FORUM

The enforcement staff of the US Securities and Exchange Commission has indicated to Martha Stewart’s lawyers that it is contemplating a civil action for injunctive relief, and possibly ancillary remedies such as disgorgement and a civil penalty of up to three times the loss she avoided by alleged insider trading in shares of ImClone Systems. Before the five Commissioners themselves vote to allow the staff to proceed, however, the SEC will give Stewart and her lawyers an opportunity to respond to its advisory. Stewart and her lawyers can attempt to demonstrate that the SEC staff has its facts, or its law - or both - wrong. They may also attack the proposed allegations as overly broad.

This procedure results in what is known as a “Wells submission," named after John A. Wells, chairman of an SEC enforcement advisory committee in the 1970s. Reputedly, Wells submissions seldom accomplish much for potential defendants, perhaps because SEC staff lawyers are extremely capable and the Commissioners tend to have a very high level of confidence in them. So some experienced SEC litigators think that Wells submissions are a waste of time.

But Wells submissions are much like the submarine races: we never know who won, the SEC staff or the putative defendant. Stewart’s case will be different. It has been high profile for some months now. If the full Commission decides not to proceed, or proceeds only for limited forms of relief, we will have a bit of empirical evidence on the efficacy of her Wells submission. And even a successful outing at the Wells submission stage may not sway the US Attorney who is investigating whether or not to prefer charges against Stewart for violating the federal false statements act and for obstruction of justice. On the other hand, if the insider trading case completely collapses, it is doubtful whether the US Attorney would proceed as a political matter.

October 22, 2002