McMenamin does a decent job exposing some of the improprieties and inequities practiced by the Department of Justice and the Securities and Exchange Commission. Based on that alone, I would say the case against Stewart should be dropped. But McMenamin's quest to make Stewart a saint seems to be a subterfuge for an anti-government agenda. Throughout the article, McMenamin ascribes innocent motivations to Stewart while ascribing evil motivations to the government. McMenamin can't imagine any economic harm resulting from insider trading; he even questions the validity of insider trading laws, a subject that could be interesting and provocative if written by a less biased person.
Prior to selling her ImClone shares, Stewart received material, nonpublic information from her broker, and then she tried to speak with Sam Waksal for the purpose of receiving additional information. McMenamin tries to mitigate this by referring to the SEC's "long discredited fairness theory." McMenamin gladly accepts unfairness in business but bitterly decries unfairness in the judicial system. Both topics are worthy of a more balanced, reasonable approach.
San Leandro, CA
One for the "throw the baby out with bathwater" file is Michael McMenamin's "St. Martha." Citing the hypocrisy and machinations at the SEC and Justice Department in pursuing "insider trading" violations, McMenamin acknowledges that trading on material, nonpublic information "should be regulated by existing criminal laws" or "left to the public companies and the stock exchanges." Agreed. But to promote Stewart as a "saint" strains credibility at best. As an executive at a public company and a former stockbroker, she should have known better.
As a former investor relations professional, I assure you that misrepresentation (and probably fraud) are pandemic on Wall Street and among public companies. Sam Waksal at ImClone could not have been acting in good conscience when he traded on inside information, and then shared this information with family.
Gordon Gekko was right in Wall Street: "Greed, for lack of a better term, is good." However, sneaky, self-dealing avarice is not. Its existence should not be condoned--and certainly not lionized--by a magazine committed to "free minds and free markets."
I forced myself to read "St. Martha," despite not caring a tinker's dam about Martha Stewart, because attorney McMenamin challenges the SEC. His thesis that "government lawyers want to enhance their own power and prestige" is valid but is unfortunately buried at lilt end of the article. McMenamin's grasp of economics leaves something to be desired, and his policy prescription is somewhat glib. I give him the benefit of the doubt since he is an attorney and not an economist or accountant. But reason readers deserve better, and we libertarians can offer better regulatory policy for that market. In the aftermath of Enron, this is really important.
McMenamin's economic argument is weak when he quotes Henry Manne (whom I have not read), perhaps out of context: "When insiders trade on their knowledge, that information is immediately reflected in stock prices." Well, no, not immediately; these very traders are the mediators. They enjoy an opportunity to sell before anyone else knows why. Smart money moves first, but who should take the loss?
A simple example: My house is infested with termites, but I sell it to you as if it were fine. You buy and discover the deficiency, so now the "market" knows. Caveat emptor. You eat the loss and I get away scott-free--unless, of course, you file a civil complaint for restitution, which keeps me awake at night and may cost me all the expense that I tried to avoid by dumping it on you. You win. I suffer the loss anyway, along with the punishment of court costs to boot. Isn't this economic justice?
In the case of ImClone, Sam Waksal sold knowing about the termites. The buyers are victims of his panic, and the SEC should side with them (and sellers influenced by Waksal) as a matter of policy. It should seek restitution from the perpetrator at civil law.
Civil complaint has two benefits: The loss is forced back on the person who tried to avoid it, returning some compensation to the hands of the defrauded plaintiffs, and it is far easier to achieve a judgment at civil law.
In criminal law, the standard for decision is evidence of crime "beyond a reasonable doubt," and doubt is easy here. In a civil complaint, the finding need only be based on a "preponderance" of evidence. Such a policy will scare the living daylights out future Waksals, Ken Lays, and Jeff Skillings. Caveat emptor is well and good, but it's only half the story. Caveat vendor is equally necessary to dissuade fraud and allow equal recourse so that everyone is responsible for building the trust that is the fundamental basis of free trade.
Samuel H. Coppock
Thanks for taking the time to put together the story. I have never been a fan of Martha Stewart, but shame on the media and the prosecutors for putting her through this.
Michael McMenamin replies: The editors chose the title, but I happen to like "St. Martha." My memory from a Catholic childhood is that, like heroes, most saints did not volunteer to be martyrs. Neither did Stewart. But saints had the courage to stand up for their beliefs. So did Stewart.
No American should ever be indicted for the "crime" of publicly declaring her innocence of charges leaked by anonymous government sources. That's what James Comey, the U.S. attorney for the Southern District of New York, did to Stewart, and it's wrong.
Trading on asymmetric information, whether or not it's "unfair," is not synonymous with fraud. Steven Mason may really believe Stewart received "material, nonpublic information from her broker," but no competent securities lawyer would agree. ImClone stock had already tanked by the time Stewart's broker called her; and the fact that he (improperly) told her Sam Waksal and his daughter were among the selling horde is not "material" by any legal precedent.
As for the claim that Stewart "should have known better," give me a break. Insider trading is the epitome of an undefined, unconstitutionally vague offense. It's only a valid target of the law in a situation where there's actual fraud involving someone to whom the trader had a fiduciary obligation, such as the one Sam Waksal had to his shareholders not to trade on inside information.
Martha Stewart had no fiduciary obligation to anyone, and no one had ever been charged before with insider trading because his broker tipped him to another customer's sales. How was Stewart to know she was going to be a test case for the newest iteration of the undefined crime of insider trading?
Martha Stewart does not belong in the same sentence with the likes of Enron's Ken Lay and Jeff Skilling. Unlike Stewart, they betrayed their fiduciary obligations to employees, retirees, and shareholders. Those were cases of accounting fraud. Libertarians don't need to offer "better regulatory policy" to take care of that.
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|Article Type:||Letter to the Editor|
|Date:||Jan 1, 2004|
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