Don't Diss Domestic Diva

New at Reason: With Halloween decorating season just around the corner, we're presenting a delicious nibble from our October goody bag. Michael McMenamin goes to bat for Martha Stewart, whose troubles with the SEC should be packed into a nicely fringed credenza and buried under the hydrangeas.

Comments

[Hovig John Heghinian]

An excellent article, describing a sickening government trend. Between Martha Stewart and Microsoft, I wonder sometimes whether "too much success" in America is a punishable offense.

I also wonder whether Martha Stewart will do the same thing Microsoft has done since their infamous prosecution: Started paying campaign contributions (see chart at bottom).

[Rob]

If you look at the facts, Martha merely followed the herd. Period. I work in the securities industry, and many of my co-workers agree that if anyone did anything dodgy, it was her broker, who told her about the trading activity of other clients.

My friends and I see this as a fishing expedition by the SEC to further expand the boundaries of securities fraud. It is completely insane that she's being accused of securities fraud for protesting her innocence in a criminal matter. The definition of Catch-22. Especially when it doesn't seem to have worked anyway; her company's market cap is about half of what it was before the "scandal".

[R.C. Dean]

Insider trading is based on violations of fiduciary duty. Martha was not an Imclone fiduciary, and was not an insider. She cannot be guilty of insider trading.

Martha did not obtain her information from someone who was fiduciary to the Imclone shareholders. She got it from her broker, who in turn was reporting that certain insiders had traded. The fact that insiders trade is not, in itself, inside or even non-public information.

Thus, the SEC did not bring an insider trading lawsuit against Martha because it had no case at all, except under the discredited "asymmetric information" theory. Once you go outside the insider/fiduciary trading theory, there is really no stopping place on who has an unfair advantage in a transaction, until you get to the point where both sides have exactly the same information and analysis.

Rather, the SEC's case was based on Martha's denial, in public, that she had engaged in insider trading. This was a true statement. Somehow, making a true statement is treated by the SEC in this case as engaging in securities fraud.

[Rob R]

Bruce,

You are completely wrong on this issue...

You wrote:

Let's look at McMenamin's arguments. First he says,

"Stewart was not the only investor connected to Waksal who joined the selling mob that day."

So it wasn't that serious a crime. Again, not a great defense.

It appears you missed the fact that "insider trading" is undefined, and the government is selectively applying it to whomever it wants.

I'd like to know why only 1 WorldCom executive, the CFO, as far as I know, is being charged with any criminal activities regarding their LYING about corporate profits.

Where is the SEC when you need them? Why doesn't the SEC go after REAL criminals, rather than bring this stupid case to trial, where they don't stand a chance?

Insider trading prohibitions are arbitrary laws.

You also wrote:

"Then McMenamin gets to the meat of his argument, which seems to be that insider trading is good and that you can never get rid of it anyway. The argument that IT is good is made with respect to situations different from Martha's case. This was not speculation by those more knowledgable about the company conveying information to the market; this was the knowledge of an important yes/no piece of information by the sellers, that the buyers were totally unaware of. And it is wrong."

And why didn't the buyers do their OWN research, and come to their OWN conclusions regarding the possibility that the company's drug might not get approved?

What obligation does Stewart, or anyone else for that matter, have to other market participants?

What is wrong is when a seller LIES to a buyer, telling something that is patently untrue. If a private car owner tells me a car has 70,000 miles when it really has 170,000, AND HE KNOWS IT, then he is committing fraud.

However, if he tells me "I think this car has 70,000 miles, but there have been odometer problems" then it is MY responsibility to take the chance on buying the car.

You claim:
But markets depend on symmetrical information.

This is wrong, and explained in the article. Markets are based ASYMMETRICAL information, or different evaluations of the same information. You don't go to a doctor because you KNOW what is wrong with you. You go to an MD because you DON'T! The doctor has more knowledge and experience, and that is what you pay him for.

"When I buy something I want to have the same information about it as the seller."

And when I play poker, I like to know what hands my opponents hold. But does that mean they are obligated to give it to me?

The ONLY information relevant to a rational consumer is "will this product or service do what I want/need it to do cost effectively?"

Some of this is obtained from the seller, but it is ridiculous to expect the seller to willingly disclose information that will hurt his chances to make the sale. There is a grey area over what a seller should divulge, and what research a buyer should do on his own, and I'm skeptical that any clear cut rules can be laid out that will cover all situations. Caveat emptor.

"Sorry if I seem to take this so seriously, but this intellectual defence of corruption somewhat sickens me."

What sickens me is when people make poor financial decisions, and fail to take responsibility for them by blaming others or "corruption."

Only a fool would buy a stock plunging on heavy volume just before the FDA is about to release its decision on a company's main product. Those who bought on such in risky situation should have known better.

Just because someone invests in the stock market does not mean they are ENTITLED to profits, which is what so many people think today.

Any time someone loses money in the market, someone else is to blame. Very few can take personal responsibility for their own trading and investing losses. The few that can have hope of making money.

Stocks are RISKY assets, and a potential buyer had better educate themselves upon the risks and rewards, because no one else will.

[Keith]

Good article. I read it in the print edition.

[Bruce Gottfred]

Let's look at McMenamin's arguments. First he says,

Stewart was not the only investor connected to Waksal who joined the selling mob that day.

She wasn't the only one breaking the rules -- hardly a great defense for a crime. Then he says,

Likewise, the government says insider trading is illegal because it does "economic harm" to the market. Therefore the size of the trade must matter. Aliza Waksal avoided $630,295 in losses and her grandfather three times that, while Stewart saved only $45,000.

So it wasn't that serious a crime. Again, not a great defense.

Then McMenamin gets to the meat of his argument, which seems to be that insider trading is good and that you can never get rid of it anyway. The argument that IT is good is made with respect to situations different from Martha's case. This was not speculation by those more knowledgable about the company conveying information to the market; this was the knowledge of an important yes/no piece of information by the sellers, that the buyers were totally unaware of. And it is wrong.

As to the fact that you can never get rid of it completely, I agree. But markets depend on symmetrical information. When I buy something I want to have the same information about it as the seller. This is an impossible ideal, but when obvious infractions such as Martha's are overlooked, they become more common. Maybe the SEC is making an example of her and maybe she is not the worst offender, that still doesn't excuse what she did.

Sorry if I seem to take this so seriously, but this intellectual defence of corruption somewhat sickens me.

[Anonymous]

If it sickens you, you should be looking at the government's own, much more massive abuses of it before you isolate you thinking on something that is at worst a petty abuse, and most likely completely on the square.

[Gwyn Thomas]

I'm sorry,I'm just not seeing the "corruption" in not wanting to see one's hard-earned money go down the loo.I believe Mr. McMenamin rung in the bit about Mr. Waksal's daughter to underscore the arbitrary nature of who is indicted and who is not-that is how I read it.

[Brad S]

Bruce - but the point is, for there to be no "insider trading", at least by the government's definition of it, every single participant in the market would have to have the same access to the same information at all times. To have no "insider trading" would be to have perfectly symmetric information at all times, which is theoretically preferable but impossible in practice.

As far as I can tell, the only thing Martha Stewart is guilty of is basically being unpopular. Granted, maybe she deserves to be unpopular, since she is your basic bitch on wheels. But a lot of people who simply don't like her style have joined the media lynch mob without even understanding the charges against her, much less understanding whether or not said charges have validity.

[Gwyn Thomas]

The likely end of "symmetric information" would be-no trading at all.I make my living as a used record dealer by possessing odd bits of info.If I were forced to disclose to someone that the record he is willing to sell me for a fiver is worth $100 to someone in the UK,there would be no transaction on my part at that price,and likely none on his side as well,unless some British soul cult fan magically stumbles into the equation.

[Jean Bart]

The argument that outlawing insider trading won't get rid of it is a bit like arguing that outlawing criminal acts of homocide won't get rid of it.

As to "symmetric information," clearly there is no expectation that this be the case; however, SOME information (and not most) cannot be used as a means to trade on, partly as a result of fiduciary responsibilities and partly because some information provides such an unfair advantage as to undercut the transparency of the market. In other words, Gwyn Thomas, likely I can do research on said record to discover its market value in venues; my lack of knowledge on its value is not due to secret information that is unavailable to the industrious. Martha Stewart trade on information which was unavailable to most, and undiscoverable at the time of the trade.

As to the incosistency of the application of the law - that is hardly an argument for allowing insider trading, though it is an argument for SEC reform.

[tim]

Bruce Gottfred, that is a pretty serious misrepresentation of McMenamin's arguments; among other things, what you call different "situations" are legal precedents indicating (to me at any rate) that Stewart is not guilty of any crime. Other readers, please don't take my word for it, or Gottfred's. Read the article and see if McMenamin doesn't pretty persuasively cite legal chapter and verse, and the specifics of Stewart's case, in making his point.

[Gwyn Thomas]

Not true,mate,I'm talking about a one-off situation like a record fair-you as a neophyte would have no way of obtaining such information in such a time frame,it's not printed anywhere and is closely held by the DJs themselves-very much insider information.As for Imclone,I understood that the rumors of an adverse FDA ruling and its price decline preceded Ms. Stewart's sale by several weeks at least-how was the information "unavailable",then?

[Gwyn Thomas]

Even if I accepted that trade by "insiders" was wrong,Ms. Stewart was clearly not an officer of Imclone,just another stockholder,and had no fiduciary responsibility to anyone.

[Citizen]

I second tim, Bruce, you've done no justice to Mcmenamin's arguements.
"Stewart was not the only investor connected to Waksal who joined the selling mob that day." She wasn't the only one breaking the rules -- hardly a great defense for a crime.
Are you suggesting that ALL of those in the "selling mob" were guilty of insider trading? No, the point is that by the time Martha got any information at all, it was not "insider," as the price had already dropped $6 a share. Seems like the information was awfuly public.

As stated in the article, if anything, her broker is guilty of breaking client confidence, but all charges against MS, especially the one the SEC is going to court on, feel pretty flimsy.

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