RoR: Forum

Right on, Tibor. By what right does Uncle Sam tell individuals not to act on their knowledge? Do individuals own their minds or not?

Post 1

Thursday, June 19, 2003 - 6:06pm

As a rational person, I cannot imagine myself buying anything if the contract of sale included a disclaimer such as:

"This transaction is valid and final even if the seller has knowingly witheld from the buyer information that, if disclosed, could cause a reasonable buyer not to complete this transaction."

As a rational person, I would not buy "a pig in a poke" - or anything else - under conditions that did not require the seller to disclose such information. I can't imagine any stock transaction taking place between rational people in a free society, where the parties would fail to insist on disclosure of any information that could be reasonably expected to affect the conditions of sale.

In this case, if the parties did not have such a provision in their contract, it would only be because their contract already specified that the transaction conforms to SEC regulations, which specify that if relevant information is witheld then there is no informed consent to the transaction and therefore no valid sale. In the absence of an SEC, any rational buyer would have insisted on an equivalent provision in any reasonable private contract of sale.

The ethical question must be, "would this transaction have taken place in the absence of coercion" - "which means, ""would this transaction have taken place in a free market?" But in a free market, reasonable people would insist on full disclosure as a pre-condition of sale, so the Martha Stewart stock sale would not have taken place without fraud on her part. The existence of SEC regulations does not make this sale less fraudulent than it would have been in a market without an SEC.

Post 2

Thursday, June 19, 2003 - 7:36pm

This would have to be one of the dimmer things I've read.

For starters, game rules are not designed to "even things out between competitors" to keep fans interested. Exactly the opposite - they're designed to the make initial conditions - the "playing field" - as neutral as possible so that the true difference in skills of the team can be revealed! (Actually, fans *love it* when good teams or players keep winning). A game falls into disrepute when mediocre or bad players evade rules to win, and get away with it time and time again, because it's a false test of talent and ability. (Look at the farce professional boxing has descended into).

Given that he doesn't get what rules are for in sport, (in fact, he makes it sound like they're some kind of socialistic handicap on talent designed to keep the lumpen masses interested!) it follows that he doesn't have a clue what they're for in business either. Here, Martha wasn't just taking advantage of an opportunity to gain, like a woman looking for a hot date. Ethically, she was selling something *she* knew was a dud, but which her buyer *could not* reasonably know! In this respect it is no less fraudulent than passing a phoney dollar bill.

While Martha's fraud is minor in the current business context (and is a bit of a distraction from more serious cases), it is plainly fraudulent nonetheless, for the precise reasons that Adam Reed coolly points out.

Post 3

Friday, June 20, 2003 - 4:28am

You know Daniel and Adam seem to have forgotten something.

Life is a calculated risk. And the stock market is exactly the same. I had the chance to listen to a lecture given by a SF stock Broker two weeks ago.

The essence of his advice was this. The stock market is a gamble.

To win he said that you have to manage you risk according to two golden rules: (1) Set your limits for loss and winning and stick to them, don't flog a horse to ring every last drop of life from it because death in this game is *VERY* sudden and (2) never take a 50:50 bet (He was a 70:30 man). Why? Because if 1/2 the time you win and 1/2 the time you loose you don't make any cash.

Insider trading is essentially forcing someone to ignore the 70:30 bet by *ignoring* the knowledge you have gleaned that proves that the bet is 70:30. That's DUMB.

The stock broker: He is a very rich man because he followed these rules and never waited around for a 99:1 bet - if he had he would have remained a pauper.

Which is to say this: If you play the stock market you are going to loose at some point, it is a gamble - that's *why* the rewards are so huge.

*IF* you want a safe bet get a savings account or better still a mattress.

Sight unseen I'm going to make this prediction about Martha's little indescretion. It was a judgement call on her part - she didn't know 100% that calamity would follow. Even if she *had* the calamity wasn't of her making, and the morons that bought her stock without making their *own* inquiries were just playing the stockmarket. They were gambling and when you gamble you will loose.

To make money when you gamble you must manage your risk well.

Post 4

Friday, June 20, 2003 - 4:31am

Friday, June 20, 2003 - 11:34am

Just about everyone in the stock market knows things other people don't. Why should it be illegal to use what you know? Should research be illegal, unless everyone has full opportunity to do exactly the same research? The distinction between "public" and "inside" information seems unclear at best. What if Martha had sold her stocks on a hunch? She would have done the same act exactly. So shouldn't hunches be illegal? Any law that makes it illegal to act in a particular way based on your motivation for the act is troubling. The consequences of the act should be what count. Any participant in the stock market should not be counting on "fairness" or uniformity. He should be expecting utter randomness. If he acts expecting randomness, he will not be harmed in any way by "insider trading".

Post 6

Friday, June 20, 2003 - 12:21pm

This has also been a discussion on the OWL board and all and sundry seem to have missed the underlying reason why insider trading is fraud, pure and simple.

The officers of the company are hirelings of the stockholders, who own the company. The officers are paid for their services to uphold the interests of the stockholders. The officers have, from time to time, privileged information that only they have access to. If they act on
this information to their own benefit rather than to the benefit of all the stockholders then they
have a conflict of interest and have defrauded those who pay their salary, stock options,
whatever. The obligation extends to the lawyers, brokers, accountants who are also privy to
the privileged information. If they give tips to their friends they are defrauding the
stockholders and if the friends know that the information they receive is privileged then they
also are defrauding the (other) shareholders.

If you want to argue that Ms. Stewart didn't know that the information she got from her
broker was privileged then I suppose you can try to make a case but the coincidences would
seem to be overwhelming.

Paul

Post 7

Friday, June 20, 2003 - 8:03pm

The "hey, life's a gamble!" defense shows that Robert W obviously doesn't spend much time in casinos.

Casinos are among the most rule-bound, obsessively vigilant institutions on earth, precisely to *avoid* the equivalent of "insider" dealing. Dealers are not allowed to stack decks to favour players, dice are not allowed to be loaded. Yes, you are allowed to play "hunches", but you're not allowed to have the dealers slip you aces under the table. (BTW, the house always wins, but that's another story...;-)) Anyone caught - or even suspected of - doing these things is prosecuted and barred for life, and not by the government, but by the casino owners.

The other Robert's argument about research is equally naiive. Once again, a player is not allowed to "research" the dealer's cards by, for example, secret mirrors or hidden video cameras. They have to work with the same information every other player does - knowledge of the rules, the games, and the odds - or else it becomes a game of neither skill *nor* luck. In fact, it's not even a game.

By decrying such rules, the Roberts - and Machan too - are really endorsing not the romantic notion that "life's a gamble!", but the cynical idea that "life's a setup!". It's not what you know, but *who* you know (and what they know...) This is of course the *opposite* of capitalism, the essence of which is the tradeoff of risk vs reward.

This is a false capitalism, where I get the reward and you take the risk; where the winner is quietly decided by gentleman's agreement in advance. And so is the loser...

Post 8

Saturday, June 21, 2003 - 10:27pm

No I don't spend time in Casino's. Why? Because the bets are at best 50:50. Actually it must be skewed in the house's favour or they would never make any money.

I'm but I like gambles loaded in *my* favour and I try my best to load those gambles by applying knowledge I have gathered...

Post 9

Monday, June 23, 2003 - 1:53pm

So Martha Stewart sold shares in a company she suspected may be about to go bust and she is being prosecuted. How is that different to me selling my car after it has developed a funny noise and my mechanic tells me the engine may soon go bang? I am not obliged to tell this to a prospective buyer, it is his responsibility to check the car out thoroughly. So long as I do not make any false statement about the car I do nothing wrong. He can obtain expert advice by employing a mechanic to check out the car and a prospective buyer of shares can do the same by employing a stockbroker. At the end of the day it is buyer beware. The only prohibition should be to providing false or misleading information.

Post 10

Monday, June 23, 2003 - 2:27pm

The difference is that it is possible to do due diligence on the condition of the car. It is not possible go for a prospective buyer of the stock to go to a stockbroker to find out the damaging information because the only stockbroker that has the privileged information is the one employed by the company. It's privileged. It's secret until formally disclosed via a press statement.

Apparently the posters here haven't had much experience with the market. I trade daily. When critical information such as a drug not being approved by the FDA is determined, the FDA informs the company. The company is the entity that discloses that information in a press release, usually after the close of markets, so that all investors doing due diligence will have the information by the time the markets open the next day. The market will then exhibit a large gap downwards in price from the previous close. If the information is leaked to someone like Martha Stewart she sells the stock before the close of the market at a price that reflects the value of the stock as though the status was unchanged, thus avoiding a loss corresponding to the gap. The buyer of her stock was swindled out of a corresponding amount.

You could (erroneously) argue that the buyer entered an open order to buy the stock at, say, $25.00. Say the stock's latest trade was $25.10 before Martha sold hers. Martha would have entered a market order (i.e. sell at whatever price is offered ... she wants to get out at any price). So, the trade was accomplished that would never have occurred unless Martha hadn't intervened. Of course there would have been a continuous list of offers below $25.00.

I hope I haven't belabored this too much.

Post 11

Tuesday, June 24, 2003 - 2:26pm

As Samerica notes:"Apparently the posters here haven't had much experience with the market."

This is sadly typical of so many advocates of unregulated capitalism - they don't seem to really how (or why) capitalism works in the first place!

Post 12

Sunday, May 5, 2013 - 9:12am