The less-than-critical Howard Kurtz of the Washington Post, the wild-eyed James Cramer, Chris Matthews and others in the media have been whooping it up for the Securities and Exchange Commission after an investigation by the agency saw the arrest of former ImClone CEO, Samuel Waksal, for insider trading.
To the delight of the jackals, Waksal’s pal, Martha Stewart, was in the SEC’s dragnet. “The home-decorating doyenne” sold her ImClone shares around the time when she and Waksal were supposed to pretend they were not apprised of – or entitled to act on – any special knowledge.
Readers know by now that in this columnist’s mind the law is not necessarily equated with justice. The “Law is Force,” said Frederic Bastiat, and if the law violates the rights to life, liberty and property, it becomes tantamount to brute, unethical force.
The law unethically distributes tangible property at the point of a gun. Lawmakers have, however, found that distributing advantages like IQ, beauty or knowledge is a little more complicated. To their dubious credit, legislators have come up with ingenious ways to forcibly suppress natural advantages. Non-discrimination laws have done wonders to ensconce ugly flight attendants on airlines and obese fitness instructors in gyms. SATs are being ingeniously standardized to reward congenital stupidity, and so on.
With insider trading, legislators have devised laws to punish those who are in a position to benefit from the risks and rewards of their occupation. Accordingly, the laws against insider trading prohibit an individual from profiting from non-public information, gleaned because of his position within the firm.
The yipping in the press easily leaves the impression that business is becoming increasingly corrupt. The accelerated activity of bureaucrats, however, is what lurks behind the glut of SEC-driven prosecutions. As Cornell’s Jonathan R. Macey averred, the SEC is teetering perilously on hounding any trader who trades on “the basis of an information advantage.” A trend that, if not halted, will see the SEC bring ruin to capital markets.
A one-time immunologist turned entrepreneur, and aided by a renowned cancer scientist by the name of John Mendelsohn, Dr. Waksal was working on the development of the new cancer drug, Erbitux.
The FDA takes 12 years to approve a substance. On average, the agency allows “only five out of every 5,000 substances to be tested in clinical trials. Of these, only one is approved for patient use.” It’s a testament to the tenacity of the entrepreneur that, despite the FDA, the Waksals of the world continue to drive innovation.
And so, during the month of December, ImClone’s promising cancer drug moved from the FDA’s vacillation stage to its chopping block. Following the FDA’s snub, Waksal attempted, but failed, to sell his ImClone stock. Members of his family had a measure of success. The upshot is that Waksal is being charged with the “offenses” of securities fraud and other related counts.
So did Dr. Waksal (or his alleged tippee, Martha Stewart) defraud buyers on the market? Did they violate anyone’s rights?
In their discussion on whether insider trading constitutes fraud, economists Walter Block and Robert McGee invoke the example of the merchant who is first to sell his grain “where wheat fetches a high price.” He knows that other merchants will follow, and the price of grain will fall. It would be virtuous of him if, then and there, he lowered his prices, but he isn’t morally – much less legally – obliged to so do.
Is our trader then morally obliged to tell buyers that share prices may soon fall?
By seeking to be rid of the stock, Dr. Waksal conveyed all the information to which a potential buyer is entitled. Why would he be attempting to sell the stock if he did not expect share prices to soon fall? Equally, when insiders buy stock, what other reason would there be for such a purchase other than the expectation of a profit?
Waksal’s investing partners, Merck KGaA and Bristol-Myers Squibb, to whom he indeed had a fiduciary duty, were fully in the loop. Waksal didn’t mislead them about the FDA’s shenanigans.
Absent a moral obligation to divulge information, criminal charges are a grotesque overreach, a position emphatically reiterated in the Supreme Court’s recent decisions. The Supreme Court has maintained that “there is no duty to disclose nonpublic information.” The Court rejected the notion that all trading parties have to have parity of information. In fact, the Supreme Court’s rulings all but nullify the need for the SEC, pretty much conceding that it is up to company shareholders and their employees to regulate insider trading through contracts.
Clearly, the SEC is a feral, rogue agency that needs to be culled.