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The Therapy Sessions
Sunday, March 07, 2004

Stewart is going to jail because she is human

I'm not sure how to feel about this:Martha Stewart found guilty on all counts

I hate Martha Stewart as much as the next guy. But I think the laws that govern information and stock sales are irrational.

The best reason to buy or sell a stock is because you think you have information that others don't have. You may be one of the first to buy a new product, you may be a scientist who understands the implications of new technology, or you may have received a tip from an enthusiastic employee of a hot company.

Any one of these people has information that others don't have.

But information is "special" if someone tells you a company's stock is about to plunge. You can't act on that.

Come again?

I know that Stewart was convicted on "obstruction of justice." But the law is unclear, and it always will be: it is (yet another) case of the government attempting to regulate information.

Companies are paranoid about this right now. I work in the pharmaceutical industry. If I somehow got wind that a clinical trial was going poorly and dumped my stock, I could be convicted of insider trading (or so they say: we were forced to sign onto company policies in this regard, but I'm not a big fish. If I were to ignore the company policies, I doubt anyone would bother with me).

Yes, I realize that connections shouldn't allow connected people to benefit grossly out of proportion to everyone else (are you listening Hillary Clinton?), but the whole point of markets is the aggregation of information.

And some of this best information comes from on high: Indeed, the knowledge that high-level executives are dumping their own company stock is very important information to everyone else. Information about such trading is available to everyone (especially on the internet).

Now, these fearful executives will hold, even when extremely bad news is imminent.

How does this help the little guy?

The law seems have the noble intention of putting the humblest person on the same plane as Warren Buffet when he buys and sells stock.

But is that realistic? Granted, it is well-intentioned, but if it can't be implemented fairly, is it noble?

I agree that Samuel Waksal deserved to go to jail. He had inside information (though lots of others had this information too), and he acted on it (and I'm sure many others did too).

But the government actually expects any person to look on placidly when they know that they will lose tens of thousands of dollars tomorrow?

Some people are always going to have better information than others: that is why we have markets.

How does law regulate the flow of this information? Anyway that it does so will be flawed.

I believe that the greatest dispute of the 20th century was between societies that attempt to control information (totalitarians) and societies that freely allow its distribution.

The lesson was that information is not something that a government can control.

This has implications for all manners of government policy: from trade, to science, to campaign finances to insider trading.

One of the difficulties of laws in these areas is that it is damn near impossible to know when one is in violation of the law.

Law should not be like that: the difference between right and wrong should not be so nuanced that rules have to be interpreted by full time lawyers. That doesn't benefit anyone.

Law should be as clear as black and white, and one should have no illusions of innocence when one is committing a felony.

Who benefits from the fact that that our tax laws are such a hodge podge collection of incentives and deductions meant to favor certain groups of people? The little guy doing his taxes with a calculator, or the rich guy who pays full time accountants?

As I said before: I hate Martha as much as anyone, but I don't think she belongs in jail for acting rationally.

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