Reference no: EM132993201

After reading the article related to the Martha Steward's case included below: By Jeremy Kahn February 9, 2004 (FORTUNE Magazine) - Whatever the nation's CEOs may think of Martha Stewart, currently on trial in Manhattan for federal securities fraud and obstructing a government investigation, they ought to be praying she beats the rap--at least on the securities fraud charge.

According to legal experts, the prosecution's case stretches the scope of securities laws in ways that threaten to muzzle all top executives. "Under the prosecution's theory you have no ability to proclaim your innocence without being subjected to potential securities fraud if you are the CEO of a company," says David Mills, a senior lecturer at Stanford Law School.

Stewart sold a quarter-million dollars' worth of stock in ImClone Systems in December 2001. Stewart says she sold because ImClone's stock price fell below $60, a level at which she and her broker had previously discussed selling. The government contends she was tipped off that her friend, ImClone CEO Sam Waksal, was selling, and later conspired with her broker to alter documents to back up her claim. That's why federal prosecutors have accused her of obstruction, charges to which she has pleaded innocent.

But instead of trying Stewart for insider trading, the government has hit her with a securities fraud count, arguing that her allegedly false public claims of innocence misled investors in Martha Stewart Living Omnimedia. Never before has a CEO been accused of securities fraud for material misstatements about personal facts, says Jennifer Arlen, a New York University law professor.

The government's securities fraud case hinges on the idea that investors regarded the value of Martha Stewart Living as inextricably bound to Stewart's personal reputation. Arlen says the same theory could be applied to any superstar CEO or high-flying executive whose talents are seen as closely linked to a company's success. "If the government wins," says Eugene Goldman, a lawyer at McDermott Will & Emery in Washington, D.C., and a former senior counsel in the SEC's enforcement division, "the ability to proclaim your innocence gets watered down." Stanford's Mills notes that this seems an especially perverse application of the law in a justice system in which people are innocent until proven guilty.

Problem 1: Which raises the question: Why did the government bring this case in the first place? It may have wanted some leverage to force Stewart into a plea bargain (obstruction charges carry a maximum sentence of five years, while the securities fraud count carries a potential ten-year sentence). Also, some studies have shown that adding more serious charges increases the chances that a jury will convict on a lesser charge.

Problem 2: What's more, for the government, looking to come down hard on corporate crime, there is no doubt that the image of Stewart in court makes for good TV. Too bad it also doesn't make for good law.