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Article published Thursday, March 11, 2004, p. A15 in Investors' Business Daily.

"Sentencing Fairness" Rules Backfired in Martha's Case

By John R. Lott Jr.

Martha Stewart is going to prison. Stewart's conviction reaffirms the old adage that the cover up is frequently worse than the crime.  Investigators depend on the people they interview not lying to them, so the guilty verdict is only reasonable. 

Yet, the penalties Stewart faces are out of all proportion to the crimes she committed.

The U.S. Sentencing Guidelines leave Judge Miriam Cedarbaum little discretion in determining how long Stewart will spend in prison.  Stewart probably faces between 10 and 18 months in jail for the four counts she was convicted of.  Such narrow ranges were set up to promote "fairness."

Prior to the guidelines in November 1987, judges could sentence two criminals who had committed the same crime to vastly different sentences.  For example, if the guidelines weren't in place, Judge Cedarbaum could even let Stewart off with simple probation.

Stern Justice
While well-intentioned, not allowing judges much discretion unfortunately has had the opposite effect -- making penalties less, not more, equal.  The reason is simple: the justice system imposes many types of penalties on criminals, but the sentencing guidelines only make sure that the prison sentences are equal.

Beyond prison, criminals can face fines and restitution, both of which largely depend on the criminal's wealth.  In Stewart's case, criminal fines can reach $250,000 while her restitution and the penalties from civil actions (both from the Securities and Exchange Commission and shareholder suits) could be enormous. 

Other so-called "collateral" penalties that affect many white-collar criminals include the loss of business or professional licenses or the ability to serve on a publicly traded company's board of directors.

Even equal length prison terms do not result in equal penalties.  Stewart will also be forced to give up the $1.5 million per year she makes as President of Martha Stewart Living. 

Market Message
But that is only a small part of the impact of the prison sentence because of Stewart's overwhelming importance to the company.  On Friday the stock soared from $13.70 to as high as $17 as news reports speculated that some type of deal had been struck limiting her prison sentence, only to see the stock then plunge to $10.50 by the end of the day after Stewart had been convicted of all four counts. 

Stewart's conviction changed the company's value of over $320 million just between the day's high and low.  Sine the high price was based only on rumors that there was a deal, the stock's value would surely have gone higher had she been found innocent.  Thus these numbers only represent a lower bound of the cost of her conviction.

As Stewart owns 63 percent of the company, she personally suffered a loss of $203 million on Friday.  The other shareholders bore the rest of this loss, but they will soon file civil suits against Stewart forcing her to cover their losses.

By contrast, compare the penalties Stewart faces to those of, say, a drug dealer convicted of the same crimes of giving false information to investigators.   The dealer would face the same possible prison sentence. 

But without any discernable assets, there would be no fines or restitution or much lost legitimate earnings while in prison.  There would be no loss in stock value or lost business licenses.  If he received a public defender, he would even avoid paying any attorney's fees.

How can these two vastly different penalties for lying to federal investigators be considered comparable?  Fairness would seem to be that if two people commit the same crime they should face the same penalty. 

Yet, Stewart's total financial penalty can easily amount to over $300 million dollars, while the drug dealer faces a negligible additional penalty on top of imprisonment.

Prior to the guidelines, what seemed like disparate penalties for the same crime were really not.  Judges were not as arbitrary as it might have appeared and they took into account these different penalties and make some adjustments to prison sentence lengths. 

Sentencing Difference
Everything else being equal, convicted criminals facing greater collateral penalties were given somewhat shorter prison sentences.

Defendants such as Stewart partially offset these much higher penalties with highly skilled lawyers, but this by no means levels the field.  Just as with taxes, the wealthy pay much more for committing crime.  It may also explain why white-collar crimes, while frequently talked about, are actually quite rare.

* John Lott, a resident scholar at the American Enterprise Institute, was chief economist at the U.S. Sentencing Commission for 1988 and 1989.


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