Posted on 06/25/2002 1:24:59 PM PDT by Senator Pardek
Poor Samuel Waksal. Back in December, the Food and Drug Administration struck a grave blow to his company, ImClone Systems, by denying it the right to market a potential cancer treatment it had developed.
Then two weeks ago the FBI arrested him (and the Securities and Exchange Commission sued him) for letting relatives know about the FDA’s plan before it issued its press release. They sold ImClone stock before it started dropping upon news of the FDA’s decisions. So did Waksal's pal Martha Stewart, and the news is causing her no end of trouble and lost stock value for her own company -- although she denies being tipped off. Waksal, who recently resigned as CEO of ImClone, faces a potential 75 years in prison, plus fines, if found guilty of all charges.
It’s the return of that nostalgic relic of the ‘80s, the supposedly heinous crime of insider trading. The SEC reports a nearly 50 percent rise in insider-trading cases from 2000 to 2001.
It has been off the front pages so long that it pays to think about what insider trading really is, such that a (formerly) highly respected immunologist should be locked up in a cell for the rest of his life for it.
Insider-trading law can get pretty complicated -- it's designed, like most law, to be understood by trained professionals, not the citizens who have to live under it. But basically insider-trading law makes it a crime to make stock transactions, or help others make stock transactions, based on information you have ahead of the general public because of your special position within a company.
Trading based on information you have that everyone else doesn’t -- isn’t this the very definition of a functioning stock market? The entire field of stock brokering is based on people gaining knowledge that others don’t have and then using it to profit for themselves or their clients.
If you analyze historic price/earnings ratios and decide that a stock is overvalued and then sell, you took advantage of knowledge that many others don’t have. That doesn’t make you a criminal; it makes you smart.
Stock markets work best when all the relevant information about a company is spread as widely as possible, as quickly as possible. Stock prices represent a constantly shifting amalgamation of everyone’s information about and evaluations of a company’s value. It helps when those who have accurate information about changing circumstances are permitted to act so that stock prices reflect them.
Someone selling a stock in huge quantities because they know something will happen soon that will lower the stock’s value helps spread the knowledge that the price ought to be dropping. Such actions help insure that stock prices do reflect a more accurate assessment of all the relevant facts. That’s good in the long run for everyone in the stock market.
When contemplating the justice of jailing people for insider trading, it helps to consider a certainly far more widespread practice: insider non-trading -- stock sales or purchases that would have been made, but aren’t, because of "inside" knowledge. This is certainly happening everyday, and rightfully so. No one would think to lock someone up for it (though we shouldn’t give the SEC any ideas).
Markets inherently involve asymmetric information. The entire stock market world is a buzzing confusion of people trying to understand information that will allow them to make smart decisions about when to buy and sell stocks. Spreading information about a company that might affect its stock price should not be considered any more inherently unfair, illegal, or bad for the economy than tipping someone off about a forthcoming job opening.
Of course, if such information-spreading violates a contractual fiduciary duty to disclose, or not to disclose, that’s a problem. But that should be settled by tort law between the party and his employer, not through the FBI and a jail cell.
Free Samuel Waksal! Knowing things and acting on that knowledge in the stock market should not be a crime. Indeed, a properly functioning stock market can work no other way.
Martha Stewart isn't going to jail, just like Dr. Joyce Brothers didn't go to jail for the Quiz Show scandals.
Using inside information - buying and especially selling on the basis of information kept secret from the general public including the majority of shareholders - is akin to playing with marked cards. They used to hang people for playing with marked cards!
I fully support mandatory blind trusts for public officials.
Why should people be upset about Shoeless Joe Jackson making a buck from his insider info
Jackson was allegedly involved in throwing a series - it had nothing to do with knowledge.
And you're right, it would cut down on capital, because the public would become paranoid.
I just support repealing the laws in theory.
This has to be one of the dumbest comments I've ever seen here on FreeRepublic. It's one thing to make trades based on information like a company's P/E ratio (that may not be readily available to every shareholder), but making trades based on information that is only known to specific people inside a company is a different matter altogether.
And just remember -- laws against insider trading are meant to protect corporations themselves as much as they are meant to protect the shareholders. A company like General Motors wouldn't be able to raise a nickel in capital if their stock offerings included an implicit understanding that ordinary shareholders would eventually get screwed.
Yes she was.
When the feds questioned her about the quiz fixing, she started to cry, and they stopped questioning her.
The Good the Bad and the Ugly, was a better picture.
I should know.
See my #15.
That is what I'm saying.
Imclone knew it would not get FDA approval.
They agressively sold shares saying that once the FDA approval went through the stock would skyrocket.
Then they told all their freinds to get out, quietly, while the stock price was high.
They created the apperance that they were not gonna throw the game while they bet on the other team.
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