The Burden of Proof

Posted: Jan 12, 2004 12:00 AM

 Get ready for the ?Year of the Megatrial.? During 2004, Scott Peterson will be tried for murder. Kobe Bryant for sexual assault. Michael Jackson for child molestation. And leading off, Martha Stewart will be tried for insider trading.
Oh, wait. Actually she won?t. When her trial begins on Jan. 20, Martha Stewart will face much less serious charges: Securities fraud and obstruction of justice. And that?s something that should frighten us all.

 The case all began with Stewart?s controversial sale of ImClone stock way back in December of 2001. Prosecutors claim Stewart dumped her entire portfolio upon learning that the founder of the company, her friend Sam Waksal, was selling his stock.

 How did Stewart get this alleged ?insider tip?? Not from Waksal. The government admits she didn?t talk to him until after she?d unloaded her stock.

No, the feds say Stewart got the tip from her brokerage. And, ?as a former securities broker,? the federal indictment reads, ?Stewart knew the information regarding the sale and attempted sale of the Waksal shares had been communicated to her in violation of the duties of trust and confidence owed to Merrill Lynch and its clients.?

Now, insider trading is a serious charge. If the government can prove it, Stewart should go to prison. But, interestingly, the government isn?t even going to try, which means the U.S. attorneys must realize they don?t have nearly enough evidence to convict. Instead, they?ve pretending they?ve already proven insider trading, and they?re now trying Stewart for crimes that would stem from that.

The obstruction of justice charge is tied to an unwritten agreement Stewart and her broker, Peter Bacanovic, say they had to sell ImClone if it dropped below $60 per share, which it did on the day she sold. The government says there was no such agreement, and that the two made it up to obstruct justice.


If the government can prove that, punishment is certainly in order. However, since both Stewart and Bacanovic have stuck by their story throughout a two-year long investigation, they certainly deserve the benefit of the doubt unless Uncle Sam can prove otherwise. After all, we?re all innocent until proven guilty.

But the big concern is the securities fraud charge. It actually has nothing to do with ImClone. Instead, the charge hinges on the claim that Stewart lied to the press and the public in an attempt to prop up the value of her stock, Martha Stewart Living Omnimedia (MSLO).

During June 2002, the Associated Press reported that Stewart sold ImClone shares just before the Federal Drug Administration rejected the company?s application to license a new drug. It was this impending rejection that allegedly triggered Sam Waksal?s sale of his stock. This fact ?had not previously been publicly reported,? according to the indictment.

Now, how do you think something like that would leak out? Did Martha Stewart call a reporter and spill the beans about the federal investigation, which by then had been going on for six months? Seems unlikely. It?s more plausible that someone on the government side let slip that Martha may have done something wrong. And the story, predictably, spread like wildfire.

The effect on MSLO was equally predictable. Within a month, the stock plunged from $19 per share to $11.50 -- a loss of about 40 percent. Stewart controlled the vast majority of MSLO stock, so she obviously stood to lose the most when it tanked. She did the only thing any reasonable person would do in her situation: She denied any wrongdoing.

This, of course, is an American tradition. Virtually every person who?s accused of a crime denies it. In fact, most of those who?ve been convicted still deny it. But this month Stewart will be prosecuted, for simply saying she hadn?t done anything wrong.

For complete disclosure, I?ve never owned any of Martha Stewart?s stock. I can?t fold a fitted bed sheet to save my life. I?m not generally a fan of Stewart?s. But I am a fan of the First Amendment right to free speech.

The government is trying to set a dangerous precedent. If Martha Stewart goes to prison for denying a crime that she hasn?t even been charged with -- let alone convicted of -- it will be a travesty of justice. Prosecutors should make their case on the insider trading charge, or leave Stewart alone.

Because if the feds win, we?ll all have to shut up, or risk facing the consequences.