It was almost four years ago that the great stock market bubble burst. Despite revelations of systematic fraud across Wall Street and corporate America, the criminal consequences have been surprisingly minimal. The Wall Street banks, at the heart of the chicanery, mostly got off with a $1.4 billion settlement deal with the authorities, less than 4 percent of their profits between 1996 and 1999. The disappointingly short list of the indicted and/or jailed includes a handful of Enron execs, Tyco's Dennis Kozlowski, ImClone's Sam Waksal...and not many more. Though they and their deeds are rich with symbolic value, almost none of them have become household names. The major exception was a household name before indictment: Martha Stewart, whose trial began on January 20.
Why Martha? Though most people think she's charged with insider trading, she's not. She's charged with conspiracy, obstruction of justice, lying to federal prosecutors and securities fraud--charges for which she could do serious time if convicted. And the original trade that gave rise to all this trouble was probably not illegal in itself.
So what's it all about? In December 2001 Stewart held 3,928 shares in ImClone, a New York-based biotech firm that was about to hear some bad news from the Food and Drug Administration, news that would inevitably hammer its stock--that its promising cancer drug Erbitux was not going to be approved. On the morning of December 27, the day before the bad news was to be made public, Aliza Waksal, the daughter of the firm's CEO, Sam Waksal, told Douglas Faneuil, the assistant to her Merrill Lynch broker, Peter Bacanovic, to sell the ImClone shares in her account. Soon after, Sam Waksal's accountant tried to sell Sam's shares as well. Faneuil told Bacanovic about the Waksals' lust to sell, and Bacanovic quickly called Stewart, leaving a message that ImClone's stock was "going to start trading downward." If he based that opinion on the Waksals' actions, telling other clients would violate Merrill Lynch's client confidentiality policies.
There followed a series of phone calls, whose exact content is in dispute. What isn't in dispute is that Stewart sold her ImClone shares on the afternoon of the 27th. The question is why. If Bacanovic told Stewart that the Waksals were bailing out of ImClone stock, that might have been illegal (but historically such maneuvers haven't been treated as such). Stewart claims that she had a pre-existing arrangement with Bacanovic to sell her shares if the price fell below $60, but she hadn't put in a formal "stop-loss" order, which would have set off the sale automatically.
ImClone's stock fell on the 27th on heavy trading volume, a sign that more than a few people probably knew of the FDA action in advance. But it fell even harder after the announcement on the 28th. Stewart saved around $45,000-$50,000 by selling early, but it's almost impossible to say at whose expense that saving came. Compare that with, say, the huge and very visible losses suffered by stock investors who were seduced by the happy talk and lies coming from CEOs and Wall Street analysts.
At any rate, what happened on December 27 isn't at the heart of the criminal complaint. What Stewart's really in the dock for are the defenses she mounted after news of her well-timed sale became public. The Feds accuse her and Bacanovic of conspiring to "conceal and cover up" Bacanovic's violation of Merrill's confidentiality policy as well as Stewart's real reasons for the sale. The prosecutors claim that the $60 agreement was an invention after the fact. They also claim that aside from trying to exculpate herself, Martha also designed her alibi to prop up the stock price of her company, Martha Stewart Living Omnimedia, since her being packed off to jail would almost certainly damage the firm severely. That, to the prosecutors, was securities fraud. So even though the circumstances of the original sale were probably not criminal, it may be that Stewart thought they were, and made up the $60 story as a self-defense. Should bad judgment be a felony?
Amazingly, Slate hired Henry Blodget to cover Martha's trial. Judging from his earlier dispatches, Blodget is as qualified to be a journalist as he was qualified in his previous career on Wall Street. He was a Merrill Lynch research analyst, one of the major promoters of the tech bubble, who privately disdained stocks (he famously referred to one as a "piece of shit" in an e-mail to a colleague) he was publicly recommending. Though people lost pots of money on Blodget's advice, he paid a $4 million civil fine, but faced no criminal charges. Why isn't he the defendant?
Though she has millions of fans, Martha is not broadly loved. She was voted the seventh most annoying person of 2003 on the website amiannoying.com (falling between Osama bin Laden and Jacques Chirac). More rigorously, Gallup reports that 55 percent of Americans have an unfavorable opinion of the Diva of Domesticity, and just 36 percent a favorable one. There's little doubt that this dislike contributed to her indictment, and to the widespread assumptions of her guilt.
Why the resentment? As one young fan recently pointed out to me, it's because she severely confuses our gender codes. She invaded the traditionally male turf of big business, but her business is based on "skills that were supposed to be girly and stay-at-home." Yet while she "plays the über-homemaker, she isn't charming or warm. She's cold and efficient and a little awkward. She's not marketing the warmth and the comfort of the home, she's showing how it's like a business or a machine. That's not so easy to like, and it makes her scarier, to men especially."
Those are not good reasons to send someone to jail. But, more broadly, why are insider trading and related transgressions often treated more severely than defrauding retirees, lying to stockholders or, more prosaically, running a dangerous workplace? The only obvious victim of Martha's alleged crime is the public's perception of the fairness of the stock market. The authorities would love to preserve the illusion that everyone is equal, and that the rich and well connected have no special advantage over the masses. But that's absolute nonsense. Though people on the left often cheer the prosecution of insider trading (which, remember, is something Stewart isn't even accused of), there's nothing particularly progressive about preserving the illusion of Wall Street's fairness. It is, therefore, in the interests of both individual justice and political clarity that Martha be found innocent.