Posted on 9-2-2004

Martha's trial is dish of the day

Edmond Warner

It is difficult to know which currently has the strongest lock on celebrity-crazed Americans' attention - the last series of Friends or the trial of Martha

Stewart. Both provide a window on a glamorous world that is the heartbeat of American aspirations. Both also hold the promise of conclusions that, while broadly predictable, will nevertheless bring forth oceans of tears and orgies of introspection.
The phenomenon that is Martha Stewart is difficult to comprehend from afar. A celebrity lifestyle guru who has managed to turn her homespun housekeeping wisdom into huge commercial success, she is perhaps a Linda Barker with noughts on. Now she is standing trial accused of obstruction of justice following an insider dealing investigation.

The sum of money involved - a couple of hundred thousand dollars - is paltry by her standards, but the reputational sums (for all concerned) are huge.

Long odds

Successful prosecutions for insider trading are rare indeed. Critics of the British authorities repeatedly carp at the failure to bring apparent abuses of the market to trial, let alone to completion. However, experience in the rest of the world - including the United States - is little better. The odds are stacked against prosecutors who have to prove receipt of inside information, of knowledge that the information is privileged, and of its wilful employment in the pursuit of financial advantage.

This is an age of intensive surveillance and of routine recording and archiving of email and telephone traffic by stockbroking firms. However, the rate of capture of insiders remains so low that even the most puritanical observer might be tempted to conclude that, in spite of billowing clouds of smoke, there is indeed no underlying fire.

It would be a sad day indeed were the puritans to admit defeat, for the markets rely on the assumption that, although information is not universally available, all transactions are based solely on that which is distributed to all. If you have privileged information, you do not trade on it. Period.

Ms Stewart's trial is a test of puritanical nerves. The prosecution has a "tame" witness, a Merrill Lynch broker involved in the transactions at issue, clearly designated the sprat to catch the celebrity mackerel. It also has copious electronic records with which it hopes to entangle the businesswoman.

Viewed from afar, and through primarily British reportage, it is hard to avoid the conclusion that Ms Stewart is staring down the barrel. But, this is not only America, it is also a trial involving a financial scandal - and an American celebrity trial at that. The prosecution will not count its chickens until they are plucked, roasted and served in a dining room fit to grace one of Ms Stewart's own lifestyle programmes.

All of which, regardless of the rights and wrongs of the case itself, is a great shame. The burden of proof in criminal fraud trials should be no greater than in any other case. Moreover, it is an indictment of the regulatory system that the pursuit of an alleged miscreant with celebrity status should assume such make-or-break status. Either she is or is not guilty.

With all the available evidence it should be a simple, clear-cut case either way. The resources poured into both prosecution and defence, though, indicate just what is at stake - and must raise concerns that what should be simple and clear-cut becomes convoluted and opaque.

Financial journalists as a breed are full of suspicion and certainly see insider trades behind every sharp share price move that precedes a piece of corporate news - and many others besides. Brokers and fund managers also have a rich seam of cynicism running through their bodies. They too see abuses of privilege behind many price movements.

Unfounded suspicions

Although for every real insider trade there is probably a multitude of unfounded suspicions, there is still enough smoke to suggest that a smouldering fire of market abuse really does exist. The combination of greed, the wide spread of prior knowledge and the lack of successful prosecutions is highly combustible. Each deal will be known in advance by the corporates themselves (from secretary up to chairman), their advisers, printers, couriers, not to mention brokers and fund managers formally taken over the "Chinese wall". That is a lot of scope for misdemeanour.

There are those who view insider trading as a victimless crime - or at least one that leaves its victims with mere financial scratches, and thus warrants little resource devoted to its pursuit. Such a lazy interpretation overlooks the ability of such fraudsters to divert very substantial sums from others through the mechanism of share price movements. Peter the investor is robbed by Paul the insider trader just as surely as if he had been a cat burglar.

We will know soon enough whether Martha Stewart is guilty as charged. Whatever the jury's verdict, its ramifications will be substantial. Either way, it feels a vain hope that the trial will leave the markets a cleaner place.