- things look pretty darn bleak for Martha, right? Actually, no. First of all, barring new revelations, it’s unlikely that any criminal charges will stick. If the SEC forces her to step down as CEO of Martha Stewart Living Omnimedia, she’ll still control it because she owns 62% of the stock. And the company is holding up surprisingly well. Even if Martha ends up in prison, her business is unlikely to be in jeopardy.
Of course, if the government flips another key witness and strengthens its case, Martha may indeed do time. But so far the government’s case looks weak, say many securities lawyers who are watching the proceedings closely. “Is she going to jail? My gut feeling is no,” says Howard Meyers, a partner at Meyers & Heim and a former enforcement attorney with the SEC.
Like one of Martha’s infamous 22-step sugar-cookie recipes, the government’s attempts to build an insider-trading case against Stewart are complicated. That’s partly because the feds would be venturing into uncharted territory of securities law. Typically, insider-trading cases involve a high-ranking person inside a firm who uses nonpublic information, such as knowledge of an upcoming merger or product development, to buy or sell stock. For instance, ImClone CEO Samuel Waksal pleaded guilty in October to charges of trying to dump his shares–and getting his father and daughter to do the same–after he became aware that regulators were going to turn down his firm’s application for its cancer-fighting drug.
That is a classic insider-trading case. Stewart’s is different. Regulators are arguing that Stewart knew that company insiders–Waksal and members of his family–were selling and that this constitutes insider trading. “Knowledge that another insider was selling has never been the basis for an insider-trading case,” notes Seth Taube, chair of securities litigation at McCarter & English and a former branch chief of enforcement at the New York regional office of the SEC. Prosecutors need to prove not only that Martha knew insiders were selling but also that she was aware that the information wasn’t public. They also have to prove that she knew her Merrill Lynch broker, Peter Bacanovic, or his assistant, Douglas Faneuil, were breaching their duty to their clients and their employer by giving her the information. (Prosecutors will argue that Martha knew the latter because she used to be a stockbroker herself.)
As my brother said, whether or not there are many people who trust Martha personally, there are an awful lot who trust her taste and that is what her company sells.