Corp Law Prof Bainbridge has a rant about why Martha Stewart has not committed insider trading.
Its a good piece, filled with solid analysis. The good Prof wrote the book — literally — on insider trading. The only problem is that the SEC isn’t really prosecuting the Insider Trading charge as their main focus. Yes, Martha’s been charged with insider trading — But what the SEC seems to be keying on is the “Obstruction of Justice and Lying to Federal Investigators” aspect:
“The Commission alleges that, during the morning of Dec. 27, 2001, Bacanovic instructed his assistant, Douglas Faneuil, to tell Stewart that Waksal and his daughter were selling all the ImClone stock held in their Merrill Lynch accounts. During a subsequent telephone call, Faneuil conveyed that information to Stewart, who promptly instructed Faneuil to sell all 3,928 shares of her ImClone stock. The next day, Dec. 28, 2001, ImClone announced that the FDA had decided not to accept ImClone’s Erbitux application for filing. By the close of the next trading day, Monday, Dec. 31, 2001, the price of ImClone stock dropped 16% to $46 per share. By selling when she did, Stewart avoided losses of $45,673.
The Commission alleges that Stewart and Bacanovic went on to lie when the Commission staff and criminal authorities questioned them about the facts surrounding Stewart’s sale of ImClone stock. Stewart and Bacanovic fabricated an alibi for Stewart’s trades, stating that she sold her ImClone stock because she and Bacanovic had decided earlier that she would sell if ImClone’s stock price fell below $60 per share. In addition, Stewart told the government that she did not recall anyone telling her that day that any of the Waksals were selling their ImClone stock.”
Similar language shows up in other SEC docs:
On several subsequent occasions, Stewart and Bacanovic lied to the Commission, the U.S. Attorney’s Office for the Southern District of New York, and the Federal Bureau of Investigation about the events of December 27, 2001 and the facts surrounding Stewart’s sale of ImClone stock. For example, the Defendants fabricated a false alibi for Stewart’s trades, stating that she sold her ImClone stock because she and Bacanovic had decided earlier that she would sell if ImClone’s stock price fell below $60 per share. In addition, Stewart told the government that she did not recall anyone telling her that day that any of the Waksals were selling their ImClone stock.
As tricky Dick so effectively showed us, tain’t the crime but da coverup dat getsya.
I don’t think its an effective legal strategy to focus on defending yourself against charges that aren’t the main focus of where prosecutors are aiming. Yes, it sounds bizarre, but the Insider Trading charge is where Martha is most likely to skate. The lying to investigators is her vbulneability.
Sometimes the best thing to do is just lawyer up and keep your muffin bakin’ mouth closed. Other than that . . .
Hat tip to Marginal Revolution
Source:
The insider trading charge against Martha Stewart, Professor Bainbridge
Litigation Release No. 18169 / June 4 2003, Securities and Exchange Commission v. Martha Stewart and Peter Bacanovic, 03-CIV-4070 (NRB)(S.D.N.Y.)
SEC Charges Martha Stewart, Broker Peter Bacanovic with Illegal Insider Trading, 2003-69
You’re not reading the complaint correctly. yes, the SEC says the things you quote. But they say them in the factual allegations. You’ve got to look at the claim for relief to figure out what the complaint is based on. The claim for relief is based on charges under 10b-5 and sec. 17: “The Defendants Violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder.” The complaint goes on to say:
On December 27, 2001, Bacanovic, in breach of a fiduciary duty, or other duty arising out of a relationship of trust and confidentiality that he owed to Merrill Lynch, conveyed to Stewart, through Faneuil, that the Waksals were selling or attempting to sell all of their ImClone stock at Merrill Lynch.
While in possession of the information that the Waksals were selling or attempting to sell their ImClone stock, Stewart sold 3,928 shares of ImClone stock on December 27, 2001.
The information that Stewart possessed on December 27, 2001, that the Waksals were selling or attempting to sell their ImClone stock, was material and nonpublic.
When Stewart sold ImClone securities on December 27, 2001, Stewart knew or acted in reckless disregard of the fact that: (1) she possessed confidential information that the Waskals were selling or attempting to sell their ImClone stock; and (2) Bacanovic’s conveyance of this material and confidential information to her constituted a breach of fiduciary duty, or other duty arising out of a relationship of trust and confidence, that Bacanovic owed to Merrill Lynch.
By reason of the foregoing, the Defendants, singly or in concert, directly or indirectly, violated, and unless enjoined will again violate, Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
All of the provisions of the claim for relief relate to insider trading.
I don’t disagree with what you are suggesting at all — that’s the correct technical reading.
But when most people think about inside trading, they think about having material non-public knowledge, sourced from within the company itself. The breach of fiduciary duty regarding confidential information by Bacanovic is not what we typically think of when we hear the phrase “inside info” (i.e., IMCL was not going to get FDA approval); Rather, it was a violation of the duty he owed Merrill Lynch.
I’m thinking about how a defense lawyer would go about fighting the charges against Martha.
Refer to Martha’s acts — her Merrill broker told her “confidential” info about another of Merrill’s client — and suggested she sell her stock. That’s a fairly defendable act for Martha, at least in the eyes of a jury. While it might raise technical legal issues, a good litigator should put all the blame on Bacanovic and the poor Merrill supervision — “Her broker called her and sell – so she sold — if there was any crime, it was broker Bacanovic’s fiduciary breach to his employer Merrill.”
They would also make certain the jury knows that this confidential info is not at all the same as CEO Waskal telling Martha “inside info” about Imclone. Its unlike, say a printer seeing certain docs and buying a takeover target.
I think the more difficult charges for Martha are the “stop loss” issues — she apparently conspired with Bacanovic to fabricate a stop loss order, without any computer entry or paper trails that Merrill requires. Not only a lie in the face of an investigation, but a pretty obvious and bald faced one. As Yogi Berra might say, “a verbal stop loss ain’t worth the paper its written on.”
Ultimately, that’s the petard Martha will get hoisted upon.
I stumbled across your blog while I was doing some online research. This was a truly fascinating discussion, and I especially appreciated the distinction you made between insider trading and the crime to which Ms. Stewart was accused.