Wednesday, November 12, 2003

Free Martha Stewart - Celebrities Academia Law SEC Stocks Investment Criminal Sanction

Celebrities Academia SEC Stocks Investment Criminal Sanction

Celebrities, Academia and Law meet as Alex Tabarrok at Marginal Revolution in a posting entitled Free Martha! references Professor Bainbridge who, according to Tabarrok, has opined (in Tabarrok's words) "that Martha [Stewart] is innocent of insider trading", and as Tabarrok adds: "He ought to know, as he wrote the book on insider trading law."

Knocking the High and the Mighty from their Pedestals

So why was Stewart charged at all for - essentially - merely acting on what Bainbridge describes as a "hot tip" through her broker, Merrill Lynch, which is legal behavior.

Somewhat disturbing is Bainbridge's statement:

"I don't particularly like Martha Stewart's public persona. Like a lot of people, I get a vicarious little thrill out of seeing the high and mighty brought low."

The price of fame?

What is the Proper Job of the SEC and the Department of Justice?

Apparently, here is a case of the SEC - and the Justice Department - going after the high and the mighty just to bring them down a notch. Surely it should not be the job of the SEC to charge people with insider trading just because they are celebrities. Yet, this appears to be the case, since, as Bainbridge notes, the SEC has merely brought a civil complaint [apparently frivolously], against Stewart, while the Justice Department is not following the SEC's interpretation of either facts or law, and is merely charging Stewart with "conspiring to obstruct justice".

What is Obstruction of Justice?

"Obstruction of Justice" is a crime that I often interpret to mean that "the accused did not play along with the authorities in helping them to prove a crime that may not have been committed in the first place". It is sort of a catch-all crime to get people you can get for nothing else. I definitely think that this is one crime - the obstruction of justice - that should be taken off the law books except for unique, isolated cases.

The Criminal Sanction is Unsuitable for many so-called "Crimes"

Indeed, substantial changes need to be made in our perception of the role of the criminal law in our society, where the criminal law is applied to a host of areas - such as so-called "white-collar economic crimes" - for which the criminal law was originally never intended and where its application is not only often absurd, but generally yields no visible societal benefit, other than to keep government officials and lawyers busy with make-work. Or does it make any sense at all to lump marijuana plant growers, habitual drunks, child molesters, murderers, bigamists, tax evaders, repeat automobile thieves, habitual false parkers or insider traders in one jail cell? Hardly. We will talk about this topic in the future in greater detail.

The Legal System has Better Things to do

Frankly, the legal system should have better things to do than to involve people like Martha Stewart in criminal proceedings just because she is a celebrity who is buying and selling stocks and - like everyone else - trying to make a profit in doing so, also through the fact that she "knows people". Anyone who follows stock prices knows that there are often large movements of stock which generally precede ANY material announcement about a company's welfare. Information is the name of the game in investment. As Bainbridge writes:

"Charging [Martha] with insider trading stretches that crime beyond where it was ever meant to go."

The SEC should be made Accountable for its Work

The SEC is playing the high and the mighty here, and frankly, it is THEY who should be taken down a few notches. THEIR JOB is to improve the flow of correct securities information to the public, not just to wield their powers in an arbitrary way - and they have NOT been doing a good job of this, if we take cases such as Enron as an example. That kind of thing should simply be impossible, if the regulatory mechanisms were properly working.

I did quite a bit of SEC work in my old law firm in New York City and no matter what the registration, there were always new "Mickey Mouse" changes required by the SEC in newly submitted - often boilerplate - documents - NOT for the purpose of improving the document's information value, but merely to show who was boss. The same wording submitted and OK'd the week before was found deficient one week later. As one senior partner in the firm in those days commented, "we simply make the changes required, it would be a waste of time to dispute with the SEC about these things."

If the SEC were properly doing their job and concentrating their efforts on ESSENTIALS, rather than exerting their influence on the high and the mighty, giant flops such as Enron would be less likely.

Stocks and Investments - the Main Rule is Caveat Emptor

In addition, I personally have no sympathy for those who have lost money through Enron. When investors make windfall profits on the stock market, they put that money in their bank accounts without uttering a sound. When the market goes the other way and losses are made, the investing community always screams fraud on the part of the principals and/or their lawyers, rather than biting the bullet and admitting that they simply made an unsound investment. Trying to make a profit means risk and the person potentially making the profit should bear the burden of that risk. The risk should not be shouldered by the taxpayers, through the medium of government. The same people yelling about high taxes on their profits are the first to call on Uncle Sam for help when they have stupidly invested their money in the wrong firm and stand to lose money.

The University of California, Enron and Eolas

Disturbing is also the fact that the lead plaintiff in the Enron case, the University of California, lost $145 million in the process. Someone should put the financial dealings of this university under a microscope. The U of C invested money in Enron - between May 2000 and November 2001 - at the same time that it was making contracts with Enron for services - as Enron's largest customer in California. I would call that a fiduciary conflict of interest.

It was the U of C which also assigned an exclusive license of the university-funded rights to browser "embedding", whatever these legal rights may actually turn out to be, to private individuals at Eolas - essentially a one-man firm, which has since won a big money judgment from Microsoft (which may not stand, but we will have to wait and see). According to a posting at, Eolas would get 75% of the verdict and the University of California only 25%. Something stinks if that is true. What kind of a licensing agreement is that? If there were a true belief at that time that this was some kind of a pioneering discovery, no-one would give away a 75% interest for nothing. In any case, I would say that the responsible officials at the University of California ought to be examined for whether they possibly violated their fiduciary duties to the university and why they did so.

The Government is NOT a guarantor for Investments

Caveat emptor - buyer beware.

The government should not be made to function as a guarantor that investments will be profitable. By definition, if some companies make profits, some will make losses. There will be successful and capable executives and others who will prove incompetent and untrustworthy. Deals of all descriptions are the name of the business game. Big money will be made - and lost. Win or lose. Most of the capitalist world is hype and scam - I am a capitalist mind you, but a capitalist who understands the system - and the purpose of Madison Avenue advertising is to get you to buy a lot of things you really do not need and can get by without. The modern economic system of the world is largely based on a type of "fraud" upon the consumer, because it is constantly presenting that consumer with a make-believe world that he should allegedly purchase or buy into. But this does not mean that capitalist perpetrators (perps in the novo lingo) belong in jail. This brings nothing. There is no real societal retribution - this is better served by confiscating illegally acquired wealth - and the deterrent effect of criminal sanctions in the economic sector is virtually non-existent. Enron has had no impact on liability insurance, which one would surely have expected.

The market is guided by supply and demand - and necessity.

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