An Insider Trading Case With Twists and Turns

Let us dive into a case in which all sorts of interesting economic and ethical issues arise. On Christmas 2002, Sam Waksal, CEO of ImClone, learned about negative interim F.D.A. test results on ImClone’s promising cancer drug Erbitux. He promptly informed his family before the test results became public knowledge, who sold their shares and thereby avoided millions of dollars of losses. In 2003, Waksal was indicted and sentenced to 7 years in jail for insider trading. (Ironically, the interim results only caused a delay. Waksal’s Erbitux seems to work and will probably save thousands of lives.)
Economists are divided on whether insider trading should be prohibited. First, informed trading aids market efficiency: it moves stock prices more quickly towards their correct values. Second, the zone between what constitutes illegal trading based on inside information vs. legal trading based on superior business knowledge can be rather gray. Third, the social cost of making sure that inside information neither leaks nor is exploited is very high, and we currently criminalize even many innocent slips.
But ignore for a moment whether insider trading should be legal or illegal. What is the right penalty for this currently illegal activity? Sam Waksal is one of the world’s top biotech experts. Some patients consider him a saint, though perhaps one with mild flaws, because his work has saved the lives of thousands of people. His incarceration will slow down the ongoing work of ImClone—a fact that could cost the lives of thousands more people who will no longer be able to benefit from what Waksal might yet have done. (What if Waksal’s efforts had saved or could save you or a family member?) Is it better to allow Waksal to forfeit a part of his fortune and thereby stay out of jail? The victims of his insider trading (the shareholders who bought the shares at too high a price) could be made better off. Cancer patients could be made better off. And Waksal would be made better off.
But there are problems with the financial penalty suggestion: If forfeiture became the sole legal remedy, would this be enough to deter future offenders? Could future insider traders avoid penalties if they sheltered their fortunes in shell companies? Would companies just make up the penalty for executives convicted of insider-trading?
More generally, should richer people, or people who have contributed more to society, or people who would contribute more to society (an economic gain that incarceration would destroy), be allowed to pay in order to get away with actions that others cannot get away with? We already can see some of this differentiation today: bail is more easily met by wealthier people, and many penalties come in the form of a choice to the offender: pay X dollars or go to jail. So, should we go so far as to allow richer people to commit crimes if this “can make everyone better off,” e.g., if we then had them pay ample compensation to the victims? What if they commit parking violations? breach of contract? speeding? fraud? rape? second-degree murder? first-degree murder? Where do we draw the line? (Consider that the victims could receive a lot of money that they might not otherwise receive. And consider that you could be the victim!)