Nominees for the 2006 Martha Stewart Prize, International Division

U.S. Media Mogul Martha Stewart is still fighting over her use of insider information to sell a pharmaceutical company’s stock before bad news about the company’s prospects became public. It looks like the Chief of Staff for Israel’s Defense Force, Daniel Halutz, is in for a similar fight. Halutz is rejecting calls for his resignation after admitting to selling a stock portfolio valued at more than $25,000 within hours of Hezbollah’s July 12 raid into Israel and at the same time Halutz was meeting senior officials to plan Israel’s armed response. The value of the stocks Halutz sold reportedly declined 8.3% over the next two days. Apparently, in selling his stocks, Halutz violated no Israeli laws – Israel’s insider trading statute applies only to trading based on information about the company putting out the stock, rather than information that might affect financial markets in toto. Still, Halutz faces criticism both for taking personal financial actions in the midst of a military crisis and doing so in a way that implied a negative view of Israel’s situation and its ability to respond. In his defense, Halutz has stated, that “I am a citizen of the state and I have my own personal economic considerations. This issue can only cast a baseless stain on me, and anything beyond this is not worthy of attention.”

Putting aside the fact that the losses Halutz avoided are relatively small (less than $2,500 if you accept the press reports as accurate), Halutz’s case raises two interesting questions. First, should senior military and political leaders be able to manage their own financial affairs, notwithstanding their authority to make decisions that affect financial markets (or individual stocks) that correspondingly give them knowledge unavailable to the public? Even if Halutz’s stock sale wasn’t actually motivated by his own activities in planning Israeli military actions, the timing of the sale certainly gives some appearance of impropriety. Here in the U.S., I know ethics rules prohibit government officials from being involved in decisions that might have personal financial consequences for the official. Many officials have to file annual listings of all their financial holdings and transactions, while senior U.S. officials like the President and the Vice President have blind trusts, which prevent them from managing their personal finances while in office. Israel seems to have similar rules for its Prime Minister and government ministers, but they don’t extend to members of the military, an omission I expect to receive much attention in the coming weeks.

Second, if you accept the need to regulate senior political and military officials’ financial dealings to avoid any appearance of impropriety, where should those regulations come from? Certainly, each nation state may design rules for its own officials, but what about international law? Should international law seek to harmonize national regulations on restricting personal financial activity by government and military officials, or is this solely a national issue? Lately, states have become concerned with harmonizing national rules on issues such as corruption because of the direct and indirect transnational impacts corruption can have. But, those rules don’t cover the Halutz situation. Article 8(5) of the UN Corruption Convention, for example, requires each state party to

endeavour, where appropriate and in accordance with the fundamental principles of its domestic law, to establish measures and systems requiring public officials to make declarations to appropriate authorities regarding, inter alia, their outside activities, employment, investments, assets and substantial gifts or benefits from which a conflict of interest may result with respect to their functions as public officials.

Since the obligation only applies to government (not military) officials and then only through fairly loose language, it doesn’t address whether certain government and military officials should be prohibited from engaging in private financial dealings entirely. I wonder, though, whether the Halutz case might cause some states to rethink this issue and consider agreeing to adopt such a ban? What do readers think?

UPDATE: An astute reader points out that, contrary to my reading of the plain text, the UN Corruption Convention likely does cover military personnel. Although the Convention defines “pubic official” in Article 2(a) as, inter alia, “any person holding a[n] . . . executive . . . office of a State Party . . . ,” the travaux preparatoires for that article indicates: “the word ‘executive’ is understood to encompass the military branch, where appropriate.” See UN Doc. A/58/422/Add.1 (reproduced in Treaty Doc. 109-6 at p. 66). Israel has signed but not ratified the Corruption Convention. So, in order for Israel to join the Convention, it likely will now have to wrestle with whether changes to Israeli law extending financial ethics rules to military officers are required by Article 8. Alternatively, Israel could argue that the travaux‘s reference to “where appropriate” or the text of Article 8 itself (requiring a state party only to “endeavor, where appropriate, and in accordance with the fundamental principles of its domestic law” to have financial reporting by political and military officials) provides Israel with sufficient flexibility to comply with the Convention using the same laws that reportedly did not prohibit Halutz’s stock sale. And that still leaves open the question of whether, in addition to the Corruption Convention question, international law should impose stricker mechanism (e.g., blind trusts) to avoid senior military and political leaders having any private financial dealings while in office.