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Martha Stewart's Surreal Ordeal

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Tags Big GovernmentLegal System

02/23/2004Christopher Westley

So the Martha Stewart trial has come to this. Judge Miriam Goldman Cedarbaum ruled that the government cannot introduce testimony about how Stewart’s statements to the press asserting her innocence of violating insider trading law affected investors of her firm, Martha Stewart Living.

As a result, the government has effectively lost. The New York Times reports that this development is the nail in the coffin in the prosecution’s case, noting that "[a] person involved in Ms. Stewart’s defense said the ruling ‘renders the securities fraud charge dead on arrival,’ although other material might be introduced by prosecutors themselves."

This statement highlights what this trial is about—not insider trading, but the right to declare one's innocence, even when the government later agrees with the declaration. Surely if others attempted a similar defense in the face of a Kafka-esque judicial machine, the bullying Justice Department would be seen for what it is, forcing it to assume a lower profile and move somewhere behind the front line of the government’s funding trough.  

While there is little doubt that MSL shareholders have suffered due to this brouhaha, the real damage to shareholders occurred when the government first accused Stewart of insider trading of shares in ImClone Systems—a truly ridiculous charge when made against someone without any fiduciary responsibility to the firm. Could it be that Justice Department lawyers slept through that very basic lecture during the first year of law school?

Today, shares of MSL are at two-thirds of their level on the day that Stewart called her broker to execute a stock sale to which she and her broker previously agreed. Yet we are told that the real shareholder damage occurred when Stewart publicly proclaimed her innocence to the government’s original charges.  

If a private entity were to make such a claim about another firm, causing damage to shareholder wealth in the process, it would be liable to accusations of harm in civil court. It is obvious that the Justice Department is going escape such scrutiny—only because the public sector is held to much lower standards than the private.

This latest development is merely one of a long list of transgressions perpetrated by the government in its zeal to ruin Martha Stewart. The reason why ImClone shares were set to fall in the first place was due to an incompetent Food and Drug Administration's decision to reject the firm’s request to market a highly anticipated cancer drug—a decision it would hypocritically reverse. Absent the immoral gate-keeping function of the FDA, Stewart would today be facing challenges associated with satisfying consumer wants on a voluntary basis instead of facing the horrifying prospect of a multi-year jail term courtesy of career-minded lawyers who were fishing for a high profile victim to advance their careers.

It seems to me that some lessons should be learned from this most smarmy affair. Three stand out. The first was stated by that great social philosopher, Michael Corleone in "Godfather II": Keep your friends close, but your enemies closer. Running a profitable firm is perfectly acceptable in the halls of Congress and along K Street as long as you are not aloof to them. After all, those who depend on the wealth of others for their incomes and status need to maintain institutional arrangements that allow for a profitable private sector so as to maintain the flow of taxpayer funded loot.

But successful private firms ignore Washington at their own peril. Microsoft, which (incredibly) did not maintain a full-time lobbying presence in DC until the late 1990s, learned this lesson by almost having its operations effectively socialized by Judge Thomas Penfield Jackson’s initial decision in an antitrust trial initiated by a much more politically connected firm. Martha Stewart, we can assume, will walk away from this trial with the same lesson and will not avoid nurturing the necessary relationships with (and the coffers of) her demonstrated enemies as a form of insurance from similar ordeals in the future.

Second, the notion of an independent judiciary in a democracy is a myth. The judicial system is every bit as susceptible to the corrupting influence of the power, perks, and prestige that can accrue in the private sector. Martha Stewart was a likely target during a time when the popular opinion was agitated against highly controversial CEOs such as Ken Lay, Bernie Ebbers, Richard Scrushy, Dennis Kozlowski, and Stewart’s friend Sam Waksal. In the popular press, these are the scapegoats for the most recent recession who serve the purpose of drawing attention away from the role played by government policy in creating it. The Justice Department’s willingness to bring each man to court (and to denigrate the integrity of all CEOs in the process) was the source of much political capital, not to mention an ideal justification for increased budgets.

The Stewart trial should serve as a reminder of Murray Rothbard’s criticism of the notion of an independent judiciary in Power and Market (1970, p. 195):

"If the judiciary is really independent of the popular will, then it functions, at least within its own sphere, as an oligarchic dictatorship, and we can no longer call the government a "democracy." On the other hand, if the judiciary is elected directly by voters, or appointed by voters’ representatives…then the judiciary is hardly independent. If the election [or appointment of judges] is subject to renewal, then the judiciary is no more independent of political processes than any other branch of government."

Finally (and most importantly), the gall—the heroic gall—to fight such absurd charges is crucial for a free society. We should be thankful that Stewart, whatever her faults, was willing to stake her reputation and wealth to fight this surreal ordeal in court. We can be sure that, post-Martha, the DOJ will be more careful where it picks its fights. We can hope that the Stewart trial will be viewed as a harbinger of things to come in the fight against an activist federal judiciary.

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