by Matt Barr

Not a good thing

Martha Stewart gets out of jail, free, today. Just as commitment to freedom of speech must be its steeliest in the face of objectionable ideas, commitment to the liberty of people who may be living examples of fingernails on a chalk board measures our worth there. Review the case against the case against "St. Martha":

Insider trading was not a crime until passage of the Securities and Exchange Act of 1934, Section 10(b), which prohibits "fraud" in the sale of securities. This offense was intended by Congress to cover stock trades by a corporate officer, director, or major shareholder -- someone with a fiduciary responsibility to a company’s stockholders -- based on nonpublic, material, "inside" information. In 1961 the SEC for the first time claimed that Section 10(b) and its SEC-promulgated companion, Rule 10(b)(5), extended beyond people traditionally considered to be corporate insiders. The case involved a Cady, Roberts & Co. broker who learned from a director of Curtis-Wright Corp. that the company was going to reduce its dividend. Before the reduction became public knowledge, the broker sold Curtis-Wright shares owned by his wife and clients.

Although the broker was not a traditional insider and did not have a fiduciary duty to Curtis-Wright or its stockholders, the SEC charged Cady, Roberts with insider trading. It argued that Section 10(b) was "designed to encompass the infinite variety of devices by which undue advantage may be taken of investors and others." The SEC thought it was inherently "unfair" for the broker to sell shares when he knew that the people buying them did not have the same information he had. The SEC ignored the fact that all trades on impersonal stock exchanges involve the potential for asymmetric information; one party frequently will know something the other does not. That is how markets work. It’s why two people can simultaneously think XYZ stock is a buy and a sell at $2.

Yet the SEC is still using the same "fairness" rationale today....

Martha Stewart got nailed for saving $45,000 without breaching a fiduciary duty to anyone. The initial trading case against her centered on whether she knew that Sam Waksal was selling his ImClone stock because of the FDA’s impending rejection of the company’s anti-cancer drug. The feds interviewed Stewart about the sale and claim that during the interview she lied to cover up her wrongdoing and then issued false claims of innocence when anonymous government sources leaked these unproven accusations against her, allegedly doing so to support her own company’s stock price.

The government now admits Stewart never had inside information from Waksal.

Reason has a great big bundle o' links to its coverage of Martha Stewart's SEC troubles.

UPDATE: Joe Izzo posts some pictures of the media types surrounding Martha Stewart's house today.

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