The original claim for government was that it was instituted to guarantee justice. Its role, in other words, was a negative one: it punished wrong-doers. The "wrong" was an assault by a person or group upon the persons or property of others. If no one complained, the "wrong" either wasn't wrong at all, or the parties involved settled it amicably, or decided to overlook the matter.
That was then: this is now. There are hundreds, if not thousands, of "laws" on the books which punish individuals chosen by the government for having violated no one's rights, and which do not require the complaint of any citizen to be put into action. Inside trader laws fall into this category.
This insider-trading is tricky stuff. The position of the government is that, when purchasing securities, you shouldn't have any particular knowledge of what you're doing, or if you do, you not act upon it. The Martha Stewart brouhaha illustrates this perfectly. Informed by a friend with connections at ImClone that the company was being denied approval for its cancer drug Erbitux, Mrs. Stewart assumed, quite reasonably, that the news, when it became public, would cause a drop in the price of the stock. So she sold her 3,928 shares. She could go to jail for doing that.
Obviously, the government's position is that Stewart should have held onto her stock, though knowing full well that it would almost surely drop in value. Is that a reasonable thing to expect someone to do?
The role of the tip-giver is given great importance. If he has a fiduciary obligation to the company involved, then he is surely wrong in tipping off friends and family that the stock is going to drop prior to that becoming public knowledge. That's quite understandable: his job is to protect the value of the company assets; in warning his cronies that the stock is about to tank, he's certainly not doing that. On the other hand, once the news of the company's problem becomes public knowledge, the value of the stock will drop anyway, so one might ask what difference it makes.
The person receiving the tip, however, has no fiduciary obligation to the company. Indeed, his only fiduciary obligation, assuming the stock is held in his own name, for his own use, is to himself. Nonetheless, if the tip is inside, i.e., not public, information, even the "tipee" can be held liable. For example, a psychiatrist, informed by a patient that her husband was likely to become head of BankAmerica, and that his backers would invest in the bank if he did, bought shares in BankAmerica, and made $27,475 when the stock appreciated after the public announcement of the patient's husband's plans. He got five years probation, and was fined $150,000.
Another fellow bought shares in a supermarket chain when he learned from a relative (who heard it from his wife, whose uncle was head of the chain) that the stores were going to be taken over by A&P. This poor guy was sentenced to two years in jail, but, since the tipper had no fiduciary relationship to the company, he was released – after serving nearly half his sentence. A year in the slammer – oh, well!
Does anybody ask, "Who's the victim?" If you're fined $150,000, or spend a year in jail, it's presumably because you've harmed someone, or some group. Who? Was Martha Stewart's broker injured by buying her stock the day before the price dropped? But it was the broker, allegedly, who tipped her off! Was it the individual who bought that stock, or some of it? But the following day the price would have fallen anyway.
And who collected the $150,000 fined we mentioned? Was it distributed to the supposed losers in the stock transaction? Aw, come on! The government put it in its pocket, of course. It was the injured party!
Finally, is there politics involved, do you suppose? There were many puts and calls (the puts far outnumbering the calls) involving American Airlines stock immediately prior to 9/11. Somebody was expecting a drop in the price of that stock. Are these transactions being investigated with the same vigor as the investigation of Martha Stewart? What have you heard on the evening news about these airline stock sales?
Martha, it's not enough to raise your own vegetables, scramble your own hens' eggs, and decorate your own house. You've got to shove some cash at your own politicians. Insider trading seems like the kind of "offense" that can be very selectively prosecuted.
June 28, 2002
Dr. Hein [send him mail] is a semi-retired ophthalmologist in St. Louis, and the author of All Work & No Pay, which will soon be available at Amazon.com.
