insider trading, the feds were unable to put together a case against Martha, and are not pursuing insider trading charges.
What, then, is Martha being charged with?
The most serious criminal charge against her is not perjury or insider trading but securities fraud, based on the fact that she denied to the press, personally and through her lawyers, that she had engaged in insider trading. This was done, the feds say, not for the purpose of clearing her name, but only to prop up the stock price of her own publicly traded company, Martha Stewart Living Omnimedia. In other words, her crime is claiming to be innocent of a crime with which she was never charged.
The whole disgusting saga reads like a textbook example of abuse of power by regulators and prosecutors.
She should not have been charged. The point about insider-trading charges that were not made applies also to Michael Milken, who was in a position to profit hugely from inside information but never did so. Milken pled, and paid hefty penalties (and I don’t blame him — his family was essentially being held hostage by indictments and threats thereof, and RICO), but I hope Stewart hangs tough. It sounds as though the situation is at the stage where the prosecutors, having failed to intimidate the defendant, are now seeking a face-saving deal. We will know they have lost if she agrees to plead to a misdemeanor and pay a modest fine.
Martha’s only guilty of being a successful woman, but as a role model to housewives and not as a professor of gender studies in some university.
She’s also made a bucket of money doing so, which automatically earned the enmity of the Terminally-Envious (journalists, quasi-socialist politicians etc) in New York.
I hope she fights it all the way, and doesn’t choose a plea bargain.
Martha is no powderpuff. I would expect her to be fighting this like a wildcat, and would bet that if they have no case, she will prevail. She’s obstinate and has a ton of money.
ummm.
I seem to recall that the evidence seemed to point to the fact that an insider with advance information, Sam Waksall (sp?), the Prez of IMCLone (or whatever it was called) called her, and then she immediately then sold her stocks.
A day or two later the company had to make an announcement that their major product was a bust and stock price consequently crashed. The Prez knew about it when he called Martha.
How is that not insider trading? (Advance information, not available to market sent to certain investors who all sold. Sounds textbook clear to me.)
Did the time-line not work out?
Was her broker’s suspicious sounding behaviour in fact above board?
Fred
p.s. Now that’s the kind of friendly phone call I want, I’d short that stock like a bandit with golden advance info.
pps. All that being said, it was by her and other standards of Wallstreet criminality, utterly piddling, and they should try to get the bigger fish rather than worry about Martha.
How is that not insider trading? (Advance information, not available to market sent to certain investors who all sold. Sounds textbook clear to me.)
It is not insider trading because Martha is not an insider of Imclone, and was not acting on behalf of such an insider. The textbook illustration of the principle at work here is a visitor who overhears gossip by the President and Board Chair in the company men’s room. The visitor owes no duties to anyone, and is free to trade on the information, while the President and Board Chair are not.
You are making the same mistake the SEC is making, trying to convert insider trading into an attempt to control the flow of information, from a breach of fiduciary duties owed by corporate insiders (officers, directors, employees, and their agents) to the corporate shareholders. If you prohibit people from trading based on information that they might have that has not been pyblished, you have crippled the ability of the markets to take new information into account, and have really outlawed trading as we know it.
The article does a nice job of critiquing this approach to insider trading. Everyone trades on limited information; trying to change that is both impossible and counterproductive.
If you outlaw the use of “advance information, not available to market sent to certain investors who all sold,” you have removed all incentive to do market research. After all, market information is valuable in inverse proportion to the number of people who have it. Why should I hire a staff of researchers if I have to publish their findings before I can use them?
Trading on information that is limited in distribution is the key way that this information finds its way into the market, via price signalling. Efficient market theory requires that people trade on information that is not published.
Also, your facts are a little off. Sam did not call Martha; Martha’s broker called her. He is not an insider either.
a perfect example of gregarious prosecutors pushing vague law against rich people on the grounds that they are going to get richer just so said prosecutors can get a raise and a better office. If that’s not high-minded hypocricy I dunno what is.
Um, R.C., that’s not exactly true. The code forbids trading on inside knowledge, for people who have access to such knowledge, by virtue of their position.
In other words, it’s a scienter requirement, or a bad intent requirement.
If you should know better than to trade on inside information, then the law says you should have known better than to trade on it.
If your special position gets you the information – you are a company CEO, or accountant, or even the janitory- you can’t trade on it.
If your brother is the CEO, or your best friend is the accountant, you still can’t trade on it. You know it’s inside information, you are a sophisticated person who runs R.C. Dean Living Magazine Inc., and you should know better. You have scienter, bad intent.
On the other hand, if you hear a couple jokers at a bar talking about how Imclone is about to hit the fan, and you go home and place a sell order on your e-trade account, well, you are probably okay because you just happened into the information – you didn’t get it by virtue of your privileged position.
This isn’t exactly a discredited legal theory. Sometimes the courts buy it, sometimes they don’t.
The lesson here is simple. I’d be careful about trusting Reason Mag for legal analysis. You have a lot of non-lawyers pronouncing various legal doctrines dead, live or triumphant – which is probably about as reliable as a fishmonger’s pronouncements on quantum physics. That magazine has pretty much gone to hell since Virginia Postrel moved on…
Insider trading laws are stupid, market crippling, idiot-rewarding, intrusive, and confiscatory. They are an attempt to turn markets from trading based on value estimates, into a “fair” gambling game. Scrap ’em, says I.
Omnibus – my recollection of security law is rusty, as I admit up front. However, the “by virtue of their position” is, or was, another way of saying you had to be an insider, meaning someone with fiduciary obligations to shareholders (which includes both the CEO and the janitor). Someone acting on behalf of an insider (such as a family member or other person affiliated with an insider) is also caught in the net.
Saying a nonfiduciary becomes an insider if they should have known better is completely circular – this defines an insider as someone who knows they are defined as insider. It also makes a hash of the principle that ignorance of the law is not a defence.
Being a friend of the CEO, by contrast, does not (or should not) bar you from trading in that stock, regardless of how big a blabbermouth he is. If the CEO goes around leaking confidential company info, there are legal sanctions that can be taken against him, but his friends and acquaintances owe no duties to shareholders or anyone else to limit their trading.
Reading “by virtue of their position” much more broadly than this is what leads to trouble, and has not been, as you note consistently accepted by the courts (nor should it be). After all, the market analyst gets their information by virtue of their position, as well, and may have this information sourced, perfectly legally, within the company (they get it by asking questions of employees, for example).
In any event, this has been the subject of an ongoing legal struggle for close on 40 years, and the SEC has been struggling to draft regulations on insider trading for nearly that long.
The fella who wrote the article for Reason, by the way, is a lawyer. I would suggest that, if your view of the law is correct, the feds would have a laydown win against Martha for insider trading. If that is the case, why have they decided not to bring insider trading charges?
For what it’s worth, I remember this full well since it was my own company that was being acquired : http://www.sec.gov/litigation/litreleases/lr16848.htm.
Most of the people involved were not insider. They were family relatives, friends, business acquaintances of those friends.
So this would agree with Omnibus Bill.
The biggest joke of all in the whole affair is that the situation which hurt Imclone’s stock price has reportedly changed, and I understand that the price is going back up.
Sylvain, Omnibus – I am not denying that the SEC has pursued the overbroad reading of “insider” trading, or that they may have gotten away with it. I am saying that their approach has been rejected by at least some courts, has no good jurisprudential basis, is bad policy and economics, quickly becomes incoherent in the real world, and is an open invitation to prosecutorial abuse.
Further, Sylvain, family members are (and arguably should be) caught by fiduciary-based insider trading rules. Friends and others can be caught by such rules if they are acting on behalf of, or as part of an enterprise with, the true insider (split the profits, mutual leaking, etc.).
Hear hear Julian, my thoughts on the subject exactly!!
Instantly disclosed insider trading could send perhaps the best price signals possible about corporate value, but instead, it’s crippled and they’ve tried to remove it from the market.
Stupid stupid stupid
It’s about as dumb as trying to legislate what chemicals hypersmart apes can put in their bloodstreams. Oh wait they do that too!