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The Therapy Sessions
Monday, June 14, 2004

Just who is an insider?

At a lunch party recently:

Me: "I hate Martha Stewart as much the next person, but sending her to jail is ridiculous."

Someone else: "But she broke the law!"

Well, true. But the law is silly. It is a well-intentioned, but ineffective piece of legislation that attempts to give the common investor the dumb - and dangerous - idea that he is on the same plane as Warren Buffett when it comes to trading stocks.

A better apporach would be for the feds post signs all around Wall Street stating the obvious: LET THE BUYER BEWARE.

The stock trading world is filled with tips and rumors, some true, some false. That is what markets are, and it is what they always will be. As a practical matter, there is no way to clamp down on all this information and make its distribution "fair." Most people recognize this, and this is why they entrust the their money to mutual fund managers, who are more likely to plugged into the Wall Street noise.

But certain people believe that laws like this are justified merely becuase they are well-intentioned, not because they solve anything. It is legislation for the sake of legislation, fertile ground for lawyers.

I believe bad laws are worse than no laws at all. Laws that attempt to impose order on chaos only increase the unfairness of it all.

Martha Stewart will be going to jail because she is Martha Stewart. There is no way around that simple fact. Enforcement of this law is arbitrary, and because the problem is so widespread, it is similar to trying to extinguish a forest fire with a garden hose.

If they feds need to "make an example of someone," why not make someone as obnoxious as Martha Stewart? This gives the government a dangerous amount of leeway: they can concentrate their efforts on rich and unlikeable celebrities for doing what everyone else does as a matter of routine.

Justice shouldn't make such distinctions: it wears a blindfold.

Yes, she lied in an effort to save her own skin. It's not admirable, but it is understandable. Bill Clinton committed purjury, but the questions he was being asked under oath were unreasonable. Putting people in a position where they will almost certainly squirm and lie counts in my eyes as a form of entrapment - and a prosecutor better have a damn good reason to do it. I believe they didn't have a good case for doing it with Clinton, and with Stewart they had even less of one.

To make matters worse, the laws are unclear: if Waksal had told a friend who, in turn, told Martha Stewart of the impending diaster at Imclone, she would be guilty of nothing more than a well-timed stock sale. She would have been acting on a rumor, which is perfectly legal.

If Waksal had just mentioned it to some guy he met on the street, no one ever would have cared.

If Waksal had not told a single soul, but had directed his company to cease work on marketing their future drug, the message to "insiders" would have been as clear as if he had shouted it in their ears. But Waksal would only have been looking out for the interests of his company, which was his job.

Who's an "insider?" What counts as "illegal inside information?" Nobody really knows. Politicians fudge the issue in impenetrable legalese that even they don't fully understand, but questions of right and wrong should be as clear as black and white. In the haze of uncertainty, more power is transferred to zealous prosecutors who use the law to bludgeon the unpopular.

I saw it in Sierra Leone, where ridiculous laws on price controls are violated by everyone; but enforcement is left up to the police, who use the laws to pick on people they don't like.

Government's best approach to "the problem" is to recognize that it can't solve it. "Insider trading" laws are really well-intentioned attempts to control information and who has access to it.

Controlling information is a goal of totalitarian states, not capitalist ones.

It rarely works, and in a free society, it should not be attempted.

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