Save Martha Stewart? Observations about Equal Justice in U.S. Insider Trading Regulation

Article excerpt

I. Introduction

Martha Stewart1 is the subject of a civil enforcement action alleging violations of U.S. securities laws and regulations governing insider trading.2 This, in and of itself, is not remarkable. Many rich and powerful people-and many others in less financially and socially advantaged situations-have been pursued and brought to account for trading securities while in possession of material, nonpublic information. In these post-Enron times,3 much of the public has become numb to the pain of new revelations of possible securities fraud, including insider trading. In this landscape, the Martha Stewart insider trading investigation (including the related insider trading proceeding) is just one of many examples.

Yet, the Martha Stewart investigation somehow seems different-out of proportion to its apparent financial magnitude.4 The human and monetary resources that have been (and continue to be) deployed by the U.S. Congress in connection with possible lawmaking, the U.S. Securities and Exchange Commission (SEC), and the U.S. Department of Justice (DOJ)5 in pursuing Martha Stewart seem vast when compared to the gross profit she made from her December 27, 2001 sale of approximately 4,000 shares of ImClone Systems Incorporated ("ImClone") common stock.6 The facts, as we now know them,7 suggest that the considerable governmental resources spent pursuing Martha Stewart result from an express decision to single her out for potential criminal prosecution or civil enforcement based on some characteristic or characteristics personal to her or to one or more groups of which she is an actual or perceived member. For example, one may conclude that she has been singled out for investigation because she is (1) a woman, (2) a member and financial supporter of the Democratic party, (3) a public figure, or (4) a combination of some or all of the foregoing-that is, a very visible and controversial female public figure with political interests adverse to those of the Bush administration.8

The selective or targeted use of government resources in investigating and bringing civil enforcement proceedings or prosecuting criminal actions is an accepted part of civil and criminal enforcement.9 Those charged with enforcing our laws must have evidence of a possible violation of those laws before they may begin the inquiry and investigation process. This type of information may be more available with respect to some people or classes of people than for others. Moreover, federal investigators have only limited resources available for use in pursuing possible violators.10 Accordingly, each prosecutor or enforcement agent must pick and choose those against whom the laws within its jurisdiction will be enforced.11 This enforcement discretion,12 while broad, is subject to statutory, regulatory, and constitutional limits in certain cases.13 Even validly exercised enforcement discretion, however, may tilt the enforcement playing field in directions that do not well serve the intended purpose of and policies underlying the applicable legal or regulatory scheme. Enforcement bias14 that does not favorably serve the intended purpose of or policies underlying the laws or regulations being enforced should be identified and eradicated.

The recent Congressional, SEC, and DOJ emphasis on securities fraud investigations, prosecutions, and civil and administrative enforcement actions (many of which include facts supporting insider trading allegations) has put U.S. insider trading regulation in the spotlight.15 In this environment, important questions about selective enforcement16 of insider trading violations remain unanswered. Among these questions is the extent to which the nature of U.S. insider trading regulation allows for selective enforcement and the introduction of enforcement bias based on the nature and composition of the enforcement body or the personal background or characteristics of the individual enforcement agents.17 This question can be answered only by reference to the structure of the applicable system of regulation and by analysis of the impact of that structure on the effective enforcement of insider trading prohibitions. …