What’s Wrong with Insider Trading?
I'm anything but a fan of Martha Stewart, and the idea of her stuck in a cage making baskets of potpourri for the next two years is not at all unappealing. Stewart lost all my respect when, after the first indictment against her came down, she accused her adversaries of being part of a vast right-wing conspiracy against her.
Something tells me that the twelve men and women of the jury who convicted her of four felonies were not right-wingers getting back at her for her left-wing policy positions.
Nonetheless, Stewart's felony conviction on Friday was a miscarriage of justice; there can be little doubt that she is being hung out to dry much more for her celebrity status and wealth than for her transgressions, which were minimal. She is in many ways a victim of the witch-hunt against corporate excess and corporate accounting scandals, all the rage on the left these days.
Throughout this trial, what seemed to be forgotten was that Stewart's original crime, an alleged insider-trading deal with ImClone stock, can hardly be considered a crime at all. (I know that Stewart was convicted for lying to federal investigators, but the "lying" and obstruction-of-justice charges were all related to this one sale of stock that occurred 24 hours before the market tanked.)
Libertarians have long argued that insider trading should not be a crime, because 1) there is no victim, and 2) because everyone who makes money in the financial markets is engaging in some degree of insider trading — some just have better information than others. Being a good stock picker involves having more information, and knowing how to get it, faster than other traders. What is the difference, really, between a hot stock tip, and insider trading? The line is so murky that it makes the enforcement of insider-trading laws inconsistent and capricious.
Now, advocates of insider-trading laws are probably irate at this proposition of mine to legalize insider trading, because insider trading "hurts the mom-and-pop investor." They also say that we need to enforce this law to maintain the integrity and the public confidence of the financial markets. Baloney. The market fell — it didn't rise — on the news of Martha Stewart's conviction. If investors believe that the SEC can throw you in jail for making trades that can be construed by a federal prosecutor as based on "insider information," this has a chilling effect on the financial markets and all stocks are hurt. That means all investors are also hurt.
I'm in favor of repealing insider-trading laws and replacing them with a new "let the investor beware" rule in publicly traded companies. My colleague from the Cato Institute, Doug Bandow, has written persuasively on this topic for years, and I would recommend his logic on the subject. Why not let those who have access to insider information trade on it? Let companies have bylaws in their charters to deal with selling on insider information. Repealing insider-trading laws will simply lead to information being spread faster and more efficiently throughout Wall Street.
It is believed by many policymakers that, after the market collapse in 2000 and the corporate scandals at WorldCom and Enron, we need more SEC cops on the beat, tighter government regulations, and an off-with-their-heads penalty regime. This too, through the passage of the Sarbanes-Oxley law, was supposed to restore serenity to the financial markets. But the financial markets hated the new law, and stocks fell in its wake.
If only Uncle Sam would stop protecting the "average Joe" investor, Joe might be able to start making some real money in stocks.
The Stewart convictions should leave a bitter aftertaste in conservatives' mouths for another reason. Stewart, it appears, was a victim of class warfare, which has filtered down from the brainless, demagogic left-wing politicians to now even juries of our peers. One of the jurors commented gleefully that this conviction was justified, in part, because it would send a message to the "rich and powerful" that they can't get away with such abuses. But was Martha's real crime here the illegal stock transaction, or her hoards of wealth? The press also delighted in playing the "class-warfare card" by skewering Martha Stewart for such transgressions as wearing expensive jewelry during the trial. She has become the first Leona Helmsley of the 21st century. You would have thought she had said "only poor people pay taxes."
Stewart now faces perhaps two years in prison and the liquidation of at least half of her wealth (in the hundreds of millions of dollars), all because she managed to save herself $50,000 selling ImClone stock when she heard that one of the drugs the firm had been developing had failed to get FDA approval. That was her crime, and is why she will do time.
Love her or hate her, Martha Stewart has been one of the most successful capitalists of this generation. She created hundreds of millions of dollars of new wealth and virtually a new industry that was, in effect, herself. She created thousands of jobs and was a successful entrepreneur who happened to make a lot of money while she was at it. The source of my uneasiness is that many in our society applaud her downfall precisely because of her enormous success. But success is a virtue in America, and when we start treating it as vice, we denigrate our capitalistic system. And then we have a much bigger problem in our society than whether people are trading on hot stock tips in the middle of the night.
— Stephen Moore is president of the Club for Growth.
