Commentary

Martha’s Mistrial: The Insider Trading Accusation Came from a Cowardly Press Leak from a Congressional Committee

This article originally appeared in National Post’s Financial Post & FP Investing (Canada) on March 9, 2004.
Despite the assertions of both jurors and journalists, Martha Stewart was not convicted of insider trading. This misrepresentation is chilling.

Martha Stewart has been convicted of conspiring to cover-up a crime she was not accused of having committed — insider trading. She was convicted of “lying” but never charged with perjury.

Martha Stewart was also convicted of “obstructing justice” without any explanation of how the prosecution of anyone but herself could have been obstructed by her first attorney’s explanation of what motivated her to make a perfectly legal sale of ImClone stock.

On the evening of the Martha Stewart verdict, the U.S. public radio show Marketplace opened with David Brown saying, “It’s rare that a case involving insider trading attracts such attention.” Unfortunately, this case attracted only careless attention. Reporters paid considerable attention to the handbags Ms. Stewart was carrying, but not to the eccentric nature of the alleged crimes. As a result, Mr. Brown and the jury came to imagine the Martha Stewart case involved insider trading. It did not. There is a dubious SEC civil case pending, but that has to do with fines, not crimes.

Juror Chappelle Hartridge told reporters the jury felt Stewart’s background as a stockbroker meant “she should have known her moves were illegal.” The jury thought Stewart was guilty of insider trading, and should have known better because she had been a stockbroker.

The reason jurors and journalists wrongly accused Stewart of insider trading is just one reason Martha Stewart deserves to win on appeal. Judge Miriam Cedarbaum prohibited the defence team from mentioning the fact that it was perfectly legal for Martha Stewart to sell on her broker’s advice, regardless what Doug Faneuil may have said or why. Either his explanation or hers may be correct, and they are not mutually exclusive. But the jury would surely have wondered why the motive for selling ImClone stock mattered so much if they could have been told the sale itself was no crime.

The only time Martha Stewart was accused of insider trading was June 6, 2002 — one year before she was indicted for a new crime called “lying.” The insider trading accusation was made in a cowardly press leak from the powerful House Energy and Commerce committee, chaired by Louisiana Congressman Billy Tauzin, with Pennsylvania Congressman Jim Greenwood chairing the subcommittee heading the ImClone investigation.

The federal indictment of Martha Stewart alluded to an Associated Press story about that year-old leak but carefully concealed its congressional origin. What AP reporter Theresa Agovino wrote on June 7, 2002, was, “There are allegations that certain people profited handsomely, although illegally, from ImClone stock. Waksal’s relatives sold a total of $400,000 in company stock before the news of the rejection emerged, a source close to the investigation said, on condition of anonymity … legal documents given to the committee show that domestic doyenne Martha Stewart also shed 3,000 ImClone shares. Stewart and Waksal have been romantically linked in the past.”

This sensational, yet anonymous, congressional leak publicly accused Stewart of acting on inside information from Sam Waksal, ImClone’s CEO. That sneak attack was totally false. Yet it sunk the stock price of Martha Stewart Omnimedia from $19.01 on June 6, 2002, to $11.47 on June 28.

Instead of blaming the bogus leak for slashing the wealth of Martha Stewart and her shareholders by 40%, the Department of Justice opted to blame Stewart herself for making “false and misleading statements” to minimize such damage. This was the fanciful basis of the government’s fraudulent charge that Stewart was guilty of fraud. Once the judge tossed out that charge, there was no longer any pretense that Stewart’s stock sale cost anyone a cent. She was merely one among hundreds of thousands of investors who sold ImClone as the stock fell from over $75 to $58 by the time Stewart joined the exodus.

After Stewart was indicted on June 4, 2003, House Energy and Commerce Committee chairman Tauzin and Oversight and Investigations Subcommittee chairman Greenwood issued the following statement: “This action should send a sobering signal to everyone that insider trading is not a victimless crime — no matter how insignificant the ill-gotten gains — and any attempts to cover it up should be dealt with swiftly and forcefully.”

A year after their phony press leak, Congressmen Tauzin and Greenwood were still covering up the scandalous fact that someone on their committee or staff had falsely accused Martha Stewart of the crime of insider trading. Their press release gave themselves credit for the indictment, citing the committee’s letter to Attorney General John Ashcroft of Sept. 10, 2002, which was also signed by Michigan Congressman John Dingell and Florida Congressman Peter Deutsch. That letter began as follows:

“We are writing to request that the Department of Justice investigate whether Ms. Martha Stewart, chief executive officer of Martha Stewart Living Omnimedia, knowingly caused materially false representations to be made to the U.S. House of Representatives Committee on Energy and Commerce (Committee) in violation of 18 U.S.C. 1001, in connection with the Committee’s investigation into the matter of ImClone Systems … As you know, under 18 U.S.C. 1001, it is a Federal felony for anyone to knowingly and willfully make any materially false statement, or to falsify or conceal a material fact, in connection with “any investigation or review, conducted pursuant to the authority of any committee, subcommittee, commission or office of the Congress.” At the outset, we want to emphasize that the Committee has not reached any formal conclusion as to whether Ms. Stewart’s actions constitute a crime under Federal law. It is not our Constitutional role to do so … Because Ms. Stewart repeatedly has refused to be interviewed by Committee staff — and her attorneys have stated that she would invoke her Fifth Amendment right not to testify if subpoenaed to a Committee hearing — the Committee has been prevented from attempting to resolve many of the discrepancies, ambiguities, and suspicious communications outlined in this letter.”

Once the June, 2002, accusations of insider trading were proven false, the 2003 effort to make up some other case against Martha Stewart ended up being critically dependent on this section 1001, as Tauzin’s committee had suggested. Without Stewart’s two convictions under 1001, the other two would fall like a house of cards. Section 1001 makes it a federal felony to merely “conceal a material fact” (i.e., failing to tell Congressional staffers or ambitious prosecutors precisely what they wanted to hear) regardless whether the person charged was under oath or committed any crime.

Congressman Tauzin, Greenwood, Dingell and Deutsch evidently regarded the fact that Ms. Stewart “refused to be interviewed by Committee staff” and had the audacity to “invoke her Fifth Amendment right not to testify” as an excellent reason to leap the wall between the judicial and legislative branches of government and ask the nation’s top prosecutor to send Martha Stewart to jail. That is a chilling redefinition of justice. You have to wonder why the American Civil Liberties Union has not yet leaped to her defence.

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