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dispatches from the martha stewart trial:

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from: Henry Blodget

The Securities Fraud Charge

Posted Friday, Dec. 19, 2003, at 12:22 PM ET

Henry Blodget, a former securities analyst, lives in New York City. Read his full-disclosure statement about his potential conflicts of interest in covering the Martha Stewart trial here. For a complete listing of Blodget's dispatches, see Slate's Guide to the Martha Stewart Trial, which also has links to related Slate articles.

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.

dispatches from the martha stewart trial
entries
12345678910111213
from: Henry Blodget

The Securities Fraud Charge

Posted Friday, Dec. 19, 2003, at 12:22 PM ET
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Henry Blodget is the editor of Silicon Alley Insider.
Photograph of Martha Stewart (Nov. 20) by Peter Morgan/Reuters. Photographs of: Stewart and Sam Waksal by Chip East/Reuters; Douglas Faneuil by Doug Kanter/Agence France-Presse; and Peter Bacanovic by Stan Honda/Agence France-Presse (Dec. 3). Photograph of Martha Stewart by Anthony Bolante/Reuters (Dec. 19).
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Remarks from the Fray:

Prosecution could have brought attention to insider trading without a full blown witch hunt attitude. Martha may have had sweet deals whispered in her ears and responded but isn't that more common than we would like to admit? Since she is not being charged with the insider trading the decision to charge her for an obscure related crime is probably not a good idea.

Martha should have spilled the beans immediately as the amount we are talking about is minuscule to her wealth but there was more at stake in poor publicity so she made a serious mistake in judgment. Charge her for being stupid so everyone can move on.

That mistake empowered the government and the SEC who were under staggering pressure from the Enron situations to go for the throat of someone, or anyone but should they have picked Martha? I think the answer is no simply because instead of exonerating the SEC and government, it only spotlights the weakness of the enforcements and laws. The Ken Lay's of the CEO world walking around after cheating people of millions if not billions simply because no provable law has been broken becomes highlighted by the pack attack of one woman being destroyed with something akin to joy...

--Meta4

(To reply, click here)


While I agree that there are parts of the case against Martha that are hard to understand, Blodget's theorizing on her behalf seems quite implausible. Sure, it was possible that Stewart and her brokers discussed the sale without transmitting any material nonpublic information. But think about it: Why would she buy shares in Waksal's company using Waksal's own broker, and call that very broker about selling decisions, if she didn't hope to get inside information?

For Stewart to be innocent, the call would have to go something like this: "Douglas, this is Martha. Before you say anything, shut up and listen. You know I'm calling about ImClone. I know that you are Sam's personal broker. This means that you must be very careful not to divulge any material information you have learned from Sam, not even in a wink-wink-nudge-nudge way, because then I might be guilty of insider trading. Instead, I want you to pretend you are not Sam's broker, and please give me only publicly available information. Oh, and please don't think it's strange that I'm calling you about selling at 59 after having previously instructed you to sell at 60." Not very likely.

--Scythe

(To reply, click here)

(12/4)