Sound on Some Issues

The WSJ on the Martha mess:

Mayhem Over Martha

Federal prosecutors have finally distilled criminal charges from the Martha Stewart matter, though too late to see themselves portrayed in the recent CBS celebridrama about her. Too bad for Hollywood: The fingerprinting and arraignment that followed yesterday’s indictment would have made a vivid scene, though a sad and foolish chapter in Ms. Stewart’s otherwise accomplished life.

Prosecutors didn’t see fit to bring a criminal charge of insider trading (perhaps because there’s no case) over her sale of ImClone shares. Instead, the U.S. Attorney relies on a securities fraud charge to give the appearance of added heft to the alleged wrongdoing. The claim is that because her own company is so dependent on “Martha” the brand name, her alleged lies about the motive for her ImClone sale amount to a material misleading of the shareholders of Martha Stewart Living Omnimedia.

So all of her “crimes” arise from her fear of prosecution over something that wasn’t a crime (her ImClone sale). Or because she was simply trying to protect her Merrill Lynch broker, Peter Bacanovic, which is even weirder. What is the power of this Svengali that she would risk her reputation and put her own company in jeopardy to protect him?

Ms. Stewart sold her shares after Mr. Bacanovic’s assistant told her that the family of ImClone CEO Sam Waksal was dumping theirs. Mr. Waksal, it later became clear, had been selling in response to a secret regulatory setback for his company’s pending cancer drug. He has already pleaded guilty to classic insider trading and will be sentenced soon.

Both common sense and Merrill’s written policy make clear that Mr. Bacanovic shouldn’t have been talking out of school about the trading activities of his other clients. But the absence of an insider trading charge against Ms. Stewart speaks volumes too: being the recipient of such an indiscretion wasn’t a crime in the eyes of the U.S. Attorney.

Why, then, did she allegedly let herself be drawn into a conspiracy (as the indictment calls it) to concoct a story that Mr. Bacanovic had sold her shares based on a pre-existing agreement to sell at a certain price?

Fibbing to investigators is always a bad idea; fibbing to them about why you were speeding when you really weren’t speeding is an especially bad idea. Assuming the indictment bears a decent relation to reality, it’s hard to escape the conclusion that Ms. Stewart succumbed to an inexplicable meltdown in judgment, perhaps accentuated by the atmosphere of corporate vilification then building to a peak after the Enron implosion. But there’s also the problem that if she asked her lawyers what constitutes insider trading, they wouldn’t have been able to give a clear and coherent answer.

Which brings us to yesterday’s SEC civil complaint, broadly claiming that what Mr. Bacanovic and Ms. Stewart did together amounts to insider trading for regulatory purposes. Insider trading traditionally presumed the culprit was violating a duty of confidentiality to a client or employer. The SEC has gradually overthrown this clear-headed definition in favor of one in which the market itself is “wronged” if somebody trades for the “wrong” reason, defined as somebody having information that she was supposed to know she wasn’t supposed to have. Presumably a scrap of paper could blow into your pocket and if it contained material nonpublic information, you could be charged with insider trading for acting on it.

The legal process will take its course, though we hope the essential non-maliciousness of Ms. Stewart’s alleged behavior will count in her favor. Worth mentioning, too, is that the Martha indictment comes the same week as the e-mail dragnet through Wall Street’s top offices. If we didn’t know better, we’d wonder if this was somebody’s counter-stimulus policy against a return to business confidence.