The Securities Fraud Charge
Reports on the antitrust suit.
Dec. 19 2003 12:22 PM


Forget the headlines: The charge is not insider trading
Forget the headlines: The charge is not insider trading

Only slightly less deafening than the corporate-scandal headlines of recent years has been the hollering of regulatory agencies taking credit for having uncovered them. Given this, the discretion with which the U.S. attorney, FBI, and SEC handled the Martha Stewart investigation during the winter and spring of 2002 is to be applauded. Yes, devoting resources from not one or two but three government agencies to a single sale of 4,000 shares of stock on a day in which 8 million were sold smacks of overkill (not to mention selective targeting), but for six months, as the investigators examined evidence and interviewed witnesses, the proceedings simmered quietly in private, protecting the reputations of not only those under investigation, but those who depended on them (the shareholders and employees of Martha Stewart Living Omnimedia, for example). Privacy helps investigators, too—less pressure to indict first and evaluate later—but for those whose lives and careers hang in the balance, it is a godsend. The relative burdens of proof in the court of law and the court of public opinion are miles apart, and as Stewart's experience shows, it is not only convictions that wreak havoc, but insinuations and accusations.

Still, nothing stays private forever, especially when so much can be gained by making it public. In June 2002, a fourth government agency entered the Stewart investigation—and declared ownership with the subtlety of a Rottweiler charging into a dog run. On June 6, "congressional investigators" and "people close to a Congressional investigation" told the New York Times,Wall Street Journal, and other outlets that they were investigating the suspicious timing of Stewart's ImClone sale. And then, predictably, all hell broke loose.


  • Martha Stewart Said To Sell Shares Before F.D.A. Ruling (New York Times headline)
  • Martha Dumped ImClone Shares (NewYork Post headline)
  • Martha Stewart Stock Sale Probed: Sold Before Plunge (National Post headline)
  • Martha Stewart Cleans Stock Out of Portfolio (Orlando Sentinel headline)
  • Stewart Sold Stock After Calling CEO (incorrect Seattle Times headline)
  • Congress Puts Stewart In Pressure Cooker (N.Y. Post headline)
  • Heat Is On Martha Stewart (CBS Marketwatch headline)

That summer, with the country reeling from the crash, Wall Street and corporate scandals (see Full Disclosure), and a painful recession, business executives were guilty until proven innocent. Over the next few weeks, the headlines exploded like mortar shells.

  • Martha's Prison Everyday Collection (New York Post)
  • Martha In Hell's Kitchen (New York Post)
  • Prison Life: It's 'Not' A Good Thing (Florida Today)
  • Martha Might Look Marvelous in Designer Stripes (New York Post)
  • Martha Stewart Measures Wall Street Doghouse For Curtains … (Canadian Press)
  • Justice—It's a Good Thing (St. Louis Post-Dispatch)
  • Drab Cell? Ask Martha (Newsday)

Under this barrage (for these and other stories, see the 762-page Exhibit E of Stewart's motions memorandum), Stewart's personal image soon disintegrated, and the stock of her company, Martha Stewart Living Omnimedia, got cut in half. As chairman and CEO of the company, Stewart had a duty to address the central charge—that she had been tipped off about Erbitux. As a human being, moreover, she was probably so outraged and humiliated that she was desperate to do some speculating (read: character assassinating) of her own. In hindsight, given the ferocity of the media typhoon, one could argue that Stewart handled herself with restraint. She did say a few things, though, and what she said got her indicted for criminal securities fraud.

The gist of what Stewart said that June was that she hadn't been tipped off about Erbitux; that she'd had an understanding with her broker to sell the stock if it broke $60; and that her trade had been "entirely lawful." The government alleges that Stewart's communications constituted "a series of false and misleading public statements" made "with the intent to defraud and deceive purchasers and sellers of MSLO common stock and to maintain the value of [Stewart's]own MSLO stock"—in other words, an attempt to trick investors into thinking that all was hunky-dory. This is by far the most serious charge Stewart faces (potentially punishable by years in prison and millions in fines), so it seems worth a closer look.

Henry Blodget is the founder, editor, and CEO of Business Insider. Follow him on Twitter.


The Slatest

Ben Bradlee Dead at 93

The legendary Washington Post editor presided over the paper’s Watergate coverage.

This Scene From All The President’s Men Captures Ben Bradlee’s Genius

Renée Zellweger’s New Face Is Too Real

Sleater-Kinney Was Once America’s Best Rock Band

Can it be again?

Whole Foods Is Desperate for Customers to Feel Warm and Fuzzy Again

The XX Factor

I’m 25. I Have $250.03.

My doctors want me to freeze my eggs.

The XX Factor
Oct. 20 2014 6:17 PM I’m 25. I Have $250.03. My doctors want me to freeze my eggs.

Forget Oculus Rift

This $25 cardboard box turns your phone into an incredibly fun virtual reality experience.

George Tiller’s Murderer Threatens Another Abortion Provider, Claims Free Speech

The Congressional Republican Digging Through Scientists’ Grant Proposals

  News & Politics
The World
Oct. 21 2014 3:13 PM Why Countries Make Human Rights Pledges They Have No Intention of Honoring
Oct. 21 2014 5:57 PM Soda and Fries Have Lost Their Charm for Both Consumers and Investors
The Vault
Oct. 21 2014 2:23 PM A Data-Packed Map of American Immigration in 1903
  Double X
The XX Factor
Oct. 21 2014 3:03 PM Renée Zellweger’s New Face Is Too Real
  Slate Plus
Behind the Scenes
Oct. 21 2014 1:02 PM Where Are Slate Plus Members From? This Weird Cartogram Explains. A weird-looking cartogram of Slate Plus memberships by state.
Brow Beat
Oct. 21 2014 9:42 PM The All The President’s Men Scene That Perfectly Captured Ben Bradlee’s Genius
Oct. 21 2014 11:44 PM Driving in Circles The autonomous Google car may never actually happen.
  Health & Science
Climate Desk
Oct. 21 2014 11:53 AM Taking Research for Granted Texas Republican Lamar Smith continues his crusade against independence in science.
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.