07/15/2003
Martha Stewart is the Michael Milken of this decade.
This doesn’t mean that Martha — or Milken — is a big time financial crook. Daniel Fischel, professor of law and former dean of the University of Chicago Law School, demonstrated Milken’s innocence in his book, Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution. Wall Street wanted Milken and his upstart firm out of the way. Rudolph Giuliani, U.S. Attorney for the Southern District of New York, wanted to be mayor of New York. Milken was Giuliani’s career ticket.
Martha Stewart is the career ticket for James B. Comey, the current U.S. Attorney for the Southern District of New York.
Conservatives feel no sympathy for Martha. She is one of those rich people who support the Democratic Party, the raison d'être of which is to dispossess rich people like Martha. However, at stake is the rule of law, not Martha.
The rule of law is what protects us from wrongful prosecution, injustice and tyranny. It behooves us to object when an ambitious prosecutor like Comey takes liberties with the law.
Martha Stewart is indicted, because in December 2001 she sold her shares of ImClone stock the day before the company announced that its cancer drug, Erbitux, was not approved by the FDA. Martha’s indictment originated in speculation that Sam Waksal, the CEO of ImClone, gave her "inside information" that the FDA had turned down the company’s application.
The investigation established that neither Martha nor her broker had any inside information. Martha’s broker noticed that Waksal was selling his shares and that the price was declining. He relayed the information to Martha.
A CEO might sell shares in a company he heads for a variety of reasons, but it is usually regarded as a sign that management has lost confidence in the company’s prospects — a good reason for investors to sell the stock.
If Martha had made a large speculative investment in ImClone based on Erbitux, she might have been following the FDA process. She could have concluded that Waksal’s sale of ImClone shares meant the drug had failed to gain approval. But this would not be a crime. Moreover, her investment was too modest to have any material effect on her wealth or to occupy her time in following the stock.
Martha and her broker had good reason not to suspect that Waksal’s sale indicated FDA disapproval of Erbitux. Insider trading applies to persons with a fiduciary relationship with the firm — a relationship that a CEO clearly has. As Waksal had inside information, his sale of shares prior to the public announcement is a red flag. Neither Martha nor her broker had any reason to believe that Waksal had gone off his head and decided to get himself indicted.
As neither Martha nor her broker had a fiduciary relationship with ImClone and as neither knew of the FDA decision, no felony charge of insider trading could be brought against her. An ambitious prosecutor might bring a civil action, arguing that knowledge that Waksal was selling is a form of inside information. But that should be the extent of the charge.
What, then, is the basis of Mr. Comey’s indictment of Martha for felony "securities fraud"? Hold on to your hat. Comey indicted Martha because she publicly declared her innocence!
According to Comey’s "new legal twist" (prosecutorial language for acknowledging that the "crime" is not on the statute books), Martha’s declaration of innocence constitutes an illegal manipulation of the stock of her own company, Martha Stewart Living Omnimedia. By declaring her innocence, Comey alleges, Martha was attempting to prevent her indictment from driving down the shares of her company, which depends on her leadership.
Comey’s invented charge ignores the fact that in our legal system a person is innocent until proven guilty. At the time Martha declared her innocence, she had neither been tried nor found guilty. Martha is indicted for refusing to incriminate herself and publicly confess to Comey’s charge.
Comey follows up this preposterous charge with another. He indicts Martha for covering up a crime of which she is not accused! Comey accuses Martha and her broker of obstructing the investigation of their insider trading; yet, the investigation was not only successfully concluded, but also found no basis for a felony charge of insider trading.
Law is supposed to be certain. But Martha owes her obstruction of justice charge to the uncertainty of the insider trading law. In a letter to the Washington Times (June 12, 2003) defending the indictment of Martha as an opportunity to make an example of a high profile person, U.S. Department of Justice (sic) official Corey J. Smith wrote: "Insider trading is a complicated area of criminal law, and it is not always clear who can be charged with it."
When a criminal investigation of insider trading in ImClone stock was initiated following the public announcement on Erbitux, Martha and her broker could not know whether they would be swept up in an expansive interpretation of a crime that lacks clarity concerning "who can be charged with it." To protect themselves from a vague and undefined crime, they doctored their story. It is the doctored story that constitutes the obstruction of justice charge.
Regardless of your opinion of Martha, do you want to live under a Catch-22 legal system like the one Comey has devised in which a person must incriminate oneself or be indicted for fraud?
The story gets worse. Comey owes his indictments to FDA incompetence. It turns out that Erbitux is just as effective as ImClone said and should have been approved.
Paul Craig Roberts is the author of The New Color Line: How Quotas And Privilege Destroy Democracy, with Lawrence M. Stratton.
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