Commentary

Free Martha Stewart

This article was published in the National Post, Sept. 6, 2002.

On Dec. 28, ImClone reported the U.S. Food and Drug Administration had refused to approve its promising cancer treatment Erbitux. Relatives of chief executive officer Sam Waksal reportedly sold shares a day earlier, and so did Martha Stewart. Was that a scandal?

At 1:43 p.m. on Dec. 27, Mr. Waksal’s secretary took this message from Miss Stewart: “Something is going on with ImClone, and she wants to know what.” That appears to be the closest thing U.S. congressional investigators have to a “smoking gun.” At some point that afternoon, Miss Stewart tired of waiting for a return call, so she sold 3,928 shares of ImClone. At 3:13 p.m. — 90 minutes after Martha Stewart’s message — Bloomberg News noted that, “ImClone Systems Inc. shares fell as much as 9.7 percent on concern about whether the Food and Drug Administration will approve the company’s Erbitux cancer drug, financial news network CNBC reported.” That story appeared even earlier on CNBC. But nobody even had to watch TV to notice “something is going on” with a stock that suddenly dropped 9.7 percent.

By the close of business Dec. 27, ImClone was down 8.4 percent — far too huge a drop to blame on a few family insiders, much less on Martha’s puny stake. Martha appears no guiltier than thousands of other investors, including mutual fund managers, who obviously participated in the big sell-off that day.

When fears of FDA fumbling became a certainty the following day, ImClone fell only 5.2%. Investors try to anticipate nasty surprises, not wait until they hit. Even before Dec. 27, fear the FDA would drop this ball had dropped the stock by 10% that month. Short interest in ImClone reached 7.7 million shares by Dec. 15, making Martha’s 3,928 shares look like a strange topic for investigation.

On June 6 — six days before Sam Waksal was charged — claims that Martha Stewart was suspected of acting on a hot tip from Mr. Waksal were leaked to The New York Times by “people close to a congressional investigation.” Shares in Martha Stewart Living Omnimedia subsequently fell from about $17 to $8.

Contrary to that initial smear, nobody now claims Mr. Waksal even returned Miss Stewart’s Dec. 27 call. Even if Mr. Waksal had been so chatty about company secrets, that would be his problem, not hers. An insider must own at least 10% of a company’s shares or be an officer or director. Martha Stewart was no insider, so she could not have been guilty of insider trading.

Congressional bullies switched to accusing Miss Stewart of a “cover-up” — not telling the exact truth about how and why she sold the stock. Such irrelevant gripes stopped being anonymous and “congressional spokesman Ken Johnson” was named as the usual source of assorted insults. But to fib about a legal activity does not turn that activity into a crime.

Once investigators stopped claiming Miss Stewart had been tipped by Mr. Waksal, they switched to claiming she acted on a tip from her stockbroker. If so, that is the broker’s problem, not hers. If we can’t sell on recommendations from a stockbroker, when can we sell? Because Miss Stewart is accused of listening to her broker rather than Sam Waksal (or CNBC), that makes nonsense of accusations that reluctance to chat with her tormentors might be “obstructing justice” with respect to charges against Mr. Waksal.

Frivolous investigations invite frivolous lawsuits. Miss Stewart is being sued for selling shares in her own company in January for $15 (lower than its price before June 6) on the theory that she somehow anticipated by six months becoming the victim of an anonymous and false congressional smear on June 6. Even the silliest lawsuits can pay off, which makes it financially risky for Miss Stewart to say much. Anything you say can be held against you, but anything the government says about you is just your tough luck.

Ever since Joseph McCarthy and Richard Nixon held hearings on subversion, showy “investigations” have been a favorite way for congressmen to grab free political publicity. Hunting for celebrities, then and now, ensures headlines and cameras.

The FDA’s decision shocked the market because experts know that Erbitux could save many lives. Congress should investigate the FDA’s habitually homicidal foot-dragging. Instead, the House Energy and Commerce Committee made a big deal out of the fact that Martha Stewart, among thousands of others, sold a few shares of ImClone stock after it started to collapse. Her tiny trade had zero effect on other investors. But the government’s character assassination inflicted huge damage on shareholders in Martha Stewart’s company. Congressional bullying and FDA intransigence are the real scandals.

If House Commerce Committee chairman Billy Tauzin, Louisiana Republican, is the Southern gentleman I believe he is, he will soon owe Miss Stewart an apology for many ungracious attempts to sully her reputation. Many others owe her an apology, but they aren’t gentlemen.

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