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Martha Stewart is getting a bum rap. Contrary to popular belief, she has not been charged with criminal insider trading. Indeed, the U.S. attorney for the Southern District of New York, who oversees the prosecution, said that it would be “almost without precedent” to charge her with insider trading under the circumstances. Rather, she is charged with falsely denying that she engaged in insider trading, and misleading her own shareholders by doing so, which according to the prosecution constitutes securities fraud. The irony here is tremendous � Stewart is being tried for denying that she did something that the prosecution agrees she did not do! The theory seems to be that Stewart thought she could halt the potential slide of her own company’s stock � Martha Stewart Living Omnimedia � by professing her innocence. She has never denied the central fact that she sold her ImClone stock after learning that insiders were selling. She simply told her side of the story that she had already decided to sell � the same story which may or may not convince the jury in the end. To prove securities fraud, the prosecution must show that Stewart made a false statement of a material fact, meaning a fact that would matter to her shareholders in connection with the purchase or sale of stock. The fact here is that Stewart expressed an opinion � that she was not guilty. Whatever evidence she gave to support that opinion was always couched in the cautionary language that she was confident she would be cleared of the charges. Also, any reasonable stockholder would have known that an investigation and a possible indictment were coming, and that the mere allegations of insider trading were likely to harm a business built on Stewart’s image. And every reasonable person can expect people accused of wrongdoing to protest their innocence, whether or not they’re innocent. So even if Stewart’s blandishments are characterized as facts, it is difficult to see how they had any effect on the price of the shares of her company. WRONGS VS. CRIMES Even if Stewart is technically guilty, it does not follow that she should have been prosecuted. Think about what makes a wrong into a crime. When should an act or practice be a crime rather than being left subject to some lesser punishment than jail time? The easy answer is that Congress says so. But that answer begs the question. “There oughta be a law” does not necessarily mean there oughta be a criminal law. The law recognizes many wrongs that do not necessarily rise (or fall) to the level of a crime. Generally, a crime is a wrong for which one can be sent to jail. But the law comprises many forms of punishment, deterrence, and remedy. Presumably, we should resort to criminal prosecution only if some lesser remedy or punishment is inadequate. For most wrongs, the prospect of civil suit and compensatory damages is sufficient to punish and deter bad behavior. A simple automobile accident is not a crime. Rather, the person at fault must compensate the victim. That is punishment and deterrence enough. Compensatory damages are usually adequate when the injury is purely a loss to the victim. But if the victim’s loss is the perpetrator’s gain � as with insider trading � simple compensatory damages may not be adequate deterrence unless the perpetrator gets caught every time. The fact that a fraudster must give back his gains if caught will not discourage him from trying again. Moreover, few victims will discover that they have been cheated. And even if we discover the cheater, we may not be able to tell who was cheated. Who bought the ImClone stock that Stewart sold? No one knows. And no one seems to care. Although one might thus argue that insider trading is a victimless crime, there can be no doubt that it leaves outside investors just a bit worse off, because insiders extract money from the market pool. So Congress has quite wisely intervened with a statute empowering the Securities and Exchange Commission to sue to recover the ill-gotten gains, plus a fine equal to three times that amount. That seems like a fair amount of deterrence (and if it’s not, Congress can always increase the level of the fine). And � no surprise here � the SEC is indeed investigating whether Stewart violated noncriminal securities laws on insider trading. If she had sold her own Martha Stewart Living Omnimedia stock, that might have been criminal insider trading. But she didn’t. WHO GOT HURT? So, then, how exactly did Stewart harm Martha Stewart Living Omnimedia shareholders to such an extent that she’s facing criminal charges? Perhaps by triggering a scandal. But that is not the charge against her. Thus, the lost value of Martha Stewart Living Omnimedia cannot be the point. The only point can be that some traders were induced to buy � or hold � Martha Stewart Living Omnimedia stock because of Stewart’s story, which presumably is why the prosecution plans to call a parade of securities analysts as witnesses. According to the Supreme Court, however, holders have no standing under the federal securities laws. Only those who buy or sell matter. What about the buyers, then? The problem is that for every buyer who loses, there is a seller who gains. Shareholder wealth � like matter and energy � cannot be created or destroyed. It just moves around. Neither Stewart nor Martha Stewart Living Omnimedia extracted any money from the market by selling stock. Thus, well-diversified investors � even those who bought after Martha claimed innocence � are equally likely to gain as lose. And most investors are in fact well-diversified. Over 60 percent of all stocks are held in mutual funds and other institutional vehicles that typically hold 200 to 300 different stocks. Although any one investor may gain or lose a little from this particular flap, gains and losses from other corporate squalls will almost invariably net out over time. No harm, no foul. Indeed, a well-diversified investor is not merely indifferent to “frauds” of the sort with which Stewart is charged. Such an investor ought to be more concerned about the waste inherent in prosecuting a case that has no economic consequences for the supposed victims. To be sure, Congress has declared that any willful violation of the securities laws may be prosecuted as a crime. And virtually all violations of the securities laws must be at least willful to be violations even in a civil action. But there are many violations of the securities laws not prosecuted as crimes. Criminal prosecution � in securities law, as elsewhere � should be reserved for wrongs for which some lesser monetary remedy is inadequate. Most traditional crimes against people and property contain an element of violence or force that cannot be fixed by writing a check. Such crimes reduce our feeling of safety and security. That cannot be replaced with money. More to the point, there are many financial wrongs in which the perpetrator’s intended gain (however large it may be in absolute terms) is a small fraction of the victims’ loss. Enron comes to mind. At its peak, Enron was worth about $68 billion. And according to reports, its senior executives extracted $681 million when the company began to falter. In other words, the insiders’ gain was about 1 percent of the investor losses. There is no way that Enron insiders could ever hope to pay back the victims. The scheme was to take just a little and ignore the collateral damage, like a burglar who burns down a house just to cover his tracks � a classic case of criminal indifference. WHY MARTHA’S NOT ENRON There is a big difference between Enron and Martha Stewart. Nothing short of jail time will likely deter a fraudster who is willing to wreak financial havoc in order to sneak off with a few pieces of silver. But we do not need to treat all financial wrongs as crimes in order to deter them, especially when Congress has provided another more specific civil penalty. And, as for the alleged securities fraud, it is not clear that the threat of criminal prosecution does much to deter such a poorly defined crime anyway. Does anyone remember why Michael Milken and Ivan Boesky went off to camp? So what about obstruction of justice? The simple answer is that if Stewart is not guilty of securities fraud, there was nothing to obstruct. Moreover, shredding documents � as was done by Enron’s accountants at Arthur Andersen � is one thing. It prevents us from getting at the truth. But telling the prosecutors that you already had a plan to sell is quite another. It may be a total fabrication. Or it may be the truth. But do we send Stewart to jail simply because the jury does not believe her story? Should it be a crime to defend yourself if you lose? There is too much crime in the United States partly because we have made too many wrongs into crimes. There are more folks in jail or otherwise under the supervision of the penal system (as a percentage of the population) than in any other country in the world � civilized or not. For many segments of the population, to be convicted of a crime has lost its stigma. It is more like a 15-yard penalty. For some, it is even a right of passage. How can we expect criminal law to deter truly bad behavior if we use it so loosely? Richard A. Booth is a professor of corporations and securities law at the University of Maryland School of Law.

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