- The Washington Times - Sunday, October 27, 2002

Martha Stewart is still accused of something. But what? It has been widely reported that the Securities and Exchange Commission plans to recommend civil charges (i.e., try to collect a fine) because the standards of proof are lower than for criminal charges. Indeed, the standards of proof in this case are approaching a record low.
The original accusation claimed there was something fishy about the fact that Martha Stewart sold 3,928 shares of ImClone in the afternoon of Thursday, Dec. 27 one day before the news came out that the FDA would not approve ImClone's promising anticancer drug, Erbitux. Yet many, many people were selling ImClone shares on that same day. ImClone CEO Sam Waksal's family unloaded about $9 million in the early morning at prices of $62 to $63 a share. By the afternoon, when Miss Stewart finally sold for $58, CNBC and Bloomberg were reporting a big rout in ImClone shares. She called Mr. Waksal to ask what was going on, which simply proves she did not have a clue. Congressional snoops tried making a fuss over a possible cellphone conversation between Mr. Waksal and Miss Stewart on Dec. 31, far too late to matter.
At the close of trading on Dec. 27, CNBC's Carl Quintilla reported: "One stock that was under pressure today was ImClone Systems. About two months ago, they filed with the FDA for this drug, Erbitux. Haven't heard back from the FDA, and a lot of rumors now that perhaps the FDA would return a refuse-to-file letter." Michelle Caruso-Cabrera added: "The reason people are getting particularly nervous right now is there is a deadline. We're supposed to hear from the FDA by Dec. 31." This was old news by then. The stock closed down 7.65 percent, at $58.75. Hundreds of people sold ImClone that afternoon, including institutional investors. So why pick on Miss Stewart?
As attorney James Ostrowski explains, Martha Stewart is really being accused of outsider trading. Relatively perceptive members of the press politely describe this federal fraud as a "novel" or "creative" theory of insider trading.
Knowing these insider trading charges were nothing more than a sensational fabrication, everyone involved now tries to change the subject by making a felony of a suspected fib. Martha Stewart's lawyer told a congressional committee she had instructed her broker to sell if the stock fell below $60. Since there was no formal "stop loss" order recorded, critics claim this was a lie. That is not obvious. Back when I used a broker, I often said things like, "If this drops to $60, let's consider selling it." I have never used a stop-loss order because it is too inflexible. In any case, it does not matter why Miss Stewart executed a perfectly legal trade.
Obstruction of justice? For whom? Martha Stewart's explanation of why she joined a widespread rush out of ImClone certainly did not obstruct insider-trading charges against Sam Waksal, since he pleaded guilty. It did not obstruct her own prosecution for insider trading, because they have no such case. There is serious crime going on in this country, and this sort of foolishness over victimless, undefined offenses is a big waste of time and money.
This case makes me wonder whether insider-trading regulations are more dangerous than helpful. London had no laws against insider trading until 1985. Japan was even later. Some of the world's freest economies, like Hong Kong, have no such laws. Strictly speaking, the United States has no specific laws against insider trading either. The standard code of ethics for stock analysts, "The AIMR Standards of Practice Handbook," points out that "no statutory definition of insider trading exists in the United States." All we have is theories spun by the SEC and the courts. With the Stewart case, the theories are spinning out of control.
In "The Encyclopedia of Law and Economics," UCLA professor Stephen Bainbridge summarized the most plausible explanation of why the SEC has been trying so hard to redefine illegal insider trading in increasingly sweeping ways:
"The SEC desired to enlarge its jurisdiction (by federalizing matters previously within the states' domain) and enhance its prestige. Administrators can maximize their salaries, power and reputation by maximizing the size of their agency's budget. A vigorous enforcement program directed at a highly visible and unpopular law violation is surely an effective means of attracting political support for larger budgets. Given the substantial media attention directed toward insider trading prosecutions it provided a very attractive subject for such a program. "
The SEC's infamous lust for "substantial media attention" is absolutely guaranteed when the agency aims its loose canons at someone as notable as Martha Stewart. But it is about time the media noticed that the fishiest thing about the Martha Stewart case is not her little stock trade last December, but the fanatical attention it has gotten from federal officials who surely have more important chores to tend.

Alan Reynolds is a nationally syndicated columnist.

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