JANUARY 01, 2003 by SHELDON RICHMAN
Filed Under : Government Intervention, Market Failure, Interventionism, Rule of Law
Martha Stewart is certainly an attractive target for an ambitious Securities and Exchange Commission (SEC) enforcer. She’s the “domestic diva” people love to hate. But under any rational notion of the rule of law, she should not be in the government’s crosshairs.
At this writing, the SEC had informed Ms. Stewart that it intended to file civil securities fraud charges against her. According to the Wall Street Journal‘s sources, the charges are “based on novel theories of both insider trading and securities fraud for statements Ms. Stewart made proclaiming her innocence.” Criminal charges were also being contemplated.
What is Ms. Stewart supposed to have done? She sold almost 4,000 shares of ImClone Systems stock right before it was announced that the Food and Drug Administration (FDA) had turned thumbs down on the company’s cancer drug, Erbitux. She is a close friend of former ImClone CEO Sam Waksal, who last October pleaded guilty to insider-trading charges.
But the SEC is not saying she knew the FDA was about to release bad news for the company. Rather, its theory is only that Ms. Stewart sold her shares after her broker, who knew that members of Waksal’s family were selling, advised her that ImClone’s price was probably going to fall.
Insider-trading law is inconsistent with the principles of a free society. But even if that statement is wrong, there are no grounds for charges against Ms. Stewart. In typical unconstitutional fashion, Congress, rather than defining “insider trading,” left it to the SEC to write the definition. To be guilty of insider trading, one must be “in breach of a duty of trust or confidence that is owed directly, indirectly, or derivatively, to the issuer of that security or the shareholders of that issuer, or to any other person who is the source of the material nonpublic information.” By what stretch of the imagination does Ms. Stewart satisfy that criterion? She was an ImClone stockholder — period. She owed no duty to anyone connected with the company.
Moreover, there were no victims of her action. The anonymous buyers of her shares were already in the market looking for ImClone stock. If she hadn’t sold hers, the buyers would have found others. She certainly did not cause the stock price to fall. The FDA did that.
The charge of untruthfulness stems from her disputed statement that she had a standing order to sell the stock if the price went below $60. Even if she lied, why is that a crime? When the government, wielding unjust statutes, invades your privacy by asking why you sold something you own, do you owe it the truth?
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