Flexible Reality
Saturday, March 13, 2004
Unintended Consequences of Legislation?
Mother charged with murder denies accusationsSALT LAKE CITY (AP) -- The woman at the center of a fetal murder case who allegedly refused a Caesarean section that doctors said would have saved one of her babies denied in a jailhouse interview Friday that she killed the fetus.
Melissa Ann Rowland, 28, rejected claims she refused the surgery because of cosmetic worries. "It was all medical concern. None of it was vanity," Rowland told The Associated Press a day after prosecutors charged her with exhibiting "depraved indifference to human life" in avoiding the C-section. "I never imagined having a stillborn would get me national news coverage or a murder charge," Rowland told the AP during a 30-minute interview at the Salt Lake County jail.
Rowland, who has been in the jail since mid-January on a child endangerment charge involving the surviving twin, said she was informed of the murder charge Thursday evening by reporters. "I feel like I'm getting a lot of attention that (should be) my private business," she said. Critics of the charges say the case could affect abortion rights and open the door to the prosecution of mothers who smoke, fail to follow their obstetrician's diet or take some other action that endangers a fetus.
"It reaches a level that is extraordinary in our legal understanding of bodily integrity and what that means in this country," said Kim Gandy, president of the National Organization for Women and a former prosecutor.
At no time did doctors tell her she needed an emergency procedure, she said, adding she would have had no objections to a C-section since she had two previous ones during the births of her other two young children, ages 7 and 9, who live with the parents of Rowland's estranged husband. She said she was never concerned about her babies' health because in all her hospital visits, she was told they had good heartbeats and were fine.
Rowland's court-appointed attorney, Michael Sikora, did not return two phone calls seeking comment, but has said that Rowland had a history of mental issues, though he was awaiting medical records for confirmation. Rowland said she had twice attempted suicide and spent time in a psychiatric hospital.
The case has won national attention over its potential legal ramifications on the debate over fetal rights. "I see this as part of an overall focus of a certain movement on fetal rights and an effort to elevate fetal rights above the rights of a woman," said NOW's Gandy.
Last month, the U.S. House of Representatives passed the Unborn Victims of Violence Act, which gives a fetus separate victim's rights in the event of an attack on a pregnant woman. The bill, prompted by the murder of Laci Peterson's son, was hailed by conservative groups as an affirmation of the legal rights of the unborn.
About 30 states, including Utah, have made attempts, most of them unsuccessful, to prosecute women for behavior affecting their fetuses, most of it drug-related, Gandy said.
In a case reminiscent of Rowland's, the District of Columbia Court of Appeals ruled in 1990 on a case involving a terminal cancer patient who died after a lower court ordered doctors to perform a C-section on her to save her 26-week-old fetus, who died after the operation. The surgery was listed as a contributing factor in the woman's death.
The court ruled that a pregnant patient's decision to refuse medical treatment is almost always paramount, even when survival of a fetus is at stake and wrote, "a fetus cannot have rights ... superior to those of a person who has already been born."
In January, the Utah Supreme Court ruled that unborn children at all stages of development are covered under the state's criminal homicide statute. That statute, however, exempts the death of an unborn child caused by an abortion.
Thursday, March 11, 2004
NASA Agrees to New Study on Mission to Hubble Telescope
By WARREN E. LEARY
NY Times
Published: March 12, 2004
WASHINGTON, March 11 — The Hubble Space Telescope may have won a reprieve from an early death. Under Congressional pressure, NASA agreed on Thursday to have the National Academy of Sciences examine plans to cancel a space shuttle mission to repair and upgrade it.
Spain Mourns 192 Dead, Probes Al Qaeda Bomb Claim
Thu Mar 11, 2004 08:47 PM ET
Reuters
By Adrian Croft
MADRID (Reuters) - Spaniards mourned the death of 192 people in the country's worst guerrilla attack on Friday as officials looked into a purported al Qaeda claim that it was responsible for the bombings on packed commuter trains. The Spanish government said it believed armed Basque separatist group ETA was most likely to blame for the simultaneous bombings of four trains at Madrid stations on Thursday three days before a general election.
However, Interior Minister Angel Acebes said police were not ruling out any lines of investigation after finding a van containing seven detonators and a tape in Arabic at a town near Madrid where the bombs may have been placed on the trains. Apart from those killed, some 1,421 people were injured in Europe's bloodiest guerrilla attack for more than 15 years.
The picture was clouded late on Thursday when a letter purporting to come from al Qaeda claimed responsibility. "We have succeeded in infiltrating the heart of crusader Europe and struck one of the bases of the crusader alliance," said the letter, a copy of which was faxed by al-Quds newspaper to Reuters. No authentication was available of the letter.
An Interior Ministry source said officials were looking into the claim but ETA remained the first line of investigation. Spain is one of Washington's closest European allies and stood squarely behind President Bush's decision last year to go to war in Iraq. Investigators say there were 10 blasts. The bombs, in rucksacks, each contained around 22 lbs. of explosives.
El Mound newspaper said Madrid had suffered "the worst terrorist attack in Spanish history," calling it "Our September 11." Amid a wave of grief and revulsion, Spaniards placed candles and flowers at the Santa Eugenia station in southeastern Madrid where one of the blasts occurred.
Curiouser and Curiouser: SCO Litigation - Microsoft Money vs Linux & Open Source
Microsoft's Ties To SCO Confirmed By Investment GroupMarch 11, 2004 (8:14 p.m. EST)
By Antone Gonsalves, TechWeb News
BayStar Capital, which invested $50 million in The SCO Group last October, on Thursday confirmed that Microsoft Corp. introduced it to the small software company that has mounted a court challenge to Linux, the open source operating system that has become a strong rival to Windows.
While confirming the introduction, a spokesman for the Larkspur, Calif., investment firm reiterated earlier statements that Microsoft did not invest any money in Lindon, Utah-based, SCO.
"Microsoft did introduce SCO to BayStar as a possible investment opportunity," the spokesman said. "But, and we said this previously, Microsoft neither participated in the SCO investment back in October, nor is Microsoft an investor in BayStar."
The spokesman declined further details, but said it was not unusual for companies to recommend investments in other businesses. BayStar last year funneled a majority of its investments in life sciences, media and high-tech companies.
Speculation that Microsoft was bankrolling SCO surfaced last week when Eric Raymond, president of the Open Source Initiative, published a leaked internal e-mail thread between Chris Sontag, a senior vice president and general manager of SCO's licensing division; and Mike Anderer, chief executive of Salt Lake City-based strategic consulting firm S2.
In the exchange, which occurred just days before the BayStar investment, Anderer offhandedly claimed that Microsoft had given SCO more than $82 million through various investment vehicles and was willing to put up more. SCO denied the claims, saying Anderer was misinformed. SCO and Microsoft have denied having any investment relationship.
Linux proponents have long speculated that Microsoft is secretly funding SCO's $5 billion lawsuit against IBM and Linux. The suit claims IBM inserted SCO's Unix code into Linux and then distributed it for free under the General Public License governing the use of Linux. IBM denies the allegations.
As a result, SCO is seeking licensing fees for Linux, and filed its first user suit against Memphis, Tenn.-based, AutoZone Inc. last week.
To date, SCO's legal challenges have failed to bring much financial gain. The company reported a net loss of $2.3 million in the first quarter ended Jan. 31 on declining revenues of $11.4 million. Only $20,000 came from its Linux licensing initiative.
While there is no evidence Microsoft is bankrolling SCO's legal battles, there's little doubt as to Linux's growing strength in the market for servers, which are computers used to run business software.
Unit shipments of Linux servers increased 52.5 percent in the fourth quarter of 2003, compared to the same period the prior year; and revenue from the operating system jumped 63.1 percent to $960 million, according to International Data Corp. Unit shipments and revenue from Windows servers also increased.
Bush attends memorial for 9/11 victims, followed by a fund-raiser
SCOTT LINDLAW, Associated Press Writer
Wednesday, March 10, 2004
(03-10) 23:25 PST WASHINGTON (AP) --
President Bush isn't backing down. His response to the terrorist attacks of Sept. 11, 2001, is a centerpiece of his campaign for re-election and he underscores the point Thursday with a visit to a new victims' memorial before headlining a campaign fund-raiser.
Bush used images from the World Trade Center's smoldering wreckage in his first re-election TV commercials last week, and refused to retreat when critics called them crass exploitation of those killed in the attacks.
Bush was to be among the first digging shovels of dirt at the groundbreaking for a new Sept. 11 memorial in East Meadow, N.Y., a Manhattan suburb on Long Island.
The quarrel over the ads was shadowing Bush, as at least two groups announced plans to protest his visit.
"No one's been held accountable for anything about 9-11," said Bill Doyle, who lost his 25-year-old son, Joseph, at the World Trade Center. Doyle, who also criticized the image in Bush's campaign commercial of the flag-draped remains of a victim being carried from ground zero, said he intends to be at the demonstration.
"I have a problem with exploiting death for political gain," he said. "I'd have the same problem if Democrats used images of body bags coming back from Iraq in one of their ads."
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Wednesday, March 10, 2004
Deficit in Trade Tops $43 Billion, Monthly Record
By EDMUND L. ANDREWS and ELISABETH BUMILLER
NY Times Business Section
Published: March 11, 2004
Associated Press
The flood of products from China, which had a trade surplus with the United States of $124 billion last year, climbed $1.6 billion in January.
WASHINGTON, March 10 — The United States trade deficit climbed to a monthly record of $43.1 billion in January as imports continued to flood in from China and American exports were hurt by slumping demand from Europe and other parts of the world.
The new data, released Wednesday by the Commerce Department, was slightly worse than economists had expected and intensified the battle over trade and jobs playing out in the 2004 presidential campaign.
Trade analysts said the deficit widened in January in part because of higher prices for imported oil and a drop in meat exports that was tied to fears about a case of mad cow disease in Washington State. Exports of meat and poultry in January dropped by 40 percent, to $379 million, the lowest since November 1993.
But the latest numbers also pointed to more enduring trade problems. The flood of products from China, which had a trade surplus with the United States of $124 billion last year, climbed by $1.6 billion in January compared with January 2003.
Analysts said the new trade report revealed more about the economic weakness in Europe than about the inability of American companies to compete. Imports and exports declined in January, but exports fell more, leading to a 0.9 percent increase in the overall trade deficit, to $43.1 billion in January from $42.7 billion in December. The previous record was $43 billion last March.
American exports to Europe stagnated for the third month in a row, even though the value of the dollar plunged against that of the euro last year. A weak dollar should bolster American exports because it makes American products cheaper abroad.
But China has kept its currency locked at a fixed exchange rate to the dollar, and European consumer demand has yet to revive from the slowdown of the last few years.
"The real problem is that our trading partners are only beginning to recover, so U.S. export growth has really been flat," said James Glassman, a senior economist at J. P. Morgan Chase.
Though the United States has been running trade deficits for many years, the gap between exports and imports has widened sharply over the last few years and reached an annual record of $489.4 billion in 2003 — 4.5 percent of the nation's gross domestic product, up from 4 percent in 2002 and 1.9 percent in 1990.
Many economists say the widening trade gap is at least partly responsible for the weakness of the American job market. The Labor Department reported last week that job creation came to a near standstill last month, and the economy has lost about 2.2 million jobs since January 2001.
In addition to the effect on jobs, the trade deficit has also led to a huge increase in overall United States indebtedness to the rest of the world. The nation's net foreign obligations, which include debt and the claim on American profits by foreign investors, are equal to more than one-quarter of total American output.
The president's latest economic report said that foreign investment in stocks, bonds, factories and funds in the United States had largely balanced the trade deficit, but some economists said this could soon change.
China's trade surplus with the United States is larger than that of any other country, including the entire European Union.
In Congress, Democratic and Republican lawmakers have been pushing President Bush to challenge China's trade practices much more aggressively than he has and to pressure China to let its currency, the yuan, rise in value against the dollar. That would make goods made in China, including those manufactured for American companies, more expensive in the United States and would make American goods easier to buy in China.
President Bush and his likely Democratic challenger, Senator John Kerry of Massachusetts, spent the day trading accusations over outsourcing, the shifting of American jobs to China and other countries with lower costs, a serious political problem for Mr. Bush
Recent Slide in Stock Steepens, With Dow Falling 160
By ALEX BERENSON
NY Times Business Section
Published: March 11, 2004
Shares continued their recent slide yesterday as investors seemed increasingly worried about weakness in the economy and the prospects for growth in profits.
This week's drop has wiped out the year's gains for the Nasdaq composite index and the Dow Jones industrial average, though the Standard & Poor's 500-stock index is still up slightly for the year. But several big investors said that stocks, while no longer cheap, were still reasonably valued and that the possibility of a steep pullback appeared slight.
No single news event accounted for yesterday's slide, economists and professional money managers said. But investors appear concerned that the economy's growth over the last year has come mainly as a result of short-term stimulus from the federal government and Federal Reserve, not because of increased corporate investment or sustainable increases in consumer spending.
Tuesday, March 09, 2004
Justice Dept. Backs Off Its Demand for Abortion Records
By ERIC LICHTBLAU
NY Times
Published: March 10, 2004
WASHINGTON, March 9 — The Justice Department is dropping its demand, at least for now, that six Planned Parenthood clinics around the country produce medical records on abortions, officials said Tuesday.
The decision, applauded by privacy advocates and supporters of abortion rights, came in response to a decision on Friday by a federal judge in San Francisco, who found that the government's demand for the records was an undue intrusion on patients' rights.
In her decision, Judge Phyllis J. Hamilton of United States District Court threw out the government's demand for the Planned Parenthood records of some 2,700 patients. Judge Hamilton also said she "strongly encouraged the government" to withdraw the subpoenas it had issued to Planned Parenthood for related medical records.
In letters dated Monday, the Justice Department did just that and notified Planned Parenthood affiliates in New York, Pittsburgh, Washington, Los Angeles, San Diego and Kansas City, Mo., that "we will not move at this time" to pursue the subpoenaed records. But the department said it might still "renew our requests if necessary."
Study Finds That Teenage Virginity Pledges Are Rarely Kept
By LAWRENCE K. ALTMAN
NY Times
Published: March 10, 2004
PHILADELPHIA, March 9 — Among teenagers who pledged not to have sex before marriage, a majority did not live up to their vows, according to a national study reported here on Tuesday. The teenagers also developed sexually transmitted diseases at about the same rate as adolescents who had not made such pledges.
But a pledge to refrain from premarital sex, the researchers found, did tend to delay the start of sexual intercourse by 18 months. The adolescents who took virginity pledges also married earlier and had fewer sexual partners than the other teenagers surveyed, said Dr. Peter Bearman, the chairman of the sociology department at Columbia University and the lead author of the study.
Of the 12,000 teenagers included in the federal study, 88 percent of those who pledged chastity reported having had sexual intercourse before they married, Dr. Bearman said at a scientific meeting in Philadelphia on preventing sexually transmitted diseases. The researchers tested the participants for three common sexually transmitted infections — chlamydia, gonorrhea and trichomoniasis — and found that the rates were almost identical for the teenagers who took pledges and those who did not.
Yet the teenagers who had taken pledges were less likely to know they had an infection, raising the risk of their transmitting it to other people, said Dr. Bearman and Hannah Brückner of Yale University, the other author of the report. Dr. Bearman said that telling teenagers "to `just say no,' without understanding risk or how to protect oneself from risk, turns out to create greater risk" of sexually transmitted diseases.
Jimmy Hester, a spokesman for True Love Waits, a campaign begun in 1993 by the Southern Baptist Convention, said, "Signing a pledge card does not mean you are magically protected." Mr. Hester said True Love Waits had followed Dr. Bearman's study for seven years but had not seen the latest findings. He added that what he had heard about the findings caused him concern "because we're not following up on pledges well enough."
True Love Waits says that 2.4 million young people have signed a virginity pledge since the group's founding in 1993.
By age 23, half the teenagers who had made virginity pledges were married, compared with 25 percent of those who had not pledged, the study found. Dr. Bearman said he did not know whether the teenagers who had broken their pledges did so initially with their fiancés or with others, because the data had not yet been analyzed.
But he said, "After they break their pledge, the gates are open, and they catch up," having more partners in a shorter time. Lack of condom use was an important factor in the higher-than-expected rates of sexually transmitted diseases among the pledgers, the study found. Only 40 percent reported having used condoms in the most recent year of the study, compared with 60 percent of the teenagers who had not pledged.
Also, the adolescents who had made pledges were less likely to get tested for sexually transmitted diseases. Among the boys, 5.2 percent had been tested, compared with 9.1 percent of the boys who had not pledged. Among the girls, 14 percent of pledgers had been tested, compared with 28 percent of girls who had not pledged.
Sunday, March 07, 2004
Government Perfidy in the Application of Insider Trading Laws
The Fraud of Insider-Trading Law, Part 1by Sheldon Richman, September 2003 (POSTED NOVEMBER 5, 2003)
Part 2
This article was originally intended as a discussion of the Martha Stewart case. But instead it will be a discussion of insider trading.
Many people think those are one and the same issue. But that is incorrect. After more than a year of associating Martha Stewart with insider trading, the U.S. Justice Department declined to indict the well-known queen of domesticity for that “crime.” In other words, after a year of investigation, the U.S. attorney for the Southern District of New York, James Comey, decided that he could not prove to a jury beyond a reasonable doubt that Martha Stewart had illegally traded stock on the basis of material nonpublic information about a publicly held company. (As we’ll see, there’s more to the charge than that.)
That did not stop the Securities and Exchange Commission (SEC) from making the charge in a civil suit against her. But, of course, a civil suit carries a much lighter burden of proof (a preponderance of the evidence). The SEC’s legal piling-on is explicable when you understand that should Martha Stewart lose, she would be barred for life from sitting on any corporation’s board of directors.
If the U.S. attorney declined to seek an indictment for insider trading, what, then, is in the five-count bill against her? (The media widely report that the bill contained nine counts. Wrong. The government issued a single bill against her and her former Merrill Lynch broker, Peter Bacanovic. The combined charges total nine.)
Instead of being about insider trading, the case against Martha Stewart is, as U.S. Attorney Comey put it at a news conference, “all about lying — lying to the FBI, lying to the SEC, and lying to investors.” Specifically, the charges are obstruction of justice, conspiracy, and securities fraud. (She was not charged with perjury because her statements to the government were not made under oath.) These sound serious. Indeed, all told, they carry a penalty up to 30 years in prison and millions of dollars in fines. Yet, as we’ll see, the case is a house of cards — worse: a house of cards standing on a foundation of quicksand.
First some background. Martha Stewart owned several thousand shares of a company called ImClone, which in 2001 attempted to get the Food and Drug Administration (FDA) to approve its anti-cancer drug, Erbitux. The CEO and brains behind ImClone was Sam Waksal, a friend of Stewart’s. In December 2001 Stewart sold nearly 4,000 shares of ImClone for about $220,000. The sale occurred a day or so before the FDA refused to consider ImClone’s application for the drug. It turns out that Waksal learned of the FDA decision before it was made public. According to charges to which he has pled guilty and for which he has been sentenced to seven years in prison, he told family members to sell their stock and attempted to sell his own, although his company’s rules forbade it.
The government does not claim that Waksal tipped Stewart off about the FDA. Instead, it charges that Bacanovic directed his assistant, Douglas Faneuil, to call and tell her that he expected ImClone’s price to drop and that Waksal was selling. Faneuil first left a phone message and then spoke with Stewart. When Stewart was asked about the stock sale, she said she had no information about Waksal and that she had earlier instructed Bacanovic to sell if the price dropped to $60. (It traded at $57 the day she sold.) Bacanovic backs up this account. Faneuil did so at first, but later turned state’s evidence, claiming he was offered inducements to lie.
The government says that Bacanovic’s knowledge of Waksal’s intention to sell his shares constituted insider information, which he passed along to Stewart, which she in turn used as a basis for her sale. It alleges that Stewart misled government investigators by fabricating the $60 sell-order and by repeatedly claiming she spoke with Bacanovic on the day in question rather than Faneuil. (That a very busy woman forgot that she spoke with her broker’s assistant rather than her broker a year earlier apparently is grounds for an obstruction-of-justice charge.) Further she is charged with altering a computer telephone message, from noting that Bacanovic thought the share price was about to fall to the generic “re ImClone.” But in a truly weird aspect of this case, the bill of indictment states that Stewart immediately restored the message to its original form. Is that really a crime?
She is also charged with securities fraud — the most bizarre part of the case of all. The charge has no direct relationship to the sale of her ImClone shares. Her securities fraud, according to the government, consists of her public declarations of her innocence of the government’s public allegations that she had engaged in insider trading. By so declaring, says the government, she misled investors with respect to her publicly traded company, Martha Stewart Living Omnimedia. In other words, the government’s campaign against her was driving down the stock price of her own company and her statements in self-defense were attempts to protect the price by giving false information to investors.
This charge has caused some people to marvel at the government’s innovativeness. Proclaiming one’s innocence can now be regarded as fraud.
The first thing to notice about the government’s case is that its basis is an alleged offense that the government did not ask for an indictment on: insider trading. Stewart stands accused of lying about an activity that the government won’t attempt to prove was illegal. Does this sound proper in a society that touts its devotion to the rule of law?
We have to examine insider trading to understand the case, for without such a concept, there is no case. Henry Manne, dean emeritus of George Mason University Law School, is the authority on this sorry idea of law. (In 1966 he published Insider Trading and the Stock Market.) Manne points out that insider trading was not illegal until the 1960s. Many people think it goes back to the Great Depression and the New Deal, when the SEC was created. But as Manne notes, insider trading could not have been much of an issue during the stock-market crash. If it had been, many insiders would have avoided the disaster.
Then why did it become an issue 30 years later? As Manne told syndicated columnist Larry Elder,
Congress needed some kind of morality story to hinge everything on, and the very phrase, ‘insider trading,’ suggested to people that something evil has been done. The SEC, at least since the 1960s, has been very successful in making this into one of the most egregious evils in the world. If you want to say that anyone’s really done something terrible, it’s not incest, or murder, or treason, it’s insider trading.
Under the U.S. Constitution, Congress is the legislative branch of government. But Congress has long violated the founding document by illegally delegating its legislative powers to so-called independent regulatory agencies. This has been especially egregious with the SEC. Rather than clearly defining “insider trading,” as one would expect under the rule of law, Congress told the SEC to define it any way it liked.
As an aside, after the Michael Milken episode, when Congress held hearings to consider finally defining the term, the SEC and its friends urged Congress not to do so because a clear definition would permit bad people to stay just inside the law. So much for the rule of law, which at a minimum requires that citizens know in advance whether their conduct is illegal.
As the current SEC regulations stand, 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.”
I leave it to the reader to decide whether this even applies to Martha Stewart. Next month, we’ll go further — to show that insider trading per se violates no one’s rights and is generally beneficial.
Sheldon Richman is senior fellow at The Future of Freedom Foundation, author of Tethered Citizens: Time to Repeal the Welfare State, and editor of Ideas on Liberty magazine. Send him email.
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The Fraud of Insider-Trading Law, Part 2
by Sheldon Richman, October 2003 [Posted January 14, 2004]
Part 1
It is virtually unquestioned in America today that insider trading in the securities markets is a dastardly act. We must make a distinction here between trading by insiders and trading by insiders on the basis of nonpublic information. Insiders are legally allowed to buy and sell stocks. The Securities and Exchange Commission (SEC) requires insiders to disclose their trades, and the financial newspapers report such trading. Investors find this information a source of valuable clues about companies. (It is possible that even without the SEC requirement, shareholders would require their executives and directors to declare their trades.)
But what could be more immoral than someone’s selling or buying stock on the basis of information he knows the other party lacks?
Put that way, maybe it doesn’t seem so immoral after all. The idea that knowledge can ever be evenly distributed is one of those utopian pipe dreams the realization of which would require nothing less than secret police and gulags. Knowledge, like everything else about people, is most definitely unevenly “distributed.” It is not distributed at all. It is acquired — by effort or luck. It’s not as though there is a central knowledge-giver who spitefully shortchanges some of us. This leads to the first observation: if the law prohibits people from exploiting knowledge advantages, they have less incentive to ferret out valuable knowledge and bring it to market. Would that be good?
Those who seek to stamp out insider trading concede this point, so they object only when the knowledge is unavailable to the public. But the line between prohibited inside knowledge and permissible inside knowledge is far from clear. As law professor Daniel Fischel writes in Payback, although inside knowledge of specifics — an earnings report, a pending merger — is an illegal basis for insider trading, more general inside knowledge is not:
Maybe the insider believes that a planned reorganization of a company’s sales force is going better than expected or knows that a key executive is distracted by health or marital problems. Corporate insiders are permitted, even encouraged, to trade on this kind of informed hunch.
Why are stock transactions involving specific inside knowledge bad? The theory is that not only are the ignorant buyers and sellers taken advantage of, but — worse, perhaps — confidence in the securities markets themselves is sabotaged because potential participants, fearing they will be taken advantage of, will stay out of the market, depriving it of capital.
This is a serious charge. What’s the truth?
Markets and prices
A good place to start when inquiring whether an act is a crime is to ask: who’s the victim? Current law has two in mind: the specific buyers or sellers of stock shares who did not possess the inside information and “the market.”
Let’s dispose of the second one first. “The market” cannot be a victim. It’s an abstraction, not a living, breathing being. You can only victimize — that is, violate the rights of — individuals. But what about the claim that insider trading erodes confidence in the market? Even if that were true, it would not turn the act into a crime.
But the assumption that insider trading erodes confidence in markets is false. On the contrary, confidence is increased by the realization that prices reflect up-to-date information. To explain this we must digress briefly to discuss the role of prices.
The price system does more than tell us what we must pay for goods and services. It produces information — in a highly concentrated and economic form — about supply and demand. We all use that information to guide our activities. For example, when a bad hurricane devastates a town and destroys homes, the new demand for plywood by suffering homeowners will bid up the price for the existing supply and attract new supply from other areas. (Unless socialistic laws prohibit “profiteering.”) Whether or not I know about the new acute need for plywood, the higher prices will probably prompt me to postpone my plans to build a doghouse for Rover.
Note the social niceties of free pricing and the free movement of goods in response to price changes. Without making impossible interpersonal comparisons of subjective utility, most people would think that it’s good that my doghouse will probably wait until after people rebuild their homes. The market’s price system accomplishes this without a dictator issuing decrees or secret police shooting the uncooperative. Strangely, the market never gets credit from the intellectuals and “human rights” activists for this not inconsiderable achievement.
Of course, the contrast among most everyday alternatives is not so dramatic, but the principle is the same. The price system enables people to make decisions about scarce resources that take into account individual needs and knowledge spread throughout society, but without burdening them with an unmanageable amount of data.
Stock prices too are generated by supply and demand. But supply and demand for stocks are not disembodied concepts. They are generated, obviously enough, by suppliers and demanders — people with preferences, objectives, expectations, knowledge, and, therefore, plans. Part of what goes into an intention to buy or sell shares in a company is expectations about its future based on knowledge about its management, organization, and so on. These expectations are incorporated into the share price, and changes in expectations bring about changes in price. The more knowledgeable the participants, the more fully do prices perform their communications work. Nothing would undermine confidence in markets more than the belief that prices are out of date.
The Martha Stewart case
Look at Martha Stewart’s ImClone stock sale. Regardless of what she knew, it is a fact that the Food and Drug Administration (FDA) was about to deny ImClone’s application for the anti-cancer drug Erbitux. Obviously, the company and its stock would be worth more with FDA approval than without it.
Thus, in the time between the FDA’s decision and its public announcement, ImClone’s share price was unrealistically high. If shareholders with advance notice of the FDA’s rejection sold their stock, they helped bring the price in line with the new set of facts.
The resulting price was a better price because it better reflected the revaluation. The direction of the price movement was also a signal to investors.
This leads to the question of whether particular buyers and sellers of stock are victims of insider trading. Again, let’s look at the Stewart case, which is not about insider trading but relies on the theory. (See part one, Freedom Daily, September 2003.) No victim was named by the U.S. attorney. Stewart ordered her stock sold on December 27, 2001, after allegedly being told that the company’s CEO was trying to sell his shares. (He was unable to sell them.) But she did not go out on the street, buttonhole a hapless pedestrian, and pitch the stock until he agreed to buy it. That’s not how it works. She told her broker to sell, and the broker sold her shares to someone already looking to buy the stock.
This raises several interesting points. Anyone shopping for ImClone stock that day surely knew that a make-or-break decision from the FDA was due any time.
How can that buyer be described as a victim? Perhaps he wanted a long shot and was hedging with other stocks.
Or, since there was short-selling going on, he might have thought the stock would be a good deal in the longer run. (In fact, the stock price has come back because of a favorable Erbitux trial in Europe.)
Thus it is unlikely that a buyer of ImClone that day was naively shopping for stock. At any rate, for the government to assure the most clueless stock buyers that their knowledge is no worse than anyone else’s in the market is to set them up for disappointment and to discourage the market research that any investor should engage in. No one is done any favors when insider trading is outlawed.
The upshot is that the buyers were not victims of Stewart.
By the way, on the day she sold, 7.7 million ImClone shares were traded — five times the volume of the day before. The members of then-CEO Sam Waksal’s family who were tipped off early about the FDA sold only 150,000 shares. Maybe the knowledge wasn’t so “inside” after all.
Note also that sellers of the stock were improving things for any unsophisticated buyers. If dumping their shares depressed the price, the buyers who would have bought anyway suffered a smaller loss than they would have had the stock not been dumped.
Benefits of insider trading
Of course, a naive stock speculator might decide after the fact that because he lacked inside information he bought or sold too soon, or didn’t buy or sell at all. But that was a risk he should have been aware of going in. In contrast, the long-term stockholder, such as the proverbial “little old lady,” who is not buying and selling in response to day-to-day price changes, is unlikely to be harmed by insider trading. On the contrary, this seller will most likely benefit.
“The long-term trend of stock prices is upward, so that, all other things being equal, occasions for good news should exceed those of bad,” Henry Manne writes in Insider Trading and the Stock Market. “Any undeserved risk to investors resulting from insider trading must, therefore, constitute a very small fraction of the total risk assumed by long-term investors.”
Manne points out that insider trading is beneficial in another way. It’s an appropriate method for corporations to compensate internal entrepreneurs for their work, because entrepreneurial insight is difficult to reward properly with bonuses or stock options. Fischel writes that insider trading (buying) can also be useful for letting executives “disclose” good news about the company without giving information away to competitors.
On the other hand, if stockholders dislike the practice, that will be reflected in lower stock prices for corporations that permit it. In the end, this is a matter for the competitive marketplace to sort out.
Insider trading, of course, is a separate issue from the use of proprietary information in violation of a contractual duty. If Stewart’s broker violated his duty to his other clients, they may have grounds for a civil suit and Merrill Lynch would have grounds to fire him. But it would be no cause for an SEC action or criminal indictment. The offense would be breach of contract, not insider trading.
