Martha Stewartís ĎCrimeí
Tibor R. Machan
by Tibor R. Machan
me start by noting that I am no expert in SEC regulations. The law
isnít my area of concern here, ethics is. Did Martha Stewart do
anything morally or ethically wrong?
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 donít 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 itís 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 companyís
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 oneís contractual obligations, it isnít 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.
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).
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.)
bottom line is that insider trading is not wrong, actually, not
if it doesnít involve failure to perform oneís 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
hadnít 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."
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.
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 doesnít 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.
trading laws aim to mimic rules of golf, baseball and football,
all of which aim to even things out between competitors. But this
isnít because it is unfair to have an advantage, not at all. Itís
because the fans wouldnít 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.
however, is not a game! Its aim is to secure prosperity, economic
success. And that requires savvy, acumen, not bending over backwards
to please oneís competitors.
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 didnít 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 itís a message to the big wigs." So, it was about envy,
resentment, not any violation of anyoneís rights.
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.
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.
© 2004 Tibor Machan