Flunking the Martha Test (When does dishonesty become fraud?)

The Wall Street Journal ^ | Friday, January 16, 2004 | DAVID MILLS and ROBERT WEISBERG

[presidio9]

We teach a course on White Collar Crime at Stanford. Planning our exam questions just after the recent corporate scandals became dominant news, we thought up an angle on a case just beginning to make headlines. In the hypothetical question, the CEO of a big company is charged with a crime related to her trading in the stock of another, wholly unrelated company, and she publicly declares her innocence of that crime. We asked whether the government could make this person's protestation of innocence itself a federal securities fraud crime in connection with the stock of the company in which she is a CEO.

[jim_trent]

Interesting, but I thought Martha did more than just say that she was innocent. I thought that she altered records in an effort to hide wrongdoing.

[presidio9]

Interesting, but I thought Martha did more than just say that she was innocent. I thought that she altered records in an effort to hide wrongdoing.

No, the Feds suspect that's what she did, but the crime she is being charged for is her manipulating the shares of Omnimedia when she told the press she was innocent. I am no fan of Martha or her politics, but this trial truely is a witchhunt.

[cpdiii]

Someone was most definitely defrauded. Those whom bought the shares at a higher price than they should have been. Martha in effect took the money of the new buyers on the sale of the stock she knew was going to tank, based on insider information.

I have more respect for a bank robber. At least they do not pretend to be honest. You know they are thieves.

[ggekko]

"No, the Feds suspect that's what she did, but the crime she is being charged for is her manipulating the shares of Omnimedia when she told the press she was innocent."

Exactly correct and it is important that everyone undertstand this facet of the case agaianst Martha Stewart. The collapse of the post-bubble stock market created a witch hunt atmosphere which put tremendous pressure on the SEC to "get" corporate "insiders". Martha Stewart is a victim of this witch hunt on the part of Government regulators anxious to deflect blame for the stock market collapse.

The insider trading case against Martha fell apart when it was revealed that there was massive selling against the Imclone stock several months prior to Martha's sale of her block of stock when it was trading at $73.00 per share (she sold her block at $48.00). The real insiders bailed out at the top of this stock's trading range when it became apparent the FDA application for its only drug was not likely to be approved.

This prosecution illustrates the abuse of vague Federal securities laws on the part of over-zealous prosecutors. Every American observing this case should be sobered to realize that any American can be dragged in front of a Federal court on trumped up securities fraud allegations. It is a scandal; these laws are in need of reform as are the rules governing prosecutorial discretion on the part of SEC and other regulatory agencies.