Martha Stewart: When it Comes to Perspective, We Have None
Martha Stewart sold less than 4,000 shares of ImClone stock on her broker’s say-so — netting what is for her, a pittance — and all hell breaks loose. My advice to Federal Prosecutor James Comey: settle this and move on to something that will better advance the cause of justice. Our financial system is crammed with meaty violators, people who are smiling so hard that their cheeks must hurt.
Let’s face it, what did Comey expect Martha Stewart to do once she received her broker’s advice? Buy more shares? Hold on to what she had and drop a couple hundred thousand dollars? If Comey went after everyone who sold stock when told to do so by their broker-even if he believed there was inside information conveyed in a conversation between the two parities-he’d be rounding up a whole lot of folks. More than we have jail cells for, I suspect.
And if it was Martha’s lying about the sale (“obstruction of justice”) he’s most concerned about, why single her out? Politicians lie just about every time they open their mouths. Corporate officers haven’t shown themselves to be bastions of truth, justice, or the American way. Research analysts, investment bankers, and brokers? Liars. Even Sammy Sosa, for god’s sake, used a corked-bat and then came up with an excuse at least as far-fetched as Martha’s Stewart’s stop-loss explanation. Sammy’s transgression hurt more people’s feelings than did Martha’s.
And what about proportionality? Do we run the risk of this side-show diverting attention from the white-collar main events? Specialists on the floor of the New York Stock Exchange (NYSE), for example, have been found to post inaccurate inside stock-spreads, front run, fail to maintain negative obligation (to many, just another phrase for front-running), and penny-jump on thousands of occasions over the years. They use information about order flow to enrich themselves at investors’ expense-and we’re talking about millions of dollars here. But since they are self-regulatory-that is, they are permitted to guard their own hen house — their transgressions register little on the James Comey Richter Scale. With him as the U.S. Attorney in Wall Street-land, the NYSE is allowed to put the public, with impunity, through every possible disadvantage, while Martha Stewart, who cost investors nothing, faces possible jail time.
Can this mismatch of punishment and crime be any more illogical? To answer that question, let’s look at the so-called Eliot Spitzer $1.4 billion settlement. The money sounds large, but is it really? Not when one considers that the total is something like two- or three-day’s revenue per bank. Looking at another way, the total approximates the fees on one large secondary offering per bank. Additionally, no transgressor was required to admit guilt and 2/5ths of the settlement could be covered by insurance or tax deductions.
Is there a model here that may be applied to Martha Stewart? As an ex-stockbroker, she was, without a doubt, stupid and should have known better. She probably did sell stock on inside information, and she probably did conspire to fabricate that cockamamie stop-loss order story with her sleazy broker. But this isn’t exactly a Ken Lay, lie-to-your-employees-and-destroy-their-life-savings kind of event.
Having said all this, Martha should be punished-after all, she did fib to SEC investigators. I suggest that we apply the Spitzer formula. Martha made something like $50,000 on her ImClone stock sale. Pro-rating the Spitzer fine — as applied to the not-so-contrite ten investment banks-she would owe something like $500 in restitution (with $200 of that covered by insurance). Given that she’s feeling a bit punk these days about the negative publicity, it is likely that the government might capture a windfall. As a starting point, U.S. Attorney James Comey might insist that she disgorge all of her supposed ill-gotten gains. If he demanded she repay all $50,000, it is likely she would agree. On an apples-to-apples basis, he’d be upstaging Eliot Spitzer by a wide-margin.
And such a precedent might reap dividends down the road. Next time nearly a dozen Wall Street banks rip off investors for $200-$300 billion, the government might righteously suggest they too pay 100% of the ill-gotten gain. With that kind of restitutionary percentage married to the copiousness of Wall Street rip-offs, we’d be looking at a balanced federal budget in no time. And if the SEC ever decided to address the abuses in the self regulated NYSE or the under-regulated hedge fund industry and fine them for past transgressions, we’d be in fat city with government surpluses aplenty — not to mention give mom and pop an investing chance for a change. In an ideal world, we might even restore investor confidence-that is, if anybody still cares about something as esoteric as the little guy’s peace of mind.
In the end, Martha could go back to hero status, sell lots of kitchen stuff, pay taxes, and help solve our fiscal mess. All we need to do is apply a little proportionality.