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About Dr. Sam Waksal, ex-CEO of ImClone Systems, it has been said that his greatest gift is having the intellectual ability to see possibilities where others cannot see past conventional wisdom. The entrepreneur and cancer researcher was recently led away in cuffs by Securities and Exchange Commission proxies – the same goons who are poised to read Martha Stewart her rights.
It’s easy to come up snake eyes when trying to understand the vague and ill-defined laws Martha Stewart and Sam Waksal are accused of violating, called insider-trading regulations, but better described as information socialism. The premise of the law, however, is not hard to divine: Competition in capital markets must proceed from a level playing field. All investors are entitled to the same information advantage irrespective of effort and abilities.
In a word, socialism!
As a matter of property rights, it’s up to the rightful owners of the company – the company shareholders – to regulate information about the company and to decide what their employees do with information gleaned about the company. If shareholders decide to forbid trading on inside information, they can so stipulate in an employee’s contract. Given that it encourages employees to learn about the firm, because they stand to profit from the knowledge – shareholders may want to allow insider trading.
Insider trading may indeed benefit the market in general, as it facilitates the circulation of information about the status of the company and prevents misallocation of funds. It’s hard to imagine that the share price of Enron or WorldCom would have soared to such heights if insider trading were permitted. Those with inside information would have dumped their stocks as soon as they got wind of irregularities, and others would have followed, saving many people a great deal of money and sorrow.
When he sells his shares, signaling to other shareholders to follow suit, the insider then is performing a service in the market. If investors are too stupid to grasp the information conveyed by a sale, they should not be investing in the market. It’s both fit and proper that when he sells, the insider will make more of a profit than the late seller, who doesn’t have his hard-won advantage.
The test of a true and sound principle is in its universal applicability. If insider trading is good law, why criminalize the use of non-public information only in capital markets? By parity of reasoning, and in the aim of “fairness,” why not abolish any and all action based on non-public information?
Aren’t professionals who get jobs through “networking” acting on non-public information? Are they not the recipients of an ostensibly unfair advantage? For acting on inside information, Attorney General John Ashcroft should certainly be forced to do the perp walk, says Bill Anderson of the Mises Institute. Like the rest of government prior to Sept. 11, Ashcroft had reliable, non-public information that terrorists might hijack U.S. airliners. While We The People were sitting ducks, the attorney general acted on his knowledge and began to fly exclusively on private aircraft.
On hand are differing opinions – many of them authoritative – on whether a non-insider like Martha Stewart can be prosecuted for acting on non-public information. That’s part and parcel of an ill-defined and unconstitutional law. Since the law, in the words of attorney James Ostrowski, “legalizes naturally criminal behavior by the state and its agents while criminalizing naturally lawful behavior by citizens,” it’s incumbent on the fair-minded to consider this: By selling her property on the basis of an alleged information advantage, has Martha violated the rights of other ImClone shareholders or potential buyers?
The answer has to be a ringing no! Martha has not violated the rights of other ImClone shareholders or potential buyers, because, very plainly, there can be no such right as a right to a guaranteed profit or a right to avoid losses.
While Martha was not bound by contract to ImClone shareholders, Sam Waksal was. If Sam Waksal violated his contractual obligation to his shareholders by selling his ImClone shares, pursuant to the Food and Drug Administration’s criminal rejection of his promising cancer drug Erbitux, then he ought to incur a civil – not criminal – liability. But it’s a lemming’s lunacy to transform this man by legislative fiat into a common criminal.
When Sam Waksal and Martha Stewart sold their shares, they conveyed all the information buyers were entitled to. A society that destroys its most productive and gifted members for no other reason than because they accrue more information than others and act on it has little to recommend it. Such a society will have fewer visionaries and, in this case, perhaps one less breakthrough cancer treatment.