Inside Out

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Fresh from failing to extend its reach over mutual funds and hedge funds, the Securities and Exchange Commission evidently has decided that its best strategy is to outlaw all stock trading entirely. At least, that’s the only logical justification we can imagine for the SEC’s pursuit of Martha Stewart on insider trading charges, a hunt that ended yesterday when Stewart opted to settle with the commission rather than risk yet another trial. Somewhere between law book and press release, the SEC’s enforcement division seems to have missed the fact that what Stewart did wasn’t actually illegal insider trading. It was just trading.

Stewart’s supposed insider deal transpired on December 27, 2001. That morning, Samuel Waksal, the chief executive of ImClone and a personal friend of Stewart, learned that his company was on the receiving end of an adverse ruling from the Food and Drug Administration. For the next two business days, until news of the FDA’s ruling was made public at close of business on December 28, Waksal and his family engaged in a selling spree, for which he later pled guilty to insider trading charges of his own.

Stewart also sold her 4,000 shares in ImClone on the same day, but why is still disputed. She has claimed the sale resulted from a sell order she had already made directing her broker, Peter Bacanovic of Merrill Lynch, to unload her stake if the price fell below a certain point. Alternately, the SEC charged that Bacanovic alerted her that the Waksals — who were also his brokerage clients — were selling their shares en masse. The SEC never charged, however, that Bacanovic passed along the actual piece of insider information at the heart of this case, which was the FDA’s negative decision in respect of ImClone’s cancer drug, Erbitux.

Thus, the geniuses at the SEC have just punished an investor for hearing that other investors were starting to sell a stock and deciding to do the same before such sales depressed the price further. Economists are divided on the degree to which any insider trading is a problem, but one would think everyone would be able to agree that basic market information like prices and the major transactions that move them don’t count as “inside information.” Not, it seems, the lawyers of the Securites and Exchange Commission.

The New York Sun

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