September 2, 2010 -- Legal scholars distinguish between behavior that is malum in se (wrong in itself, such as murder, rape, and theft) and behavior that is malum prohibitum (wrong merely because it is against a society’s structural rules, such as driving on the left side of the street in America or the right in Britain). I sometimes wonder if we do not need a third category: malum insanum, behavior that is wrong merely because someone in authority has set down a completely arbitrary edict that declares it to be wrong. That, at least, is the reflection prompted by yesterday’s SEC settlement of insider-trading accusation against two friends, one of whom boasted about his work on a possible corporate acquisition and one of whom traded on the information—for his own benefit, not for their joint benefit.
Capitalism is being held to a standard it can never meet.
According to the SEC , James W. Self Jr. worked for a pharmaceutical company (apparently
Merck ), when the biotech firm MedImmune began seeking someone to acquire it. Self was assigned to work on assessing the deal and subsequently boasted about it to a friend from Wharton days, hedge-fund manager Stephen R. Goldfield. Goldfield then bought options and stock in MedImmune, profiting when AstraZeneca was announced as the purchaser on April 12, 2007.
Now, why should any of this be illegal? I can understand that Self’s company might not want him to talk about information he acquired in the course of assessing the MedImmune deal, inasmuch as it could drive up the stock they were planning to purchase. But if so, let the company discipline him. In fact, let the company sue him, if it feels that strongly about the matter. But inasmuch as Self
still works for Merck , it would seem that the company did not think his indiscretion was a big deal.
We get into true malum insanum territory, however, when it comes to the case against Goldfield. According to the SEC’s theory of the case: “Self divulged the confidential information to Goldfield in order to boost his reputation in Goldfield's eyes and to show Goldfield that he was working on important matters.” It is preposterous to say, as the SEC does, that by listening to his college buddy’s boasting, “Goldfield . . . assumed the duty to maintain that information in confidence.” No. He didn’t. And I doubt that any ordinary human being has ever felt so constrained.
Indeed, the SEC’s theory of Goldfield’s second-hand secrecy obligation is, if possible, even more bizarre, given the circumstances surrounding the case. Beginning in December 2006, a MedImmune shareholder, David Katz, president of Matrix Asset Advisors, had been hammering the company to sell itself, and the Board’s demurrals had been becoming weaker. In mid-February 2007, Carl Icahn purchased a large block of stock, fueling speculation that a sale was imminent. On March 7, 2007, the MedImmune Board asked Goldman Sachs to contact twenty-two pharmaceutical firms about purchasing MedImmune, and doubtless each of those parmaceutical firms set up a team of people to assess the deal, just as Merck did. On March 13, a meeting was held at Merck to begin considering a possible offer for MedImmune; twenty-six people were in attendance. Multiplying those 26 people by 22 firms, we may guess that the number of people “in the know” at that point exceeded 500. If capitalism is to be held to a moral and legal standard that says those 500 diverse and unrelated people must be able to keep information secret from a market that lives and dies by advance information, then capitalism is being held to a standard it can never meet.
But that, one may suppose, is the actual purpose of malum insanum regulations.
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