The Rittenhouse Review

A Philadelphia Journal of Politics, Finance, Ethics, and Culture

Friday, January 16, 2004  

The Thin -- and Dangerous -- “Case” Against Martha Stewart

I’ve long been skeptical of the federal government’s purported case of securities fraud against media mogul Martha Stewart, going so far, as I typically am inclined to do, as to call Karen Seymour, the assistant U.S. attorney in charge of the matter, “possibly delusional,” which, to the extent one accepts such a characterization, calls into question not only her judgment but that of her superiors in the U.S. Attoney’s Office, Southern District of New York, and beyond.

Fortunately, where I am intemperate others are temperate, and where I am inexpert others are expert.

Such expertise and temperance (aside from a gratuitous swipe at “liberals”) we find in today’s edition of The Wall Street Journal, in the form of an op-ed piece by two faculty members from Stanford University Law School. (“Flunking the Martha Test,” by David Mills and Robert Weisberg, The Wall Street Journal, January 16, 2004. [Subscription required.])

In it, the authors begin with the painfully and frighteningly obvious -- “Fraud in big business is a U.S. Attorney’s favorite medium of prosecutorial creativity.” -- to which they add the not-quite-so-obvious but crucial observation, “[F]raud requires more than merely lying. The fraudster also has to aim to deprive some other person of something of material value -- and perhaps to succeed at doing so and to achieve some gain.”

Mills and Weisberg convincingly argue that the “case” against Stewart represents nothing more -- as if that were the correct phrase -- than prosecutorial abuse. The two presented the Stewart case, without mentioning her name or specific, revealing details, to Stanford Law students as a hypothetical, asking the lawyers-to-be, including, one would surmise, at least a few future federal prosecutors, whether her actions constituted fraud. They write:

Our apparently simple exam question required students to apply legal doctrines -- as well as moral intuition -- to determine if the CEO could possibly be charged with fraud or any other crime, assuming that she did not make the claim of innocence under oath or in the context of an official proceeding. The question posed a few modestly subtle challenges -- issues that would garner extra points for thoughtful students. One was to think carefully about losses and victims. The most obvious potential victims were the shareholders of our CEO’s company, given their interest in maintaining the value of their stock. But the sharp student would notice problems here: How did the CEO’s claim of innocence threaten that value? Wouldn’t the stock value suffer more if she confessed guilt and resigned? And how did the CEO financially gain from the statement -- other than in the trivially obvious sense that she avoids the financial loss she would suffer if she confessed guilt?

But there was another challenge in the question: Even if the prosecutor could somehow finesse the victim/loss issue -- perhaps on the theory that the government need only show that the false claim of innocence might in some unpredictable way, at some time, injure the shareholders -- there remained the question of moral judgment. [Emphasis in original.] It seems bizarre to charge a person with fraud when all she does is publicly proclaim her innocence under a system of justice which requires the state to prove guilt, and which allows defendants to maintain their innocence. After all, a proclamation of innocence, even containing a false assertion, is the natural way for a person charged to put the state to its proof. [Emphasis added.]

Most of our students concluded -- rightly we thought -- that no fraud had occurred in this situation. [Emphasis added.]

Alas, justice, or at least Karen Seymour, must have her day. Mills and Weisberg write:

Well, the trial of Martha Stewart for obstruction of justice and securities fraud is now in train. The core theory of the government’s case is precisely the theory suggested in our exam question. A claim of innocence by a wealthy CEO in an unrelated matter has now become securities fraud, at least when that claim is accompanied by a story the government does not believe.

At a time when we worry about the integrity of our securities markets, it may be hard to work up much sympathy for a self-promoting billionaire whose conduct may not meet the highest test of honesty. But if federal prosecutors have effectively made up their own law in charging Ms. Stewart on this securities fraud theory, then we all need to worry. Once the criminal law is detached from our common understanding of criminal acts, and once prosecutors are essentially allowed to create crimes, the balance of power has shifted toward unelected officials acting in secret under little effective constraint. [Emphasis added.]

I can hardly imagine I will ever be at the center of a high-profile “fraud” case like this, nor, I suspect, can most Rittenhouse readers. But prosecutorial abuse, whether it is aimed at wealthy businesspeople or poor and petty (or vicious) street criminals -- to say nothing of sitting U.S. presidents, their friends, and current and former colleagues -- should be of concern to everyone. As Mills and Weisberg conclude:

Americans who tend to be wary of prosecutorial power and potential abuse are rightly most exercised when the targets of government abuse are the poor and defenseless. Ms. Stewart is neither. But public concern over the dangers of prosecutorial abuse should not depend on the identity of the accused. The criminal law should be reserved for those acts that we have collectively, by legislation, decided to criminalize -- and no others.

One can only hope the jury and judge will end the trial by showing Seymour the contempt she so richly deserves.

[Post-publication addendum: TalkLeft has a few comments about the jury selection process in the Stewart case.]

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