Friday, October 08, 2004

Credit Where Credit is Due

[Update below]

The New York Times Business Section reports:

NEW YORK (AP) -- Martha Stewart has reported to a West Virginia prison to begin her five-month sentence for lying about a stock sale, the Bureau of Prisons said Friday.

"Dear Friends," Stewart's Web site said, "By the time you read this, I will have reported to a minimum-security prison in Alderson, West Virginia, to begin serving my five-month sentence."

...she and former stockbroker Peter Bacanovic were convicted in March of lying to federal investigators about why Stewart sold 3,928 shares of ImClone Systems Inc. stock in December 2001.

Which is accurate. She was not, contrary to the beliefs of many, including at least one of the jurors who convicted her, guilty of illegal conduct (insider trading) regarding the actual sale of said stock.

Speaking of Orwellian. We have the spectacle of a high profile Democrat fundraiser, put into a federal prison by the Ashcroft Justice Dept. for lying about something that is no business of anyone, but Martha.

And there's not a peep from the likes of Carville, McAuliffe, her friends Bill and Hill, nor The Two Johns of the Good Hair. Why is that?

[update, 1:00 PM, Oct 8th:]

Inquiring minds want to know, what difference it makes that Martha didn't commit a crime in selling her stock, if she did in lying about it.

The short answer is that she undoubtedly wouldn't have been convicted of lying (and not under oath) about her private business affairs, had her attorneys not been prohibitted by the trial judge from explaining that she'd not done anything wrong in the first place--unlike her friend Sam Waksal, the CEO of Imclone, who undeniably did violate the insider trading laws.

At least one juror publicly admitted he voted to convict, to send a message to the big guys who might be tempted to cheat little guys like himself by selling stock to them behind insider information. Which is going to be the core of the appellate court's reversal of this appalling (and costly) persecution.

However, it is unlikely that Martha was even lying about her stop loss order at $ 60. She probably did tell the truth. Stockbrokers are commissioned salesmen. Meetings with clients are opportunities to earn money, and you'd better have a strategy to do so, before they arrive.

Bacanovic probably had three target stocks circled on the paper listing her holdings before she came in on Dec. 20th. Martha, being a former broker, would have known what he was up to. She might have figured she'd let him sell two of them so he could "get paid", but maybe didn't feel right about getting completely out of her friend's Imclone (she'd sold something like 50,000 shares a few months earlier).

Or maybe she just didn't want to be a wuss. So, she rejects his sales pitch on that one.

He, a trained salesman, would attempt to overcome her objections. If he couldn't, he'd move to a fall back position: "Well, Martha, I really think we should watch this one carefully. I just don't have a good feeling for upside potential. Let's think about a price below which we just can't hang on to it. What do you think would be a fair target?"

$60 would be logical, and it's a way for broker and client to compromise. If she bit, I can see him reaching into his desk, grabbing the first pen he feels--which turns out not to be the same pen he used earlier in the day to circle the three stocks--and writing @60 next to Imclone.

Then,a week later, when he hears about Waksal putting some of his Imclone stock up for sale, he's got his opportunity to make a few bucks commission.

In fact, he might have had a fiduciary duty to inform her, because he knows that Waksal, as a corporate insider at Imclone (which Martha is not) must file a disclosure with the SEC that he's selling stock. That's public information. If he doesn't tell Martha, then other market traders have an advantage (or not, it was trading about $75 last time I checked) over her.

It's not an easy ethical decision for the broker with two clients owning the same stock. Or so rules the Ethics Subcommittee at the FLUBA.

No comments: