Martha Stewart versus the State
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 bust 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 whatever. 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. True, the New York Stock Exchange requires of its members to abstain from insider trading, and becoming a member is a largely voluntary process. So, if Ms. Stewart traded with "insider" information -- meaning information other interested parties didn't have available for them to utilize -- this could well be a violation of her agreement with the NYSE. So, what are the penalties the NYSE imposes on those who violate its rules? The SEC is suing her in civil court for insider trading, and the feds are after her in criminal court for allegedly misleading her stockholders.
So, then, Ms. Stewart is being sued by the SEC and not simply being reprimanded by the NYSE, for allegedly doing some 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.
The big 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 arrive at some exact time and when they do not, 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 if it doesn't involve 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 not 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 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 and 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. But finance is not a game! Its aim is to secure prosperity or economic success. And that requires savvy, acumen, not bending over backwards to please one's competitors.
For my money, at least from what we have been told, Martha Stewart, not unexpectedly for a superb entrepreneur, made some prudent moves and the feds hate her for it. They might as well indict all those journalists who have scooped their competition for failing to play fair and allow everyone to get the information when they did. How ridiculous!
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