Martha Stewart’s real crime


A FEW WEEKS BACK MARTHA Stewart’s trial commenced. There was the usual media hoopla. Most people rightfully paid no heed to the multi-million dollar prosecutorial circus. A few did though. And I have the misfortune of knowing one. A conversation with a friend who works for an advertising company turned to Martha’s court appearance. She was convinced that Martha carried a purse that cost a small fortune when she went into the courtroom on the first day of the trial. I couldn’t believe that Martha would do something so likely to annoy the jury or look bad in the press. And thus a bet was formed. If she could prove Martha was carrying a bag that cost more than $2,000 then I had to buy her a purse. If she was wrong, she would give me cash. Much to my personal chagrin, my friend was right. Martha Stewart was clutching a Hermes Birkin handbag on that fateful day. It didn’t take long to establish this because the next day the Washington Post decided that the handbag itself was newsworthy. A call to the company confirmed a much-more-than-$2,000 price tag and established that there is a six month waiting list for it.

What does this story demonstrate? First, I am a moron for having taken the other side of such a bet with a woman who has patrician tastes and a keen sense for detail, and whose job it is to cut product placement deals. And second, that Martha Stewart is clearly guilty of some federal securities-trading related crime. Okay, the latter may be a stretch – a function of my bitterness over Martha’s costly lack of discretion. But if you buy the argument underlying the actual federal case against Martha and that she deserves to be convicted then you might be willing to send her away for this as well. Truth be told, when you get to the heart of it, it would seem that Ms. Stewart’s gross offense against society – the one for which she faces years in a federal penitentiary – is being an arrogant, take-no-prisoners, successful businesswoman. That isn’t a crime. It is something the world needs a bit more of.

Let me set out the case against Martha Stewart and you can decide for yourself whether she merits prosecution. Stewart is charged with conspiracy, obstruction of justice, securities fraud and two counts of making false statements in connection with her sale of stock in Imclone one day before the FDA announced its rejection of the biotech company’s lead pipeline drug. She was not charged with insider trading. If you believe the government’s witnesses, Martha received a call from her broker, who said that Sam Waksal, who was the CEO of Imclone and a friend of Martha’s, was dumping his shares, and advising that she do the same. Shockingly, she took that advice and ordered the sale of 3,928 shares, saving herself about $50,000 in avoided losses, only to personally lose hundreds of millions of dollars in value in her own company’s stock in the months to follow. The government claims that Martha lied when questioned about the trade, saying that she had a pre-standing order with the broker to sell the shares if the price fell below $60/share. Some of the charges relate to this alleged cover up. Others, in a feat of prosecutorial inventiveness, allege that Martha – by professing her innocence – made false and misleading public statements to prop up the stock price of her own company, Martha Stewart Living Omnimedia.

What happened is no mystery. Early on, federal prosecutors looked at a sparse set of facts and optimistically believed that they had an open-and-shut insider trading case to lodge against her. It was to be a juicy high-profile one that would have low enforcement costs and garner much free publicity (derivatively, deterrence). As they continued to investigate, they discovered that they had absolutely no insider trading case. What to do? Poof: exercising your first amendment right to avow your innocence before being proven guilty is now a crime so long as you are a public company CEO and staying silent as the media speculates about insider trading charges against you might cause the company’s stock price to fall. Well, forget about that one, there’s still the cover up, right? Oh yes, Martha should have been totally forthcoming with federal authorities because it isn’t like those same federal prosecutors were looking to warp anything she might tell them into a crime.

Ultimately, the original investigation of Martha Stewart was warranted by suspicious facts. The continued pursuit of the case in light of subsequent revelations is an embarrassment. Ms. Stewart was targeted initially because of who she was – easy to dislike, rich and famous, the securities fraud equivalent of Leona Helmsley, with 10 years as a stock broker to boot. Unfortunately, the same qualities that made her the model candidate for a highly publicized insider trading conviction or guilty plea made her the worst person to let walk away. And so, federal prosecutors invented some crimes.

Fred Pollock’s column appears bi-weekly.

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