Scott Turow's Book


I was transferring Reversible Errors--excuse me, Scott Turow's Reversible Errors--from Tivo to videotape this morning, and it reminded me that the lawyer turned best-selling author had an op-ed piece in The New York Times last week explaining why we should "Cry No Tears for Martha Stewart." Turow concedes that Stewart's ImClone stock sale was not illegal but says it should have been. His argument is twofold:

1. When Stewart's broker, Peter Bacanovic, told her (through his assistant, Douglas Faneuil) that ImClone founder Sam Waksal and his family were selling their shares in the company, Stewart in effect received stolen property, since Bacanovic and Faneuil were bound by Merrill Lynch policy not to reveal that information. "She had to know she was in possession of confidential information she had no right to have," Turow writes, "and by trading on it, she was a clear accessory to the Merrill employees' misappropriation of it."

Contrary to Turow's analogy, information is not property. While Bacanovic and Faneuil violated their obligations to Merrill Lynch and to their clients, Stewart was not bound to refrain from acting on what they told her, any more than a newspaper reporter who received the same information from the same source would be obligated to keep it a secret.

2. When Stewart sold her stock, she screwed over "the poor schmo" who bought it, since he was in no position to know the Waksals were dumping their shares. "In my book," Turow writes, "that's fraud. Martha Stewart ripped her buyers off as certainly as if she'd sold them silk sheets that she knew were actually synthetic."

As the legal scholar Henry G. Manne points out in response to this argument, stocks are bought and sold anonymously by large numbers of people. If Stewart had not sold her shares, someone who had independently decided to buy ImClone would not have been any better off. (I suppose she could have tried to help such buyers by publicizing the Waksals' sales, but by Turow's logic that would have amounted to distributing stolen goods.) Stewart did not sell her stock directly to any particular person, let alone make any representations about ImClone's prospects. A stock seller usually expects the price to go down, while a buyer expects the opposite. Is it fraud in Turow's book every time a seller has better information than a buyer?

This is not to say that Stewart is a paragon of honesty. She clearly was worried that her transaction might be considered illegal, and her attempts to conceal the motivation for it led to her convictions for lying to the government and obstructing justice. But as Turow admits, Stewart's anxiety, though understandable given the inscrutability of securities law, turned out to be unjustified. Thus it's fair to say that Stewart was convicted of covering up a crime she didn't commit.

NEXT: Spirit of America

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  1. Yeah, and Turow's books aren't much better than his fuzzy logic.

  2. Jacob Sullum writes:

    While Bacanovic and Faneuil violated their obligations to Merrill Lynch and to their clients, Stewart was not bound to refrain from acting on what they told her, any more than a newspaper reporter who received the same information from the same source would be obligated to keep it a secret.

    I think you're begging the question here. What makes this true?

    Would it surprise you to learn that if I happened to find out that the back door of the Metropolitan Museum of Art was usually unlocked and unguarded between 2:00 and 2:30 a.m. Tuesday mornings, it would be perfectly legal to call the city desk of the New York Times and tell them about it, but it would be a crime to sell that information to a ring of art thieves?

    Xavier writes:

    In Martha's case, the victim would have been Merril Lynch.

    I think the company would be the victim. (Logic: Waksal had a duty to the company to keep the information confidential; by selling through Merrill, he partially disclosed that information (i.e., "something bad has happened"); Merrill employees passed on that information to Stewart who made use of it.)

  3. My understanding in this instance is that she wasn't convicted of covering up a a crime she didn't commit, she was convicted of covering up a crime with which she was never charged. "Insider trading" for non-affiliates is hard to portray, so they never charged her with it; just of the "cover-up". It would seem she is guilty of being unlikable; hope that's not the new standard!

  4. Jacob Sullum: Contrary to Turow's analogy, information is not property.

    Are you sure about that?

    I?d say that all of your ?property? only exists as information.

  5. Stewart was a broker once. Every broker knows you can't trade on information gained from "insider" knowledge.
    She knew she was breaking the law.
    That said, she should have simply done what virtually everyone else does in these cases; disgorge the profit and pay a fine. I believe this was offered to her.
    How anyone with her industry knowledge thought that fighting this made any sense is beyond belief. I suppose she could have been stupid enough to believe the trading might not have been a technical violation of the law but certainly she should have understood the probability that the trades looked suspect and would have been tough to defend in light of her personal relationship with Sam Waksal.
    What a dope.

  6. You want to repeal insider trading laws, have at it.

    But while those laws are on the books, responsible, ethical people people obey them, and pass over opportunities for greater profits in doing so. Stewart decided she didn't have to play by the rules the rest of us have to follow.

    Stewart was clearly overcharged and -sentenced, but she's still a sleaze.

  7. Turow has strongly supported limitations on political speech for years--he wants it regulated so it's "fair," and people can't spend their money to get more. Well, according to my calculations, he hit his quota of free speech in the late 90s, so we no longer need to listen to him.

  8. The misappropriation theory of insider trading doesn't logically stem from any act of congress or SEC rule, but it has been upheld by several Supreme Court cases. I think it was U.S. v. Carpenter where a WSJ columnist told his friends what stocks he was going to write about before the column was published. The friends were convicted of insider trading. If that's a crime, it's hard to see how Martha's actions would not be.

    The important thing to remember though is that the traders who bought Martha's stock were not the victims of her crime. In the Carpenter case, the defendants were only guilty because the WSJ had a policy against releasing information about reports before publication. If the WSJ had allowed its reporters to trade on unpublished information, there would have been no crime. In Martha's case, the victim would have been Merril Lynch. Oddly enough, she could still be civilly liable to contemporaneous traders, but no one thinks that rule makes any sense.

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