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Martha Stewart: Political Prisoner

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Tags Big GovernmentFinancial MarketsLegal System

06/09/2003William L. Anderson

It has finally come down to this: Martha Stewart must go to prison, or at the very least be forced to step down permanently from her position as CEO of Martha Stewart Living Omnimedia, a company that she built from scratch.

James B. Comey, U.S. attorney for the Southern District of New York, has successfully obtained an indictment on obstruction of justice charges, conspiracy, and securities fraud against Stewart as a result of her December 2001 sale of ImClone stock after the Food and Drug Administration had rejected its application, and her conduct following investigation of the sale.

(In a related story, it now 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 is likely to be a political prisoner.

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.

As I pointed out in an earlier piece on this case, insider trading laws are vaguely written and arbitrarily enforced in order to keep investors and company officials off balance, much like 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. Comey is a political animal who is seeking to follow in the footsteps of Rudy Guiliani to fame and fortune.

Furthermore, by not bringing criminal charges on insider trading, which was the original issue in this case, the government is demonstrating that it is more interested in gaining a criminal conviction—any conviction will do here—instead of having to deal with the real issues of whether or not this truly was a criminal issue in the first place.

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.

(Even if that were the case, however, violation of a fiduciary responsibility to a firm is a civil, not a criminal matter. There are times when trading on "inside information" can do harm to some individuals—i.e., the example just given—but it is up to the injured parties to bring suit. I believe there is no justification for the state bringing criminal penalties for these things.)

Given that the law targets individuals who have a "fiduciary" relationship with a firm, there is no way that Stewart, who had no relationship with the firm except to own 4,000 shares of its stock, should fall under the "insider trading" law umbrella. To put it another way, federal prosecutors would have had to stretch the law farther than it was written in order to gain an insider trading indictment, even though the federal grand jury process is now just another operations arm of U.S. attorneys. In the modern world of federal injustice, if a prosecutor wants indictments, it is doubtful that the grand jurors will do otherwise.  That alone shows how weak the government's original case really was.

Further proof that the government was stretching the legal envelope in order to charge Stewart was the charge of "securities fraud."  According to Comey, by publicly saying she was innocent, Stewart was guilty of trying to illegally manipulate the stock of her company.  While observers have called this a "new legal twist," in reality, it is fraud of the highest order, demonstrating that the real criminal here is Comey, who is trying to manipulate the law to read that if someone tries to mount any kind of defense at all, that person has committed a crime.

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 U.S. attorney that he or she is wrong is by definition to engage in "obstruction of justice." 

Stewart has claimed that she had a previous order with her broker—who was also the broker of former ImClone CEO Samuel Waksal, a friend of Stewart—when the share prices were at a certain level. After much prodding by federal investigators, the broker began to tell a different story. Soon afterwards, Congress (for lack of anything better to do, I suppose) got into the mess and began to demand information from Stewart.  (Waksal has plead guilty to the usual gaggle of federal charges, and now faces many years in jail.  All of this is because his company created a successful cancer drug that the feds refused even to have officially tested.)

At any rate, we have investigators attempting to find whether the sale of stock owned by Stewart violated a law that did not apply to Stewart in this case. Stewart fails to tell investigators what they want to hear, so she is now going to be charged as a criminal. (Would be that politicians, judges, bureaucrats, and other government employees were held to such standards.)

Because they have not been able to gain enough information to charge Stewart with insider trading—no doubt, in large part because she had no fiduciary relationship with ImClone—they are doing what the feds did to Al Capone 70 years ago when they were able to have him convicted of income tax evasion. The obstruction of justice, conspiracy, and fraud charges that she faces exist only as a tool by which to gain a conviction—any conviction—when the investigation into the original "crimes" becomes a dry hole.

The New York Times in a chilling piece on the indictments writes that by indicting Stewart, the government simply is sending a message to other corporate executives that if the feds are willing to make an example of Stewart, they will go after anyone:

The lead federal prosecutor in the case, James B. Comey, insisted that the answer to that question was no. "Martha Stewart is being prosecuted not for who she is, but because of what she did," said Mr. Comey, the United States attorney for the Southern District of New York.

Yet many longtime prosecutors said yesterday that Mr. Comey was being unnecessarily coy. Celebrity, they said, almost certainly played a role in the decision to commit resources to the Stewart investigation, and ultimately try to convince a grand jury to charge her with a crime. . . .

After all, the purpose of law enforcement is not simply to punish people for crimes they have committed, but to deter crimes that are being contemplated. That pushes prosecutors to send strong signals about the dangers of crossing the line by bringing cases that penetrate the public consciousness. If yesterday's indictment had been against Martha Jones rather than Martha Stewart, no one would be reading this article—primarily because it would not have been written.

"The deterrent effect is immeasurable," said Christopher Bebel, a former lawyer with the Securities and Exchange Commission and a former federal prosecutor. "Even if the government puts a thousand hours into building this case against Martha Stewart, the risk-reward ratio is enormously positive and constitutes a very prudent allocation of government resources."

Even if the government fails to obtain a conviction, lawyers said, aggressive corporate executives—having seen the price Ms. Stewart paid—will be far more careful about even approaching the line that defines an obstruction of justice. With the prosecution of Ms. Stewart on that charge coming only a year after document shredding helped destroy the Arthur Andersen accounting firm, it would be hard for a corporate executive not to get the message.1

In looking at the Times' account, one must remember that the "crime" of obstruction of justice is as murky as the laws against "insider trading."  Thus, the real issue here is whether or not the law acts as a shield to protect individuals from wrongdoing by the state or by others, or is simply a tool which the political masters use as a whip to keep people in line.

For all of the cheering by Martha Stewart haters over the problems she faces, there is also another story, one that has become all too typical in this prosecutorial society. Stewart is CEO of a company that has thrived under her leadership. As a result of her indictment, she has had to step down from her perch with MSLO, which already has seen its stock values fall drastically in the wake of this whole mess.

If the feds are 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. Comey will become a media superstar in the line of Rudy Guiliani and Joel Klein, who seriously damaged capital markets and the NASDAQ stock exchanges respectively through their predatory legal actions as employees of the U.S. Department of Justice. Thanks to their outrageous prosecutions of Michael Milken and Microsoft, both men today are multi-millionaires.

Finally, one cannot discount the role of politics here. As I stated earlier, the government is seeking to make her into a political prisoner. It is politics, not the pursuit of justice, which is driving this case. 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 U.S. Department of Justice and of U.S. attorneys who see the example of the Guiliani path to fame and fortune.

In the end, we are likely to have a well-known person owning a felony record and being sentenced to prison (or, at best, receiving a suspended sentence or probation) and a once-prosperous company in tatters.2 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.

  • 1. “Prosecutors Have Reasons for Stalking Celebrities,” Kurt Eichenwald, The New York Times, June 5, 2003.
  • 2. The public defense that her attorneys have put forth—“She is being prosecuted because she is a successful woman, and because the government has not indicted more Enron and WorldCom executives”—tells me that given the nature of the charges, her best defense must be taken from the pages of O.J. Simpson.
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