R. FOSTER WINANS, formerly a reporter for The Wall Street Journal, has been charged with using his knowledge of his stories in the next day's paper to play the stock market. With his collaborators, the indictment declares, he made hundreds of thousands of dollars on stocks affected by those stories. If that is true -- Mr. Winans and the other defendants have pleaded not guilty -- it was a reprehensible thing to do. But was it a violation of the securities laws?
In the Winans case, the federal government is using a criminal prosecution to expand its regulatory powers. Since it seeks to expand into the process of reporting and publishing news, readers as well as newspapers have an interest in the outcome. If this prosecution succeeds, it will constitute a significant erosion of the First Amendment.
The SEC argues that Mr. Winans, as a reporter, had a "fiduciary" responsibility to his newspaper and to his readers. Most reporters believe that they have a moral responsibility to their newspapers and to their readers. But that term "fiduciary" is the key. It's a technical term: people with fiduciary responsibilities are subject to the securities laws. Those people are insiders, the government argues, and possess inside information. The dissemination of inside information is closely regulated by the SEC, and the penalties for violation are substantial.
In past cases, the Supreme Court has limited the doctrine of the insider to people who are, for example, officers of corporations with knowledge of internal developments that will affect the price of the company's stock. Mr. Winans never came close to falling within that definition. Like most reporters, he remained the absolute outsider. The SEC is now attempting to widen the definition to include him. Under that doctrine, any reporter handling financial news would presumably become an insider and subject to the rules that control insiders' information.
There's no reason to think that the SEC has given any serious consideration to the political implications of this reach for authority. The SEC is in the hands of aggressive technicians who have been given the job of regulating the stock markets, and are consequently trying to regulate everything that affects the stock markets -- including the flow of financial news. For some years the SEC has been working -- fairly successfully, so far -- to impose its own licensing requirements on the smaller and more specialized financial publications. Now, with the support of the Justice Department, it is asserting a much wider application of its rules.
The Constitution does not distinguish between financial news and other kinds of news. If the courts interpret the Bill of Rights to allow the regulation of one kind of news now, it will allow the regulation of other kinds of news in the future.
The SEC says that the First Amendment is not a license to commit fraud. Absolutely true. But neither is the Winans case a license to commit assault and battery on the Constitution.