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Professor Douglas Branson
University of Pittsburgh School of Law
JURIST Guest Columnist

The outcome in Martha Stewart痴 ongoing insider trading imbroglio will come down to the conversations she had with Douglas Faneuil, her broker痴 assistant, on December 27, 2001. If Stewart convinces a jury that in her conversation she followed the prescription for gays in the military (泥on稚 Ask, Don稚 Tell), she may emerge unscathed.

Stewart sold 4,000 ImClone shares the day before the company announced that the Food and Drug Administration would not approve ImClone痴 Erbitux cancer drug. When the corporation issued a press release the following day, the shares fell from over $60 to the high teens, eventually trending downward to the $8 and $9 range by mid-summer.

The fly in the ointment is that Stewart shared the same broker (Peter Bacanovic) with former ImClone CEO and close Stewart personal friend Samuel Waksal. On the same day, Waksal tried to sell a large block of shares but brokers refused to process the orders. Two persons close to Waksal, including one of his daughters, were able to sell large blocks of ImClone shares, thus preserving multi-million dollar profits.

Traditionally, inside information came from 妬nside the company. The information would have been non public information about a favorable contract, a forthcoming earnings report, a soon-to-be reported write off against earnings, and so on, or here, lack of FDA approval of an important drug. Traditional inside information is distinguishable from "market information," which is information about the market for a company's shares rather than information about the company itself.

Except for a 1973 law review article, the subject of 杜arket information has not been widely discussed. In a celebrated 1975 decision, in a footnote, the Supreme Court cast a sideways glance (and somewhat of an aspersion) on the subject.

In the 1980s, of course, many securities and other professionals went to jail for trading on non-public 杜arket information, namely, that a company would be the target of a takeover bid. Takeover information, of course, pertains to the market for the company痴 shares - that demand will soon greatly exceed supply, and price will rise, rather than affairs internal to the target company itself. Regardless, courts sent arbitragers, lawyers, journalists, and others to jail in great numbers, without ever exploring the parameters of the 殿bstain [from trading] or disclose prohibition when it is based upon a defendant痴 possession of 杜arket rather than 妬nside information.

If the proof shows that an insider, or the tippee of an insider, such as the shared broker or his assistant, passed on to Stewart the news about the impending FDA announcement, Stewart is a tippee, or in the latter case a remote tippee. Even the remote tippee will have visited upon her the 殿bstain or disclose prohibition, if (1) the ultimate source of the information was an insider (presumably Waksal), and (2) in leaking the information the insider breached his duty to the company.

But what if the information relayed to Stewart was that selling activity in the stock had increased and that some significant share blocks had traded that day, and no more? Such information is non-public. It is material: a reasonable investor would want to know such 杜arket facts. Yet such information does not have a readily observable nexus with a corporate source. It is material non public 杜arket information rather than 妬nside information. Investors trade upon such information all the time, and they do so legally.

If Stewart did nothing further, other than placing a sell order, she would not have asked and Faneuil would not have told. She was free to trade.

Stewart, you say, would fill in the blanks. From the circumstances, she would deduce that the trades were by Waksal or his privies (tippees). She would have deduced further that, based upon the size of the trades, Waksal had negative information emanating from a corporate source. Based upon past conversations and knowledge, Stewart might even have deduced that the Erbitux matter had been resolved in a manner unfavorable to ImClone痴 future prospects.

Without reading Stewart痴 mind, a court cannot resolve those issues. Whether her motivation was news of significant selling activity alone, or selling by insiders coupled with the 鍍otal mix of information she had about ImClone, is impossible to resolve. It is, in fact, sheer speculation that Stewart connected the dots in such a fashion.

Perhaps, like the rest of us - and to paraphrase Oscar Wilde - Stewart can 途esist anything but temptation. If she asked, and she was told both who was selling and why they were selling, she would have crossed over the border between market and inside information and become a remote tippee.

The point is that insider trading law is murkier than the public believes. A second point is that the 殿bstain or disclose prohibition does not extend as far when the information defendant possessed was 杜arket rather than 妬nside information. How less far it extends is still an open question, but a defense of 的 didn稚 ask and he didn稚 tell could absolve Stewart. Third, even if Faneuil tells a different story, it may come down to whose version (Faneuil痴 or Stewart痴) the jury believes.

Cutting against all of this is that Stewart痴 conversation with Faneuil (who has been allowed to plead guilty to a misdemeanor in return for his cooperation with prosecutors) lasted eleven minutes. But Faneuil and Stewart could have been talking about origami, pruning the roses, or any other of the myriad subjects about which Stewart is so knowledgeable.

Douglas Branson holds the W. Edward Sell Chair in Business Law at the University of Pittsburgh and is the author of Corporate Governance (Lexis Law. Pub. 1993).

October 14, 2002


JURIST Guest Columnist Douglas Branson holds the W. Edward Sell Chair in Business Law at the University of Pittsburgh School of Law, where he teaches Corporations and Corporate Governance. Considered one of the top corporate law experts in the country, he is a prolific writer whose work has been described as the best "traditional" corporate scholarship currently being done. The most recent book on his impressive bibliography is the widely and favorably reviewed 1993 treatise, Corporate Governance.

Professor Branson's reputation as one of the country's most productive and thoughtful business law scholars has earned him an especially influential role in framing the highly prestigious American Law Institute's recommendations for corporate governance. In addition, he is considered the world's leading expert on the corporate law aspects of Alaska native corporations.

Professor Branson is a graduate of the University of Notre Dame, Northwestern University School of Law and the University of Virginia School of Law.