What did Martha Stewart do? Her broker at Merrill, Lynch called her and told her that insiders in a stock she owned were trying to sell their shares. Hearing this, she decided to sell her shares too.
But Ah Ha!! Her crime was not in selling the shares, but in lying to government investigators about it !!
What was wrong with that? She had engaged in a perfectly legal normal transaction. Because she is a celebrity, the government wanted to know why she had done it. She could have told them to get lost. That would have been the end of it. She could have simply said that she sold because her broker advised her to do so. Is not that what brokers are supposed to do? Why do we pay brokers a commission, if not because they advise us what and when to buy and sell?
Instead, she made the mistake of cooperating with the government flatfeet. Martha Stewart was threatened and intimidated into believing that by following her broker's advice, she had broken some law. She obviously received weak legal advice. She decided to claim that she had placed a stop-loss order to sell if the stock had gone below 60. Of course, she should not have lied, but of course the government had no business asking her the question. What right did they have to ask her why she sold the stock when there was nothing remotely illegal about the sale.
From now on, those who receive a call from a broker saying that he has a hot tip on the stock market will be told that by acting on the "hot tip" they have violated the SEC's insider trading rules. Can the securities market function that way? Are securities traders required to find out the ultimate source of every piece of information or every rumor that crosses their desks and make a legal determination as to whether or not this is inside information before deciding whether to buy or sell?
Because the Martha Stewart case is almost always mentioned in the same breath as Enron and Worldcom, I naturally assumed that a major corporate bankruptcy was involved. In reality, however, the amount of money was small. Martha Stewart sold at 61. After the negative news came out, the price of the stock dropped to 47. By selling her 3,928 shares at 61, Martha Stewart netted about $45,000 more than if she had sold at 47. The company involved, ImClone Systems, Inc., is still traded at about 47. It has developed a treatment for Colon Cancer which was approved in Switzerland but had not yet been approved by the FDA. It has since been approved.
The Chairman of ImClone Systems made the mistake of pleading guilty to inside trading charges and is facing seven years in prison. Colon cancer patients who might have benefited by the treatment developed by ImClone Systems will have to die while the CEO rots in jail.
But Martha Stewart is indeed guilty. She is guilty of receiving poor legal advice, of having incompetent lawyers to defend to her, and of having a famous name which made her a tempting target for zealous US Attorneys who know little about securities law and who want to make a name for themselves.
I would like to see a Congressional Investigation, not into Martha Stewart but into the Department of Justice and why they have wasted the taxpayer's money prosecuting such a meritless case.
I predict that the conviction will be overturned on appeal. The Second Circuit US Court of Appeals and the New York Courts in general have always been pro-business. They will realize that if the Martha Stewart conviction is upheld, the New York Stock Exchange will have to move to New Jersey.
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Sam Sloan has argued federal securities law orally before the United States Supreme Court and won a landmark court decision against the SEC in SEC v. Samuel H. Sloan, 436 US 103 (1978).
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