Proving Aesop Right Once Again – We Often Give Our Enemies the Means of Our Own Destruction
Avoid a remedy that is worse than the disease.
We had better bear our troubles bravely than try to escape them
We often give our enemies the means for our own destruction.
Honesty is the best policy
-Morals from Aesop’s Fables
As the entire world knows, Martha Stewart was indicted yesterday for conspiracy, making false statements, obstruction of justice and securities manipulation. Significantly absent from the indictment is a charge of insider trading, resulting from her sale of ImClone stock. Given the fact that it was that charge that was the subject of a very long, and very public investigation, its omission from the indictment makes for some very interesting reading.
And another opportunity to learn life lessons. I am a fan of life lessons, whether they are from biblical stories, or fairy tales or fables. Each of those stories contains a truism, a life lesson, something that all of humanity should know, and would be better off if they followed. We have our modern day stories too, and the Story of Martha and The Telephone Call will soon become as famous at The Fox and the Grapes, for it teaches a lesson as clearly as any that Aesop could have conjured up.
But the Story of Martha and The Telephone Call is much more than that, for it also contains lessons regarding abuse of governmental powers, and the government’s quest for ever expanding power and control. These may not be worthy of a fable, but they certainly are noteworthy reminders of the reason we have a Constitution and a system of checks and balances.
The Moral of the Story
Lets start with the Moral of this story: When one is speaking to a government employee, speak the truth or shut your mouth.
Securities lawyers and criminal defense attorneys have been preaching this lesson to our clients for years, and while most listen, every once in a while someone does not, and a story comes forth that drives the point home. If Martha had kept her mouth shut, or if she had told the truth, there would be no indictment today.
A few years ago a gentlemen retained me to represent him in an insider trading investigation. It seems that the SEC had already deposed him, that he chose to go to the deposition without an attorney, and now they wanted to ask him additional questions. He was worried, and NOW decided to retain an attorney. Unfortunately, the damage was done. He had made serious, material, and clear misrepresentations to the SEC during the course of his testimony, which could not be avoided or explained away. Soon, the federal prosecutors were looking for him, and we wound up entering into a plea agreement. Not for insider trading (a charge which he probably would have won), but for one count of perjury. And he received a prison sentence for a crime that he did not need to commit, and would have never been convicted of the main offense.
That seems to be the case here. Let me be clear. I know nothing other than what I have read about the Story of Martha and The Telephone Call, and I am assuming that the Indictment contains the true story. I make this assumption not because I trust the prosecutor, I am not foolish, but because two of the main characters have already pled guilty, their stories form the basis for the story, and the story makes sense. Certainly more sense than the unwritten $60 sell order story.
There is another lesson in these events – the abuse of the government’s power if they want to bring a case. Two separate events teach this lesson – the indictment of Martha Stewart for securities fraud – not because of her sales of ImClone, but rather because of her public denials of the accusations of insider trading, and the government’s allegation that those denials, which the government claims were false, were designed to manipulate the prices of Martha Stewart Living Omnimedia. The second event is the hand-off of the insider trading charges by the United States Attorney to the Securities and Exchange Commission. Bringing insider-trading charges in the civil arena, rather than the criminal arena is a cheap trick, and the case itself is an attempt by the SEC to expand its powers and authority beyond all permissible bounds.
The truth is, at least according to the indictment, Martha did not illegally trade on insider information, and the facts of the indictment support the conclusion that she did not. It seems clear to me at least, that if the federal prosecutors thought they could win an insider trading case, they would have obtained the indictment. They do not believe they could win, and did not bring the case.
According to the Indictment, ImClone was waiting for FCC comments on its new cancer drug, and the FCC was going to announce its decision by the end of December 2001. This would be a very significant event, and every shareholder in ImClone was anxiously awaiting the announcement.
On December 26, 2001, Sam Waksal learned that the news was not going to be good, and on the morning of December 27, 2001, he called his broker at Merrill Lynch, to sell all of his ImClone stock. At least one of his relatives did the same.
We can assume that this was big news, since there was no announcement from the FCC, and the SEC complaint alleges that there were a number of internal discussions at Merrill Lynch as to whether he could in fact sell his stock. In any event, the broker told his assistant to call Martha and tell her that he had reason to believe that ImClone was going to decline in value. And the assistant made The Call.
Martha received the voicemail message, and called back. According to the Indictment she was told that Sam was selling all of his stock, and you might want to consider doing the same.
And Martha did. She gave an order to sell all of her ImClone stock, all 3,928 shares of it, and received an average price of $58.43. According to the SEC Complaint, in doing so, she avoided losses of $45,673.
The SEC alleges that she immediately called Waksal, and left the following message: “Martha Stewart something is going on with ImClone and she wants to know what….”
Those are the facts according to the SEC and the United States Attorney. It is the prosecutor’s version of the story, and we can be reasonably certain that it was not slanted or spun to benefit Martha; and it does not support an insider trading prosecution – criminally or civilly. Plus, It makes sense, it what has been leaked to the press, and is a perfectly reasonable story. People usually act reasonably in my experience, and when the broker learned that Waksal was selling, he thought that was important enough for Martha to know (and presumably the broker’s other clients as well).
Martha’s reaction is also perfectly reasonable. Heck, if the President of the Company is selling, then I am going to sell. Wouldn’t you? Again, no inside information, no non-public information, and no wrongful conduct. People sell on the basis of the sells of insiders all the time, heck, entire companies have been formed simply to track the buying and selling of insiders. There is the small matter of the fact that Sam’s sells are not public knowledge, but the law does not require them to be, and certainly does not require Martha to know whether the information is public or not. In fact, I can make a terrific argument that Martha thought the information WAS public, but I will leave that for another column.
So far, so good, and Martha has not done anything wrong.
Then comes the investigation.
Quite honestly, I firmly believe that faced with these facts, and the questioning by the government, most of us would tell the government exactly what happened. If Martha had come to me, I would have told her to tell the investigators exactly what happened. I bought the stock, I got a call that Sam, my good friend who I know very well, and whose opinion I trust, was selling his stock. Because of that, I sold mine, and then called Sam to find out what was going on. End of story.
The reality is, there is no wrongful conduct there. But there is certainly a risk that the SEC would believe there was, and that by giving that answer, the SEC would believe that insider trading occurred. That is certainly a possibility.
Given that view, there are two choices – tell the truth or shut up. The insider trading violation is far from clear, and the worst that happens is that the SEC threatens a proceeding, and then settles for disgorgement of the profits and a one time penalty – a total repayment of� $91,346, putting her out of pocket $45,673. The SEC settles most of their cases in that manner.
Sure, there is some adverse publicity, but her public relations people could handle that – “Martha did not know that she was doing anything wrong in selling the stock, and she has voluntarily returned all of the profits that the SEC alleges she earned, as well as a small fine. She is happy to put this behind her…blah, blah, blah.” Get a couple of securities attorneys on CNBC to discuss the law, and it is clear that Martha did not do anything seriously wrong. In fact, you could even spin that so that it was the SEC who was conducting an unfair and in appropriate witch hunt.
Once again, end of story. But Martha did not choose that course of action. According to the Indictment, she chose to conspire with the broker, and his assistant, and to fabricate a story about an unwritten stop loss order at $60 and created the New Story. And that fabrication apparently led to another, and another and another, and before long, there was obstruction of justice, and a conspiracy to do so, between Martha and her broker.
Martha told the New Story to the SEC. Martha had her attorneys tell the New Story. Martha repeated the New Story to the press, and to anyone who would listen, and continued telling the story until the broker’s assistant began cooperating with the government, and then she finally did what she should have done in the first place. She shut up.
Only by then it was too late. The deed was done, she didn’t bear her troubles bravely, and her remedy was worse than her disease.
Unfortunately, Martha is going to pay a heavy price for telling the New Story, and for not learning those simple life lessons. The publicity has been a disaster for her, her stock is down significantly, she is facing a significant period of confinement, and now the SEC wants to ban her from ever being an officer of a public company. All this for $45,673, or for pride, or for the fear of telling the truth.
Then again, maybe Martha did tell the truth, and maybe this is a witch-hunt. It’s certainly possible, and it wouldn’t be the first time that a criminal defendant was found not guilty.
The SEC Complaint http://www.sec.gov/litigation/complaints/comp18169.htm
Copyright 2002, Mark J. Astarita. All Rights Reserved. Mark J. Astarita, Esq. is a partner in the law firm of Sallah Astarita & Cox, LLC, and represents investors and financial professionals in a wide variety of matters. He is also the sponsor of The Securities Law Home Page and can be reached at (212) 509-6544 or by e-mail at firstname.lastname@example.org
Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.