Applying Theories of Crime to the Martha Stewart Case

Introduction

On December 27, 2001, two days before the Food and Drug Administration (FDA) rejected ImClone’s bid to have their flagship cancer treatment drug approved, Martha Stewart sold all her 4000 shares in the company. At the same time, the company Chief Executive sold $5 million worth of stock in the company. On the 29th of December, following the rejection, company stock dropped 16%. The sale had saved Martha Stewart close to $50,000.

The two trades drew suspicion, with the Chief Executive's case being easier to investigate and close: he was charged with insider trading and jailed for seven years. Martha Stewart's case, however, was more challenging to prove. Even so, it would become evident that she shared a broker with ImClone's Chief Executive and that he tipped her off to the Chief Executive's sale. She, therefore, had access to non-public and material information that was enough to lead to a conviction. Even so, because she was not an insider, she was charged with lying, conspiracy and obstruction of justice. This is because she had deceived investigators about her knowledge of the ImClone Chief Executive's trade. Further, because she had worked as a broker before she became a media personality, she knew that her broker should not have revealed confidential information and that she should not have acted on it.

Application of Differential Reinforcement Theory to the Case

According to differential reinforcement theory, individuals will commit a crime or desist from it depending on what rewards or punishments they have received in the past for the crime, and what rewards and punishments they anticipate in the present and future. These rewards and punishments are termed reinforcements. Rewards are positive reinforcements and serve to perpetuate the behavior while punishment is negative reinforcement and serves to terminate the behavior. Therefore, according to this theory, a person’s actions are determined by the anticipated outcomes.

Martha Stewart, herself having worked as a broker, knew that acting on insider information was illegal. Further, she lied about having knowledge of insider information to investigators. Her actions suggest her expected outcome was not a conviction or even an investigation for that matter. Martha Stewart, in accordance with reinforcement theory, committed her crime expecting only reward.

Application of Neutralization Theory to the Case

Neutralization theory, as posited by Sykes and Matza, suggests that offenders experience guilt and shame before committing a crime. Prior to committing a crime, however, offenders develop rationalizations for their crimes, allowing them to neutralize their potential guilt prior to breaking the law. A few tactics for rationalization are described. Denial of responsibility transfers individual control to external actors so that the offender never shoulders the guilt of their actions. Denial of injury suggests that no tangible harm was done and that the crime was victimless. Denial of the victim acknowledges that there is a victim, but does not accept their right to claim injury, sometimes even justifying the necessity of their injury. Condemning of condemners attacks the credibility of institutions of law, order and justice, as well as other influential offices and members of society. Finally, appealing to higher loyalties, invokes a higher set of moral values to justify a crime.

It is likely that Martha Stewart and her broker, in thinking about the disposal of those 4,000 shares, made the argument that 4,000 were too few to have any real impact. If anything, the nearly $50,000 they would save by making the trade was 0.007% of her estimated fortune. Her attorneys, in defending her, even put forth the same argument. They said that she was too rich to worry about a few thousand dollars, which could also be read as: a few thousand dollars is a very small amount to be making a fuss over. The small quantities of money could also have diminished the injury to the victim in Martha Stewart’s and her broker’s mind, making it a seemingly victimless crime to them.

Conclusion

While neutralization theory has its merits in explaining the Marta Stewart case, it is more likely that differential reinforcement is a better fit. The actions of both Martha Stewart and her broker suggest that neither expected to be pursued by the Securities Exchange Commission, let alone prosecuted and convicted, for their crimes.