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Free Mark Cuban and Abolish the SEC

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Billionaire Mark Cuban, the owner of the Dallas Mavericks, has been targeted by the SEC for insider trading. According to the SEC’s complaint, in 2003 Cuban was the owner of about 6 percent of the stock of a company named Momma.com. An executive of the company advised Cuban that the company was going to issue a public offering of stock, an action that ordinarily causes the value of already issued stock to go down. Cuban proceeded to sell his stock before the information went public, enabling him to avoid $750,000 in losses that would have been incurred had he waited until after the offering had been made public to sell his stock.

Some five years later, the SEC decided to go after Cuban seeking payment of the $750,000. While there hasn’t yet been a criminal indictment, who can doubt that the Justice Department, which ruined a large portion of Martha Stewart’s life, is waiting in the wings and licking its chops?

So far, Cuban, a devotee of Ayn Rand, is not playing the role that the feds expect American businessmen to play. He’s not confessing, expressing remorse, calling himself a bad person, seeking forgiveness, and offering to rat out other people. Instead, he’s telling it like it is, pointing out that the SEC is “infected by the misconduct of the staff of its enforcement division.”

Don’t be surprised to see the Feds go after one of Cuban’s family members. After all, that’s how they got Michael Milken to plead guilty to insider trading. They indicted his brother and then agreed to let the brother go as part of a plea bargain in which Milken pleaded guilty. Given Cuban’s strong independent streak and his libertarian leanings, however, don’t be surprised if such tactics fail to achieve their intended result.

Of course, the entire proceeding just goes to show how ridiculous insider trading laws are. Why shouldn’t companies be free to set whatever policy they want on insider trading? If people don’t like the company’s policy, they’re free not to invest in that company’s stock.

The Cuban case is even more egregious than the standard insider-trading violation because Cuban isn’t even an executive in the company. Instead, he is simply the recipient of information from an executive in the company. Why not let the company handle that? Why do we need government to be involved?

The SEC claims that Cuban promised to keep the information confidential, a claim that Cuban denies. However, even if it turns out that the SEC’s claim is false, it still might not make a difference. Insider-trading laws, believe it or not, place the recipient of insider information in essentially the same position as the insider himself, regardless of whether the recipient promised to keep the information secret or not.

An interesting twist to this is the timing of the SEC’s complaint. The complaint comes some five years after Cuban’s stock sale. While it might well be just a coincidence, according to the New York Times the complaint came after a lawyer for the SEC sent Cuban a letter questioning his patriotism for helping with the distribution of a documentary entitled “Loose Change,” which claims that the 9/11 attacks were an inside job planned by President Bush and other U.S. officials. The SEC lawyer proceeded to report (rat on) Cuban’s involvement with the film to SEC Chairman Chris Cox. The SEC then filed its insider-trading complaint against Cuban.

Now, of course we can’t be sure that that is what motivated the SEC to finally decide to go after Cuban after so much time had elapsed after the sale of the stock. But we do know one thing: that’s the value of insider-trading laws and other economic regulations. They provide the government with an ever-present Damocles Sword that enables federal officials to go after businessmen whenever they want.

When I was a student at VMI from 1968-1972, the administration had issued a set of extensive regulations governing the conduct of the cadet corps. The regulations had been compiled in a book entitled “The Blue Book.” Every room in barracks was required to maintain a copy of the book, and cadets were expected to comply fully with all the regulations.

Like most other VMI cadets, initially I did my best to study the Blue Book and fully comply with all its rules and regulations. But I finally came to the realization that that was impossible. Then I realized that that was the real value of the Blue Book. The VMI administration knew that there was no way a student could ever be in complete compliance with all the rules at any one time. So, if the administration wanted to go after a student, which was a realistic possibility given the anti-Vietnam War sentiments of many VMI cadets, it was extremely easy to do so by simply issuing demerits for violations of the Blue Book, a sufficient number of which would result in dismissal from the institution. Thus, the Blue Book served as a indirect but extremely effective means to ensure submissiveness, compliance, and obedience.

The principle is the same with respect to the regulated economy. The value of thousands of federal rules and regulations governing American companies and banks is that they ensure submissiveness, compliance, and obedience. If a businessman doesn’t toe the line, they’ll just go after him for violating some regulation, even while claiming that freedom of speech is alive and well in America.

Of course, the U.S. government is not the only government that employs regulatory crimes to keep businessmen in line. Russian and Chinese businessmen operate under the same type of regulatory regime.

A good example of this process took place in the case of Joseph Nacchio, the head of Qwest Communications, who refused to go along with President Bush’s illegal telecommunications spying scheme, even as other telecoms were going along with it. So what happened to Nacchio? Surprise, surprise! He got indicted by the feds and convicted for — you guessed it — insider trading. He received a 6-year sentence in the federal penitentiary. The feds say that their persecution of Nacchio had nothing to do with his opposition to the president’s illegal monitoring scheme. It was all just a coincidence, they say.

Here’s how the slimy bureaucrat Dr. Floyd Ferris put it in Rand’s Atlas Shrugged:

“Did you really think that we want those laws to be observed?” said Dr. Ferris. “We want them broken. You’d better get it straight that it’s not a bunch of boy scouts you’re up against — then you’ll know that this is not the age for beautiful gestures. We’re after power and we mean it. You fellows were pikers, but we know the real trick, and you’d better get wise to it. There’s no way to rule innocent men. The only power any government has is the power to crack down on criminals. Well, when there aren’t enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws. Who wants a nation of law-abiding citizens? What’s there in that for anyone? But just pass the kind of laws that can neither be observed nor enforced nor objectively interpreted — and you create a nation of law-breakers — and then you cash in on guilt. Now, that’s the system, Mr. Rearden, that’s the game, and once you understand it, you’ll be much easier to deal with.”

There is really only one solution to this tyranny and oppression, and it’s not one that involves “reform”: Abolish the SEC, one of the most tyrannical, destructive, useless agencies in American history, and repeal all economic regulations, including insider-trading laws. Or to put it another way, restore free enterprise — that is, enterprise that is free of government control — to our nation.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.