Sure, the market could absorb Martha’s shares and one particular individual person will probably not be hurt by it. But I think the law is in place to keep the masses from getting burned by deceit. See, I can start a mail-fraud scam that just takes maybe 10 bucks from each person, no harm done, but I collect millions. There’s laws against that type of business too.
Originally posted by ccwaterback
I don’t see any deceit in insider trading. No one knows with certainty that a stock price is going to go down, even with inside information. But usually when someone is selling a stock, it is because he or she thinks the price will go down. Simply by the act of selling, the inside trader is saying to the world, “I think the price of this stock is going to go down.” So I don’t see the deceit.
But your other point is interesting. If an inside trader was effectively skimming $10 (for example) from each buyer he or she sold to, then that would certainly be grounds for a civil suit. Yes, $10 isn’t much, but collectively it could make a big class-action suit.
I don’t think that’s what’s happening though. If you accept as a given that a stock price is going to crash before the market opens the next day, then an inside trader will only start the market moving in that direction a little earlier than if he or she had waited until the next day to trade. Thus the people who bought it late in the day actually will get the stock at a slightly lower price than they otherwise would have. Where the stock bottoms out should be the same either way. Thus, the only possible “victims” I can identify have actually been saved some money by the inside trade.
From the article http://www.reason.com/0310/fe.mm.st.shtml :
“The most serious criminal charge against her is not perjury or insider trading but securities fraud, based on the fact that she denied to the press, personally and through her lawyers, that she had engaged in insider trading. This was done, the feds say, not for the purpose of clearing her name, but only to prop up the stock price of her own publicly traded company, Martha Stewart Living Omnimedia. In other words, her crime is claiming to be innocent of a crime with which she was never charged.” (emphasis mine)
This is an excellent article, that also spends some time with whether insider trading should be a criminal offense in the first place.
I speculated above why she was not charged with criminal insider trading.
Insider trading is illegal because it destroys the integrity of the market. It does so subtlely, and that is why there is only a crude prohibition of it in the securities laws. Much of the prohibition is case-made.
I question the statement above that it doesn’t have to be company informaiton. Do you have a cite for that?
Also, you are not safe even if you make just $100. The feds usually come down heaviest on the small fish because they can’t defend themselves. They turn these guys to get the big fish. Its unlikely someone making just $100 got the information themselves. The feds will figure out where you got the info and who you gave it to. Their ability to do so is frightening, although I’m skeptical as to the regularity of their enforcement of these laws - it seems pretty haphazard to this observer.
If a company is projected to post earnings of $2/share and in fact they are going to post a loss of $1/share, you can be sure they stock price is going down.
Tell you what mr_moonlight, any time you want to play cards with me, give me a call. See, with my rules, I get to look at your hand before I decide to bet. OK?
Wasn’t there a report that someone (can’t remember who) in the Mideast was shorting the US market heavily before the 9/11 attack?
QUOTE=LemonThrower]Also, you are not safe even if you make just $100. The feds usually come down heaviest on the small fish because they can’t defend themselves.
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I don’t know, maybe they would, but I kind of doubt it. They don’t go after tax cheats for petty amounts, people can have poker games in their house without being raided, I just don’t think they would waste their time on such a small amount.
Here’s an excellent example of inside trading, and how it happens every day. Now I can’t prove this is inside trading, but if it looks, smells and tastes like insider trading, I have to believe it IS insider trading. Here’s a company, stock symbol EONC. Their stock has been on a steady climb for months. Without any public news releases, all of a sudden yesterday and today, the stock takes a dive. I would bet someone knows something about an announcement coming up. We will see.
That is an interesting article.
The second half has a pretty good summary of the history of regulation of insider trading.
The first half seems written by the Martha Stewart fan club. I disagree with a lot of the conclusions/opinions in it.
Insider trading is prohibited because if it wasn’t, people would be leery of the markets. Look at how many people pay a premium to buy a used car from an authorized dealer instead of a used car lot or an individual. If insider trading were allowed, you could not imagine the level of fraud that would exist.
Also, MS was the Chairwoman and CEO of her company which is publicly traded. Her denial of her crimes, if proven to be false, is a material statement about her own company and defrauded investors in that company. The SEC is right to pursue this.
The real problem with this case is you have someone who is incredibly talented who is charged with something similar to shoplifting. Its almost embarrassing for the SEC to go after her, but at some point you can’t let people get away with shoplifiting.
I don’t have an opinion on her case except that her excuse is implausible and Faneuli’s testimony, if true, prove she committed insider trading.
So basically, insider trading would be as if someone sold you say, a lawn mower and neglected to tell you that they know for certain that there’s a flaw that causes the blades to come shooting out and lodge in your stomach?
Okay, so why would anybody trade in a stock if they didn’t have inside information? How are you supposed to make any money if you are reading tea leaves and chicken entrails to make your decisions?
Might as well take your money to Vegas.
No, Guin, “insider trading” refers specifically to publicly traded securities. Examples of privately sold defective property are not relevant.
Originally posted by ccwaterback:
I do like poker, but it’s not a good analogy. Poker is a zero sum game. The only way you can win is if someone else loses. That’s not true of the stock market. A better analogy might be blackjack. You can look at my hand all you want, but it’s not going to affect how I do against the dealer, nor will it affect your chances.
Originally posted by LemonThrower:
I don’t agree that insider trading is fraud. Traders and brokers do not make claims on the future value of what they are selling. Fraud also has victims, and there are no victims in insider trading that I can see.
The people who bought Martha Stewart’s shares didn’t choose to buy because she was selling. They had their own reasons. They would have bought at the same price and lost the same amount of money in the crash even if she chose to hold her shares until the news was public.
It seems that people hold a grudge against insider traders because they have made money where others lost, and people like a scapegoat. It might be like the case of a child who has died in a train wreck, and the mother holds a grudge against the people who survived. Their survival isn’t what killed the child, and they should not be blamed for surviving.
If people are so opposed to insider trading, I think it’s fine if corporations and/or stock exchanges want to stop it to appease their customers and shareholders. They might want to make some rules against insider trading that are a contractual obligation of purchasing shares. Pre-determined penalties for violating the contract could be enforced in civil court. But I think in a case where victims are nebulous at best, and most likely nonexistent, jail time is not an appropriate punishment, and it should not be a criminal offense.
Actually it was a very good analogy. I have used unfair practices and broken the rules to gain a distinct (in fact fool-proof) advantage over you.
True, but they would not have bought the shares when they did if they knew what Martha knew.
Insider trading is a way of preventing the big boys spreading around info, and reacting before anyone else has a chance to. This gives them the heads up on big deals, allowing them to buy up cheap, and allows them to sell out when the stock bottoms out from new information.
Heres the diff:
If you talk to someone in a position about their OPINON about how there company is going, its not insider trading, eg “yeah I think we’re turning the company around, Ive got a real good feeling about our new investments”
However, if you talk to them about information that has not be given to the public that knowingly would influence the stock price, that is illegal.
But remember, it all depends on what you do with the information. Thats the crime, not actually knowing the info in the first place.
I heard there are no insider trading laws in Europe. Yes, no? Or, are there similar-but-differently-named laws against it?
That’s not quite true. What is true is that they would have bought at approximately the same price had she chose to hold her shares, so any single investor isn’t out a significant amount of money. But with thousands of investors, Martha profited a little from each one.
Stealing a penny from every person in the country is the same idea. No one is out much, but your $2.9M came from somewhere. Claims that this is not a zero-sum game are unfounded with short-term markets. I’m not saying that insider trading should be illegal, just that saying it’s victimless is not exactly right.
I didnt mean to imply that insider trading itself is the fraud. Rather, if insiders like MS were allowed to trade on inside information, you would encourage fraud. Take Waskal for example. He sold his stock without disclosing that FDA approval of their key product was in jeopardy. That is a fraud of omission IMHO. He could have also announced everything was fine with the FDA and then sold if you want it to more clearly fit the label fraud.
If insiders like Waskal can sell on the basis of this information, then you have a lawless market and transaction costs rise because you have to worry about wether someone is screwing you. People would be saying one thing and doing another. Pump and dump is already a problem in the US - allowing insider trading woudl make it worse.
If MS had waited until the information was public, she would have sufferd the $40,000 loss rather than the person she sold to. Flip the facts - lets say you learn the drug will be approved by the FDA. If I buy Martha’s stock when I know that info but the market doesn’t, then I am not paying her a fair price. What MS did was unfair - she got more for her shares than she deserved only because she received a tip from an insider - Waskal.
The law itself is a little vague, especially as it applies to some convoluted practices like tipping. However, it was clear enough to MS that she violated the law that she came up with the excuse that she had a standing order to sell at a certain price.
I’m not out to get MS. I think Waskal and Merrill Lynch were more culpable in the insider trading, but MS did do something wrong and she did cover it up.
I don’t know the details, but there’s certainly some laws. A friend of mine described a memo forbidding all employees from trading company stock for a period of time, since they were privy to a potential merger.
You need to broaden your perspective. A share of stock is a share of ownership. Insider trading means that one set of owners (the insiders with the advance dope) can unfairly use their knowledge to take advantage of another set of owners (the ones who don’t have it) or buyers (the people who buy the stock).
Let’s use a real estate analogy. I’m selling my house and I have to sign a form that says I know I have formaldehyde insulation in my walls. The real estate agent (the broker) knows that will scare away buyers, so she and I agree that I don’t sign the form. You buy the house and find out that you have to spend thousands to rip out the walls and replace the insulation. I got a higher price for the house than I would have if you had known, and the broker got a bigger commission. You don’t think you were defrauded somewhere down the line?
Here’s why I think Martha wasn’t charged with insider trading: she didn’t get the info directly from an insider and the circumstances of the tip (from her broker) are such that there may not be a binding chain of duty.
While the SEC may wish otherwise, the courts have not consistently found that there is strict liability for trading on material non-public information.
You get in certain trouble if you had a duty not to trade–if a cabdriver overhears a someone in his cab talking about a merger and trades, it is probably not insider trading–he has no obligation/duty/relationship which requires him to keep those words confidential (the blabbermouth however may have preferentially disclosed insider info which may get him in trouble).
Similarly, there are always rumors floating around about deals–when your stockbroker advises you to sell a stock you would hope he has taken the rumors into account (not credulously, obviously).
I think the SEC didn’t want to have to argue that Martha knew her broker got the info from an insider (did he? I can’t remember if he was personally Waskal’s broker or if it was someone else at Merrill) and that the chain of tippees was such that she was obligated to recognize and treat the info as confidential. For instance, the testimony doesn’t seem to have the broker or his assistant specifically telling Martha that the info was not public and came from an inside source. In reality it may have, but could the SEC prove that Martha knew or should have known this? (Martha is not a spouse or shrink or adviser to Waskal or the broker such that a duty to keep info confidential would be clear–she was Waskal’s friend but didn’t get the info directly from him.)