L. Neil Smith's
THE LIBERTARIAN ENTERPRISE
Number 231, July 13, 2003
TIME TO TELL ALL
Repeal All Insider Trading Laws and Abolish The SEC
Special to TLE
The recent indictment of famous celebrity homemaker Martha Stewartwhich entails the fictitious "nine counts" with which she has been charged, including "obstruction of justice, perjury, bank fraud, and securities fraud"epitomizes the lunacy, perversity, political and legal debauchery, and political evils brought upon by the morally degenerate, treacherous, and putrid actions of the Justice Department and the Securities and Exchange Commission (SEC). It bears mentioning that the government's persecution (excuse me, "investigation") of Stewart and her trusted ally and ImClone co-founder Sam Waksal is an outstanding reason why all laws outlawing insider trading mustand ought tobe repealed. That reason also includes the needful and necessary abolition of the SEC, which is obviously a creation of the presidential regime of Franklin Delano Roosevelt.
This entire ruckus surrounding Stewart and Waksal dates all the way back to December 27th, 2002 when ImClone, the pharmaceutical company, was receiving signs from the FDA (another Roosevelt machination founded in 1938) that its approval application for its new anti-colon cancer drug Erbitux was about to be denied. ImClone had already submitted its study to the agency, arguing that the drug indeed did work; however, the agency refused to examine the application, claiming that its numbers were so flawed. When this transpired, ImClone's stock price nose-dived by a shattering 9.7 percent at the end of the business day. Such a significant drop would be too coincidental to assign blame to several of Waksal's family members or even Stewart for her paltry stake.
The stock, in case anyone hasn't noticed, initially opened at approximately $62 a share that day. The pressboards were buzzing with rumors that the stock price was going to tumble, and of course, many shareholders feared that the FDA debacle would depress the price. Bloomberg News issued a notice, saying, "ImClone Systems Inc. shares fell as much as 9.7 percent on concern about whether the Food and Drug Administration will approve the company's Erbitux cancer drug, financial news network CNBC reported." It also should be pointed out that there were potentially thousands of shareholders who were dumping their ImClone shares at the same time. Of course, Waksal and his family had already put up their shares for sale in the wee hours of the morning, totaling approximately $9 million at between $62 and $63 a share.
As for Martha, she contacted Waksal's office at 1:43 p.m. Waksal's secretary answered the phone and took her message, which said, "Something is going on with ImClone, and she wants to know what." (This proves that Martha had no idea of what was happening at that point.) It now stands to reason that Stewart, who grew tired and impatient of awaiting his callback, called her broker Peter Bacanovic and instructed him to sell her 3,928 shares. It was not until 90 minutes later that the stock price dropped to $58 a share. Regrettably, the media hardly took notice of these events.
It wasn't until later that night that Waksal returned Stewart's phone call and told her about what had transpired. Interestingly no one denies that he had actually done this. (This also proves that Stewart was oblivious to the entire ImClone/FDA matter, considering that the federal government's original claim was that she was aware of the details of the impending stock price drop and the FDA's rejection of ImClone's application.)
So why did the federal government unleash its ugly witch hunt on Stewart?
The federal government alleges that Stewart had lied to Justice Department officials and federal prosecutors about her explanation for the transaction she made. She told them that Bacanovic and she entered into a pre-existing sales agreement to sell the shares weeks in advance before December 27th and it had already been finalized. The government, in response, claimed that Bacanovic warned her about the price drop on the day of December 27th and recommended that she should sell the shares. This is in stark contrast to the Justice Department's original charge that Waksal tipped Stewart off before she uploaded her shares.
Of course, it must be pointed that the government's prime witness Douglas Faneuil, who was a Merrill Lynch trading assistant at the time, contended that he was directed by Bacanovic to tip off Stewart that Waksal and his daughter were interesting in dumping their shares. Faneuil originally testified that she had an agreement with Bacanovic to sell the shares if the price fell below $60. Even Bacanovic confirmed it, the fact that Faneuil altered his story notwithstanding.
As a result, the government also went after Bacanovic, who has been indicted ever since.
It is also obvious that federal officials are relishing the fact that Waksal, who had already been indicted on similar charges, and was ergo convicted by a federal grand jury, which led to his sentence of seven years in prison (a total of 87 months to be exact), has expressed his apologies for his "evil transgressions." However, it wouldn't have helped anyway. The judge would have thrown the book at him, whether or not he was apologetic.
So now that Martha and her broker are in serious federal hot water because of these egregious, trumped-up charges, what can we make of the insider trading laws and the federal government's role in our economic affairs? It's simple: it's time to repeal the insider trading laws and to abolish the SEC. Insider Trading Laws Are Antithetical to a Free Society
Laws Outlawing Insider Trading are Destructive and Antithetical to a Free Society
Not only that, they are primarily based on an apocryphal theoryonein which it states that if one sells his commodity to profit from it, solely based on the nonpublic (i.e., "inside") knowledge in his possession, he has gained an "unfair" advantage at the expense of traders who sustain financial losses without that knowledge.
Of course, this theory is problematic at best. In a free marketplace, individuals who engage in economic transactionsparticularly when they have informationwill profit from the knowledge in their possession. If I decide to embark upon a venture in hotel management and I open a new hotel with the knowledge I have in starting the business, I will most likely make financial gains because of my expertise. However, if I open my business without having an idea of what entails in running a hotel, then I will most likely incur financial losses. Nevertheless, keep in mind that this would be done at my own expense.
Moreover, these losses would be occurring due to the financial success of my competitors who are more experienced in running a business than I am. Ironically, no one even believes that the knowledge held by any experienced hotel manager gives him or her any unfair advantage at the expense of their losing competitors.
Insider Trading is Beneficial to the Free Marketplace
Insider trading in a free marketplace is entirely voluntarynot coerced. It is also beneficial to the function of the marketplace. And why is this so?
This is because such an activity requires any marketable equity price to unveil all and any relevant information immediately. The correct price of any product is a reflection of both the relevant information of the item and the true value of the company that makes the product. In Martha's case, insider trading resulted in this information much sooner and faster than it would have been expected otherwise. Considering the fact that the FDA thumbed its nose at ImClone's application, the true value of that firm depreciated. Stewart certainly sold her shares because of inside knowledge, but she helped the market by depressing ImClone's market price, which required the firm's true value to be revealed. Even though the public was oblivious to this information that prompted her sales, knowledge-hungry investors noticed the information firsthand and much more quickly than they would have been able to do had Stewart not sold her shares. When they received data showing that ImClone was truly not as profitable as it seemed to be, they responded by selling the shares after seeing the price dwindling.
The SEC are an Impediment to Risk Taking in the Marketplace
The SEC, which was incepted under the Roosevelt regime in 1934, was established to "provide" a level playing field in the marketplace. The SEC's mission statement states the following:
"The primary mission of the U.S. Securities and Exchange Commission (SEC) is to protect investors and maintain the integrity of the securities markets... The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public, which provides a common pool of knowledge for all investors to use to judge for themselves if a company's securities are a good investment. Only through the steady flow of timely, comprehensive and accurate information can people make sound investment decisions."
According to the SEC's chartered statement, it is a dismal failure.
Any sane, rational individual knows that its regulations are incredibly futile. Since the 1930s, more and more regulations have been dumped on investors, resulting in requirements burying them with useless data. During the Enron scandal, the Wall Street Journal's own Holman Jenkins Jr. noted that shady accounting firms like Arthur Andersen are the result of their role produced by the federal requirement which calls for an annual audit of all corporations. As Jenkins put it, it's all part of "the federal gravy train."
Regardless of what one thinks about Martha Stewart, it is impossible to overstate the federal government's intrusion into the economic and peaceful affairs of entrepreneurs who wish to capitalize on the properties they own. It's high time that the federal government leave entrepreneursincluding shareholders, traders, and investors -- alone and allow them to continue with their activities of voluntary transactions in a free and open marketplace. The only way to accomplish this is to repeal all insider trading laws and to dismantle the SEC.
Only then can economic liberty truly prevail.