More on Martha

I previously wrote about a side aspect of l’affaire Martha -- the value of billionaires.

Here's something about the case itself. As everybody knows by now, the government didn’t indict Martha for insider trading because it would have lost that theory – she didn’t trade illegally on inside information from ImClone, but at worst on a probably legal tip from her broker that ImClone insiders were trading. (Remember my warning that this site does not give legal advice.) If she obstructed justice, it was because she thought she had done something illegal, and that if exposed it would drive her stock down. As it happened, she probably wasn’t doing anything illegal but it did drive her stock down because she was indicted for covering up her legal act. Kafka take note.

The case is eerily similar to what happened to that other evil capitalist, Mike Milken, who was convicted for having too much information, but not for insider trading (rather, for a violation of the Williams Act).

I wonder if Martha would have covered up if she had legal advice that her acts were legal? Maybe I missed something (certainly possible) but I don’t think she had such advice. Why not? The rap on Martha, evident in the movie I wrote about on my movie blog) is that she’s a control freak perfectionist. While not a lawyer, she’s a former stock broker and very sophisticated on business and business law matters.

Is it possible she knew, or thought she knew, that if she was doing something illegal, and she went to a lawyer, the lawyer would have an obligation to rat on her? Now a lawyer might well have had an ethical obligation to squeal to prevent her from committing a crime, but not necessarily if she sought advice afterward (again, no legal advice here). But she could be forgiven for not recognizing this distinction.

So here we may have an example of what happens when we enlist lawyers in the effort to stop business crime. The law spun a tangled web around Martha, one that she could not be confident about using a lawyer to untangle.

You might have little sympathy for Martha or Michael in particular, or evil capitalists in general. You might say, if Martha’s conduct was illegal, it was only technically so, and morally wrong because she had access to information that other traders did not. In other words, we should discourage people from trading on superior information, even if it isn’t technically “inside” information. But consider that the actions of Martha and all the others who were trading around the FDA’s decision concerning Erbitux moved ImClone’s stock price closer to its actual value. This more accurate valuation was in the interests of all ImClone shareholders, and the market in general.

Consider also why all this happened in the first place: the FDA’s peculiar procedure of providing early warning that a drug is about to be denied. Of course, the FDA doesn’t actually tell the drug company’s insiders to trade. It just says: the bottom is about to drop out on your life savings. You decide what to do with this information. So the FDA, too, is helping to spin the web.

Meanwhile, the drug that sent its creator, Sam Waksal, to jail for several years has been found actually to be effective in shrinking colon cancer tumors.

Comments

[Tung Yin]

But it's only ex post that we can say that she didn't commit insider trading (although some of my colleagues who teach securities and corporations think she could have been prosecuted for insider trading). Ex ante, when the SEC and the FBI are investigating, we don't know. Doesn't society have an interest in having people who are interviewed by the government either (1) tell the truth; or (2) say nothing; but not (3) lie (allegedly)?

In other words, it may be that she didn't commit the underlying wrong, but by making up a false story, as she is alleged to have done, she forced the government to waste resources in checking out the false story.