Commentary

A Fair Trial for Martha?

This article was published in the Washington Times, January 18, 2004.

As jury selection began in the Martha Stewart trial, a prospective juror told gawker.com about a 35-page questionnaire used to decide whether jurors will be accepted or rejected. One question was, “Do you frequent any Web sites providing information about Martha Stewart other than www.marthastewart.com?” Prosecutors would indeed be terrified if any would-be juror had peeked at www.marthatalks.com, because the site reprints many “other views” damning the government’s case.

The media keep reporting Mrs. Stewart sold ImClone shares the day before that stock began to fall on news that the Food and Drug Administration had failed to approve the company’s cancer drug, Erbitux. In reality, ImClone stock had been slipping long before Martha Stewart’s sale on the afternoon of Dec. 27, 2001. After all, the FDA had only until the end of the year to decide one way or the other. It didn’t take a financial genius to figure out that every passing day of delay looked more ominous. After closing at $70 on Dec. 14, ImClone fell every day. “Sell the rumor” made sense.

On Dec. 27, more than 7.7 million shares of ImClone were sold — including the trivial 3,928 shares sold by Martha Stewart. ImClone opened at $63.49 that day and closed at $58.30. The reason the stock fell that day was scarcely news, nor an inside secret. At 3:13 that afternoon, Bloomberg News cited a CNBC report from earlier that day regarding ImClone falling sharply “on concern about whether or not the Food and Drug Administration will approve the company’s Erbitux cancer drug.” A little before 2:00 that afternoon, Martha Stewart finally sold her shares for $58.43 — about $14 below the December peak. Far from being early, she was a bit late.

I once spoke about this on the Buchanan-Press show, and Bill Press screamed, “She broke the law.”

Really? What law was that? He thought she had violated some law against insider trading. But Martha Stewart was never an insider at ImClone, nor is she accused of getting information from an insider. Besides, Congress never enacted any law against insider trading. A fine book on the topic by Stephen Bainbridge notes, “The modern prohibition [of insider trading] is a creature of SEC administrative actions and judicial opinions.”

The criminal charges against Martha have nothing to do with insider trading. James B. Comey, the publicity-conscious U.S. attorney for the Southern District of New York, said, “This case is about lying.” But lying is no crime, and Mr. Comey could not plausibly accuse Mrs. Stewart of perjury. So he accused her of misleading federal investigators under Section 1001, a fearsome legislative assault on the First and Fifth Amendments.

As Jack Kemp wrote, “Section 1001 makes it a crime to ‘knowingly and willfully make any materially false, fictitious or fraudulent statement or representation in any matter within the jurisdiction of the executive, legislative or judicial branch of the United States,’ even if you are not under oath. The sweep of Section 1001 and the unchecked discretion it gives to federal prosecutors are awesome.”

Through legal sophistry, Martha Stewart’s crime of having misled people by denying having committed a crime with which she is not charged was magically transformed into several other Kafkaesque crimes. The government says Mrs. Stewart “conspired” with her broker, Peter Bacanovic, to “obstruct justice” by giving an explanation of her perfectly legal sale of ImClone stock that was misleading to federal investigators and also to stockholders in Martha Stewart’s own company (mainly herself, since she owns more than 60 percent).

The previous sentence describes a single act: Two people offering a supposedly false explanation of why Mrs. Stewart sold ImClone stock. Yet this single accusation being criminally misleading was magically transformed into four more “counts” — conspiracy, obstruction of justice, misleading federal investigators and misleading her own stockholders in a material way. Multiplying counts is irrelevant to sentencing when they all describe the same event, yet it is a trick by which prosecutors hope to defraud reporters and the jury.

Mrs. Stewart and Mr. Bacanovic say they had an informal agreement to discuss selling the stock if it fell below $60. The fact she said that is, in essence, the sole basis for all these threats to toss her in jail for years. The government quickly countered that if such an agreement existed, there should be written evidence of a stop-loss order. Yet there could never have been such evidence, Henry Blodget noted, because Merrill Lynch does not accept stop-loss orders for Nasdaq stocks.

The prosecution’s case is expected to rest heavily on the testimony of Mr. Bacanovic’s assistant, Douglas Faneuil, who changed his story in exchange for virtual immunity. He now is expected to say he informed Mrs. Stewart on Dec. 27 that ImClone Chief Executive Officer Sam Waksal’s family had been selling. Sharing information about other clients would have meant Mr. Faneuil violated Merrill’s company policy, as the indictment oddly emphasized, but breaking company rules does not make Mr. Faneuil a criminal, much less his client.

The prosecutors hope Mr. Faneuil’s story will discredit that of Mrs. Stewart and Mr. Bacanovic about having previously discussed selling if the stock fell below $60. Yet there is no inconsistency between there having been such an agreement and Mr. Faneuil saying whatever he claims to have said. And which of those two reasons pushed Martha Stewart to sell ImClone shares after thousands of other investors had done so does not matter one whit. Her sale was completely legal regardless of whether motivated by broker advice or the TV news.

The real liars in this case have always been federal investigators, starting with the House Energy and Commerce Committee. On June 6, 2002, claims Martha Stewart was strongly suspected of selling her shares because of inside information from Mr. Waksal were quite deliberately leaked to the press by “people close to a congressional investigation.”

This smear — which was completely false — slashed the stock value of Martha Stewart Living Omnimedia from $19.01 in June 6 2002 to $11.47 on June 18, and eventually to about $8. The main victim was Martha Stewart, since she owns more than 60 percent of the stock. Yet the “fraud” for which she is now accused was trying in vain to prevent her stock from collapsing by saying, quite correctly, she never got any inside tips from Mr. Waksal.

The same committee that spread this vicious lie later wrote to U.S. Attorney General Ashcroft on Sept. 10, 2002, requesting that Martha Stewart be prosecuted under Section 2001 because she “repeatedly has refused to be interviewed by committee staff — and her attorneys have stated that she would invoke her Fifth Amendment right.” This frightening campaign of vengeful, selective prosecution has continued ever since.

The only fair trial for Martha Stewart would be no trial at all, and no settlement, either. But this lady has a lot of courage, so it looks as though a trial will really occur. Prosecutors surely expected her to agree to some plea bargain long before now, making her look bad and them look good. A trial will have the opposite effect.

Alan Reynolds is a senior fellow with the Cato Institute and a nationally syndicated columnist.