by Tibor R. Machan by Tibor R. Machan
Let me start by noting that I am no expert in SEC regulations. The law isn't my area of concern here, ethics is. Did Martha Stewart do anything morally or ethically wrong?
What did she do? What we know of is that she had sold stock in a company that was about to go down before anyone else but some of her close pals knew this. We don't know how she came to decide to sell, whether it was because she was told about the future prospects of the company, because she had an educated guess guiding her, she overheard something that alerted her, she had friends in high places whose behavior indicated it's time to sell, or perhaps there was an agreement, as she claims, that she should sell if the stock gets to a certain price. We know she sold in time to escape the effects of the company's downturn.
Since in a free society the law ought only to punish those who have been convicted of some kind of rights violation, including failure to heed one's contractual obligations, it isn't possible to tell now whether Ms. Stewart did anything that should be illegal. Indeed, the trial bore this out since the allegation of insider trading, as vague as that idea is, was dismissed.
Initially, however, Ms. Stewart was sued by the SEC and not simply being reprimanded by the NYSE, for insider trading. It is not only a matter of the rules of the NYSE but the national regulatory (SEC) law that one may not use insider information when one trades stocks. Her subsequent conviction on charges completely unrelated to insider trading still cannot be completely divorced from the insider trading charge since had she not been charged with it, she would have had no reason to try to hide from the feds, to lie to some of them (although not under oath, as Bill Clinton did, who got off scot-free).
The really pertinent question is whether it ought to be the law to prohibit insider trading, rather than an optional provision of private contracts. (A particular business can make it a matter of its own policies that employees must not trade that way or, indeed, they must arrive at some exact time for work; when they defy this, they might suffer consequences – but this would have little to do with national federal regulation, only with the contract and thus subject only to litigation between the parties involved, not the SEC and the company.)
The bottom line is that insider trading is not wrong, actually, not if it doesn't involve failure to perform one's fiduciary duty or stealing information. If one learns of something from a friend or overhears a conversation or obtains the knowledge via a psychic, there is nothing wrong with making a profitable move that others hadn't had the chance to make. Or, to quote the Wall Street Journal, "Presumably a scrap of paper could blow into your pocket and if it contained material nonpublic information, you could be charged with insider trading for acting on it."
This, by the way, is so elementary that it is amazing that more editorialists and pundits do not make note of it. After all, in the newspaper business a great deal hinges on scooping the competition. Indeed, reporters receive prizes for doing this, namely, jumping ahead of the crowd with information only they got a hold of so as to score! They and their editors should be especially keen on condemning federal insider trading laws – by the logic of such laws, scooping would have to be prohibited.
How silly these laws are can be gleaned from the fact that in personal conduct getting the jump on someone is often quite simply prudent. Say, a single woman learns that a very eligible and desirable potential mate has turned up in her neighborhood. Before she makes a move to get acquainted she surely doesn't owe it to all the other single women in the region to report this fact. Quite the contrary, she should do her best to get to the potential mate before anyone else has learned of the situation.
Insider trading laws aim to mimic rules of golf, baseball and football, all of which aim to even things out between competitors. But this isn't because it is unfair to have an advantage, not at all. It's because the fans wouldn't like a contest in which the same folks – individuals or teams – keep winning. So, to make things interesting, rules are introduced that will mix things up a bit.
For my money, at least from what we have been told, Martha Stewart, not unexpectedly for a superb entrepreneur, made some prudent financial moves and the feds, along with many resentful Americans, seem to hate her for it. She didn't make the right moves with the feds, of course, who came after her for that and for nothing else, really. As Juror No. 8 had put it, "Maybe this is a victory for the little guys who lose money thanks to these kinds of transactions. Maybe it's a message to the big wigs." So, it was about envy, resentment, not any violation of anyone's rights.
They might as well indict all those high and mighty journalists, the big wigs, who have scooped their competition, for failing to play fair and allowing everyone to get the information when they did. How ridiculous!
Tibor Machan [send him mail] holds the Freedom Communications Professorship of Free Enterprise and Business Ethics at the Argyros School of Business & Economics, Chapman University, CA. A Research Fellow at the Hoover Institution, Stanford University, he is author of 20+ books, most pertinently, The Business of Commerce: Examining an Honorable Profession, co-authored with James Chesher.