The Free Market 23, no. 8 (August 2003)
It has finally come down to this: Martha Stewart must go to prison, or at the very least be forced to step down from her position as CEO of Martha Stewart Living Omnimedia. The US Attorney’s office in New York City has obtained a grand jury indictment on obstruction of justice charges against Stewart as a result of her December 2001 sale of ImClone stock after the Food and Drug Administration had rejected its application.
It turns out that the ImClone anti-cancer drug Erbitux, which was at the center of the controversy, is as effective as the company had claimed. To put it another way, this whole mess could have been avoided had it not been for the FDA’s incompetence.
For all of the vows by Stewart’s attorneys that Martha will "vigorously" contest these charges, she truly faces an uphill battle. Unlike the typical set of criminal laws that exist to protect innocent people (i.e., laws against murder, assault, and theft), Stewart has been indicted under a set of laws that exist for one and only one purpose: to gain convictions. Given the hard and unpleasant facts of federal criminal law in 2003, it will be a miracle if Stewart is able to beat these charges. Too much is at stake politically for the government to back down now. To put it another way, Martha Stewart could be a political prisoner.
I do not write this because I believe Martha Stewart is a criminal. Given what I know about this case, I have serious doubts that she is guilty of anything—other than being wealthy and unpopular with some folks. Unfortunately, in this day and time, being wealthy and unpopular is enough to land someone in prison; just ask Michael Milken, Charles Keating, and Leona Helmsley.
Insider trading laws are vaguely written and arbitrarily enforced in order to keep investors and company officials off balance, much like the practices of the tyrannical Roman emperor Caligula, who would post his edicts in tiny print upon signs posted so high that they were far beyond the range of anyone to be able to read them. Thus, the average Roman would always have to wonder if he were breaking the law; today, it is the folks on Wall Street who must wonder if they are being targeted by a political animal known as a US attorney.
Yet, for all of the confusion that surrounds the question of what truly is "insider trading," the laws governing this activity clearly state that alleged violators must have a "fiduciary" relationship with the firm in question. For example, if I were an attorney secretly working on a merger with another firm but was quietly trading stocks on the side in anticipation of the merger, I would be violating my fiduciary responsibility to the firm that was employing me.
The obstruction of justice charges that Stewart faces are going to be tougher for her, and it is at this point that she is most vulnerable. In their most literal sense, laws against "obstruction of justice" basically say that individuals, once accused by the federal government of "wrongdoing," cannot defend themselves. That is because by definition a defense is a claim that prosecutors are wrong, and in the modern world of federal courts, telling a US attorney that he or she is wrong is by definition to engage in "obstruction of justice."
Should the feds be successful in their attempts to imprison Stewart, it is unlikely that her company will be able to survive in its present form. Sales will drop and people will lose their jobs. While the radio and television talk show hosts will be feeding the anti-Martha Stewart frenzy, people whose only crime was working for a successful firm will find themselves looking for work during an economic recession.
Not everyone will lose. The US attorneys will become media superstars in the line of Rudy Giuliani and Joel Klein, who seriously damaged capital markets and the NASDAQ stock exchanges respectively through their predatory legal actions as employees of the US Department of Justice. Thanks to their outrageous prosecutions of Michael Milken and Microsoft, both men today are multi-millionaires.
One cannot discount the role of politics here. The government is seeking to make her into a political prisoner. Stewart is well-connected politically, but it is to Democrats, who control none of the branches of government at the present time. Her wealth and public persona make her a convenient target of a very political US Department of Justice and of US attorneys who see the example of the Giuliani path to fame and fortune.
In the end, we are likely to have a well-known person being sentenced to prison and owning a felony record, and a once-prosperous company in tatters. Oh, and we will see some federal prosecutors being feted as though they had just solved the Case of the Century. These are dark times, indeed, for the pursuit of justice in the United States of America.
William L. Anderson teaches economics at Frostburg State University (banderson@ mail.frostburg.edu).
