The WSJ (sub. req'd) is reporting that Martha Stewart is trying to get some of the counts of her indictment dismissed. Here's the part that caught my eye:
Ms. Stewart wasn't indicted on insider trading charges but was charged with interfering with the inquiry that sought to determine if she sold the stock based on a tip that ImClone founder Sam Waksal and his family were unloading their holdings. ... Prosecutors say Ms. Stewart defrauded investors in her own company through a series of false statements that they allege were designed to curb the losses in her company's stock. ... The charge "seeks to criminalize Ms. Stewart's public declarations that she had not engaged in insider trading in making a personal stock sale," her lawyers said in the summary.
I've come to think that's exactly right. Granted, back in June 2003, I wrote an op-ed for the LA Times, in which I suggested:
Stewart apparently didn't pay much attention to the Watergate scandal. It wasn't the break-in that brought down Nixon's presidency; it was the cover-up. It won't be insider trading that brings down Martha Stewart. It will be the cover-up.
To the extent the obstruction charges are based on Stewart's denials, as opposed to the alleged alteration of documents, however, I've concluded that the alleged cover-up shouldn't bring Stewart down.
Stewart's indictment does not allege insider trading. Only the SEC's civil complaint contains insider trading allegations. In my June op-ed, I explained that the SEC's charges were so outlandish that "the Justice Department did not charge Stewart with insider trading. ... Instead, the Justice Department went after Stewart for conspiring to obstruct justice by engaging in the great American pastime of lying to the cops."
The SEC’s charges against Stewart are based on a bizzare interpretation of insider trading law. Suppose Jane is the CEO of a big mining corporation. Jane learns the company has struck gold. Before the discovery is announced, Jane buys some more stock. That is classic insider trading. Now suppose Jane tells her friend Don the good news. Don buys stock, also pre-announcement. That is known as tipping. According to the U.S. Supreme Court, the tip will be illegal if Jane got a personal benefit from making the tip and Don knew (or should have known) that Jane’s tip violated her fiduciary duty to the company. A third kind of insider trading is called misappropriation. Suppose Jane’s company plans a hostile takeover of a second company. She tells her attorney Anne about the plan. Anne then buys stock in the target company. Anne has committed illegal insider trading based on misappropriated information. If Anne tips her friend Dave, that would be illegal too. The charges against Stewart don’t look anything like these examples. It is as though Jane’s broker thought her trade was unusual and told another client about it. (Doubtless you'll want to read all about insider trading in my book.)
Martha Stewart pretty clearly didn’t know about the FDA’s Erbitux action. In fact, according to the SEC itself, after selling her ImClone stock, Stewart called Waksal and left the following message: “Martha Stewart—something is going on with ImClone and she wants to know what….” Although the SEC’s complaint makes much of the Stewart-Waksal friendship, the SEC nowhere alleges that Stewart had any advance knowledge of the problem with Erbitux.
In other words, Martha Stewart got a hot tip and she acted on it. So what? As a society, we care about insider trading because it is a form of theft. Information about the gold discovery belonged to Jane’s company, not to Jane. Information about the takeover bid belonged to the company, not to Anna. They stole that information from its owner and used it for personal gain. If the information leaked as a result, the company would be injured. But what information did Stewart steal and from whom? The SEC tells us she stole it not from ImClone but from Merrill Lynch, but does this look like theft as you know it? To be sure, the SEC may be able to make out the requisite theft in some hyper-technical sense but Stewart’s misconduct has very little to do with the historic reasons for policing insider trading.
According to published reports, the U.S. Attorney decided going after Stewart would be an “unprecedented” expansion of insider trading law. Instead, the Feds indicted her, inter alia, over her denials that she committed insider trading. At worst, however, Martha lied about doing something that isn't illegal. I still don't get why that should be criminal.
Update: An astute reader emails to ask whether I'm talking about the "infamous Count 9 of the criminal complaint instead of to the overall obstruction charges that form the basis for the rest of the complaint"? I'm only talking about count 9. I agree with the reader's assessment of that count. He writes:If you were thinking only of Count 9's charge that by publicly proclaiming her innocence, she was engaging in criminal securities fraud, I agree with you. In fact, even if she is, indeed, guilty, something bothers me if the government is allowed to publicly make allegations against her but she is not allowed to publicly deny them.
Meanwhile, Tung Yin of the Yin Blog has a very interesting post providing a good deal of detail on the legal merits of the obstruction of justice charge. I don't dispute his assessment that what Martha did could be criminal (in a hyper-technical sense, IMHO), but I still don't get why it is criminal as a matter of sound public policy or, especially, why as a prudential matter a prosectutor should have brought Count 9. I agree entirely with the first reader's assessment that it is unfair to let the government fling allegations, which they end up deciding not to charge somebody with, and then let the government prosecute that person for having denied the allegations the government decided it couldn't prove. Why isn't that just whacked?
Turning to the obstruction counts, however, I'm also skeptical of them as a prudential matter. It also seems to me that aggressive prosecutorial use of 18 U.S.C. sec. 1001 undercuts the requirement that the government prove guilt beyond a reasonable doubt. Granted the 5th amendment only gives you a right to remain silent, but shouldn't you be allowed to tell the cops "I didn't do it" without getting hauled up on charges later -- especially if they end up deciding not to charge you with the underlying crime? I mean, I can't tell you the number of times I've told a cop I didn't see the stop sign. [Ed: After reading Prof. Yin's helpful follow-up post, I added the underlined sentence for further clarification.]
I should note that Prof. Yin, to say the least, seems receptive to the prudential component of my argument:
Now, all that's left is to wonder, should the alleged lie in the actual case with the actual circumstances be a crime? And if so, is it really worth prosecuting? That's a totally different question, and certainly I can see arguments to be made that Stewart's alleged false statement really isn't worth the government's attention and time -- but for her celebrity status.
Exactly, if the defendant wasn't Martha Stewart (and if we hadn't already had Enron and so on), this case never happens. My friend Tom Smith makes this point quite pithily:
Steve Bainbridge is right on about Martha Stewart. He is perhaps too polite to add, however, that the ill-defined insider trading laws are perfect tools for ambitious prosecutors who want to go on scalp-hunting expeditions. Is Martha the most egregious insider trader in Manhattan these days? Hardly. But she is a high profile celeb with a reportedly obnoxious personality that the press would love to see fall. The Bonfire of the Vanities with the feds roasting their marshmellows on the flames.
Harsh, but true. (Download my overview of insider trading law here.)
