Martha Stewart and the Law

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The New York Sun

With all the ink that has been spilled over the federal prosecution of Martha Stewart, there’s been surprisingly little attention paid to the exact nature of the federal crimes with which she has been charged.

Insider trading isn’t one of them; despite an ambitious effort, the government apparently couldn’t come up with the goods to support a criminal insider trading charge against Ms. Stewart, though the Securities and Exchange Commission is pursuing a civil suit against her.

The charge that carries the most potential prison time, by far — about 25 years, according to federal guidelines — is a securities fraud charge. That charge does not involve the ImClone stock that Ms. Stewart sold after her Merrill Lynch stockbroker’s assistant supposedly told her that ImClone’s CEO, Sam Waksal, was selling. It involves, instead, stock in Ms. Stewart’s own company, Martha Stewart Living Omnimedia, whose investors and potential investors, under the prosecution’s theory, were deceived by Mrs. Stewart’s protestations of her innocence.

The federal judge presiding over the Stewart trial, Miriam Goldman Cedarbaum, has called this count “the most problematic” and “novel” part of the government’s case. The journalist and former lawyer Guy Lesser wrote on the op-ed page of yesterday’s New York Sun that the count was a sign that Ms. Stewart was “aggressively over-indicted” in an attempt by prosecutors to pressure her to accept a plea bargain.

This count isn’t merely problematic, it’s almost comically cruel: Had Ms. Stewart not issued a statement to reassure investors in her company, she could well have faced a shareholder lawsuit for not fulfilling her duty to keep the stock price up. If this count is taken seriously, no sane CEO will ever say anything to the public, ever.

But the counts that really got our attention in the Stewart indictment are numbers three and four, in which Ms. Stewart is charged with violating Title 18 of the United States Code, Section 1001. That is the federal law that provides for a fine or up to five years in prison for anyone who “knowingly and willfully” makes any materially false statement or representation “in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States.”

The law has been on the books since 1863, but it was amended and expanded by Congress in 1934 as the New Deal required more federal disclosures. Today, Section 1001 is well known as dangerous territory by legal experts on all sides of the American political spectrum, and it may well be worth a skeptical re-examination by Congress.

“Even in our age of ever expanding federal power, the reach of this statute and the discretion it lodges in prosecutors is awesome,” wrote a veteran federal prosecutor, Solomon Wisenberg, in an article about the law. Mr. Wisenberg, a conservative who served as deputy independent counsel in the Whitewater case and who is now in private practice in Washington, wrote, “The vast majority of federal agents and attorneys are honorable people who would not intentionally abuse this statute….But the potential for abuse of this statute is great, even for normally honest people.”

His qualms were shared by a liberal Supreme Court justice, Ruth Bader Ginsburg, who, in a concurring opinion in the 1996 Supreme Court case Brogan v. United States, warned of “the sweeping generality” of Section 1001’s language.

Justice Ginsburg wrote: “The prospect remains that an overzealous prosecutor or investigator — aware that a person has committed some suspicious acts, but unable to make a criminal case — will create a crime by surprising the suspect, asking about those acts, and receiving a false denial.”

It was a remarkably sagacious warning, as that scenario that Justice Ginsburg warns of bears a certain resemblance to the one in which Ms. Stewart finds herself, with the federal prosecutors unable to make a criminal case against her for insider trading, but nonetheless finding something to charge her with.

In many cases, prosecutors will use their discretion to avoid filing such charges. It’s certainly hard to think of another case in which a person has been prosecuted for violating this section alone, without also being prosecuted for an underlying criminal act. The closest thing people seem to be able to remember is the matter of President Clinton’s secretary of housing and urban development, Henry Cisneros, who paid a $10,000 fine and pleaded guilty to lying to the FBI about the duration and amount of payments he made to a former mistress.

Justice Ginsburg wrote, “the Department of Justice has long noted its reluctance to approve §1001 indictments for simple false denials made to investigators.” For Ms. Stewart, whose celebrity may have made her a tempting target for prosecutors to overcome their traditional reluctance, it is already too late.

The New York Sun

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