As household maven Martha Stewart takes out full-page newspaper ads and sets up Web sites protesting her innocence of insider trading and obstruction of justice charges, federal prosecutors and securities regulators continue to insist that they did not single out the diva of domesticity for any special punishment. Somewhere in between those two positions is likely the truth, although that has long since ceased to matter.
By now, most people seem to have an opinion about whether Ms. Stewart knowingly took advantage of insider information in December, 2001 when she told her broker to sell her shares in biotech firm ImClone, a company run by Sam Waksal, a man she had dated.
As with many insider trading cases, it is a little hard to believe that Ms. Stewart coincidentally sold her ImClone shares on the same day the founder of the company and his immediate family were all unloading their stock — and just a day before the company got extremely bad news from the federal authorities about one of its key drugs. But it’s one thing to suspect that something nefarious was going on and quite another to actually prove it.
In fact, U.S. attorney James Comey admitted as much during his announcement of the charges against Ms. Stewart, in which he said he was not prosecuting her for criminal insider trading. Instead, he was leaving it to the SEC to proceed with a civil insider trading lawsuit. Mr. Comey effectively said that trying to prove insider trading in a “piggyback” case such as Ms. Stewart’s would be unprecedented. Why? Because criminal cases require proof beyond a reasonable doubt, whereas civil cases rely on a “balance of probability.”
The problem with insider trading cases is that there is almost always a reasonable doubt, and particularly so in “piggyback” trading. What that means is that Ms. Stewart’s trades were one step removed from the more serious case of insider trading — that is, the sale of ImClone stock by Mr. Waksal and various family members. It’s relatively easy to make the case that the ImClone founder knew bad news was coming before he sold, but did Ms. Stewart? Or did her broker simply tell her that he thought she should sell?