The criminal indictment Wednesday of Martha Stewart could send a powerful message to corporations and individuals alike about the importance of proper etiquette on Wall Street.
While other prominent individuals have been prosecuted for financial misdeeds in the past - from Ivan Boesky to Charles Keating Jr. - Ms. Stewart is the most visible person ever charged with obstruction of justice related to insider trading.
Experts say the nine-count indictment of the self-appointed Queen of Good Taste signals that no one is above the law and is part of an effort to restore confidence in a stock market marred in the past two years by a series of financial scandals.
"It sends a very strong signal [to Wall Street]," says David Beim, a finance professor at Columbia Business School in New York. Her offense, in his view, is minor. But "one of the notable features of the recent governance crisis is how few executives have been indicted."
The multimillionaire icon of tasteful living was indicted by a federal grand jury in New York on charges of securities fraud, obstruction of justice, and making false statements. She pleaded innocent to all charges. The 41-page indictment also charged Stewart's former stock broker, Peter Bacanovic, with obstruction and perjury. He too pleaded innocent to all charges.
The charges stem from her sale of 4,000 shares of ImClone Systems Inc., a biotechnology firm run by a friend. Stewart sold the stock in December 2001, just before the government released a negative decision about an ImClone drug.
Stewart has denied any wrongdoining in the case. She has long said she had an agreement with her own stockbroker to sell her shares when they reached a certain price and that she wasn't influenced by any tip from a friend. The founder of ImClone, Sam Waksal, was arrested in June of 2002 and charged with trying to sell his own shares before the information about the cancer drug became public. He has since pleaded guilty and awaits sentencing.
Since the beginning of the insider trading scandal, the probe has drawn the kleig-light attention of everyone from Congress to the "blue light special" crowd.
That's because Stewart has become a household name, known for everything from her sheets and towels at Kmart to her food shows to her upscale magazine, Martha Stewart Living.
All this means a criminal case would publicize the concept of fair play on Wall Street to an unprecedented degree.
"More than anything, the publicity about this case has created a massive following," says Chris Bebel, a former Securities and Exchange Commission lawyer, now with the Houston firm Shepherd, Smith, and Bebel. "People have seen indications the securities laws were violated, and now they expect the government agencies to step to the plate and discharge their duties to protect the public."
Besides the criminal charges, Stewart already faces possible civil charges from the Security and Exchange Commission (SEC). Protecting the public from insider trading abuses - roughly about 10 to 15 percent of the SEC's total caseload - is an important mission for the agency. Over the past three years, the SEC has brought charges involving 156 separate incidents.
"Insider trading was a major problem -and a major focus - in the late '80s and early '90s, when a lot of deals were being done. Then when the market quieted down, opportunities were not as plentiful," says James Coffman, an assistant director of the SEC's enforcement division. "Now, with the increase in financial fraud, there's been a parallel increase in insider trading."
Such lawsuits are a priority for the SEC, which is aware of the value of a high-profile arrest. "To the extent we root out examples of illegality, it helps to assure investors that the cop is on the beat," says Mr. Coffman.
Deciding whether to go ahead with either a criminal or civil case is a tough decision for the government. "The question is asked how many hours before you're in a position to seek an indictment," says Bebel. "If thousands of hours are involved, the case is generally shut down."
But he says that the high profile of the Stewart case, plus the keen interest of Congress, which held hearings about the trading, make this case different. "The government does not want to create the impression the big fish always get away," he says.
It hasn't always been that way. From the 1790s when Wall Street was a residential neighborhood, insiders traded on their knowledge. In the 1920s, all of Wall Street was largely one inside scam from the trading floor to the boardroom.
"It was just as crooked as can be imagined," says John Steele Gordon, a business historian. Then, in 1933 and 1934, Congress, in an attempt to restore investor confidence, established the SEC and gave it broad authority to prevent fraud, inside trading, and other misdeeds.
Still, there is no black and white rule over whether the government will pursue a case, says Nancy Grunberg, a former assistant SEC director of enforcement. "If a market professional is involved, it's a more serious matter and the size of the profits can be factor," says Ms. Grunberg, now a Washington partner in the law firm Venable LLP. "Certainly, the strength of the evidence is a factor as is the seriousness of the case."
In the past, most cases were settled. However, Grunberg says that recently the government has become more demanding, requiring hefty penalties.
This has led to more cases going to trial. According to some former SEC lawyers, the government generally wins a majority of the cases that go to trial, which are usually the toughest to prove.
• Staff writer Amanda Paulson contributed to this report.