Stocks Slumber While the Lawyers Party

By George Melloan

Martha Stewart got her expected sentence last week -- five months in the slammer -- for fibbing about why she sold her ImClone stock, not revealing a tip from her broker that insiders were selling. She will appeal and this long-running drama will continue. But a good many people are wondering why a small indiscretion brought down the terrible wrath of the prosecutors and court on this woman.

Indeed, if you asked for a vote from the broad public, a great many might say that Martha didn't receive justice but was a victim of injustice. She herself was not an ImClone "insider" by any definition of that term, so the Feds had to really stretch to find something to nail her with. The best they could do was "obstruction of justice," pretty far-fetched when you ask whose justice she obstructed. They also claimed that she had defrauded her company's shareholders by lying, a strange argument if you happen to notice that the prosecution itself wrecked her company.

John R. Lott Jr. of the American Enterprise Institute wrote on these pages last week that the prospective penalties "were so far out of proportion to the crimes she committed" that the case "illustrates a criminal justice system badly out of whack." But prosecutors love to sock it to big-name entrepreneurs to deter anyone else who might set out to defy their lawyerly power.

Indeed, if anyone still doubts that lawyers have moved from their control of the Congress and the statehouses to now include a mastery of corporate America, he should look again. State attorneys general have seized the tobacco industry and made it into a cartel earning rents on behalf of state treasuries. Plaintiff lawyers are milking corporations for billions with product-liability class actions. The Sarbanes-Oxley "corporate responsibility" law has arguably made the general counsels of companies more powerful than CEOs by giving the lawyers legal responsibility for minding the behavior of other executives.

There's no way of assessing with any accuracy the effects on business vitality of this ascendancy of lawyers. But it is at least an interesting coincidence that these broad-ranging constraints on the "animal spirits" that drive business have been accompanied by a stock- market slump hard to explain by any other means.

The Dow Jones Industrial average is some 300 points below where it started the year, despite a vigorous economic recovery that has created more than a million new jobs. Corporate earnings recovered sharply last year and still are on the upswing this year. Forecasters see growth into next year.

Venture capitalist firms are turning away would-be investors because there aren't enough promising start-ups to satisfy demand for this kind of risky investment. So there's plenty of liquidity out there. But why invest in the stock markets when prices are going down even as earnings are going up? Maybe the best idea is to damn the risk and latch onto a new venture before it becomes big enough to attract the attention of predators.

To a man -- or woman -- the lawyer crusaders who are beating the daylights out of corporate America claim they are doing the Lord's work. The plaintiff lawyers go before juries in chosen venues, like Alabama or Mississippi, to emote over their clients' mistreatment at the hands of greedy corporations, meanwhile pocketing a big chunk of the jury's award. The prosecutors and attorneys general going after "white-collar crime" swear that they are protecting the small investor against management greed and connivance.

There is enough truth in all this to give it some plausibility, particularly for sympathetic populists in the press. Tort lawyers do often recover damage awards for victims of wanton negligence. And prosecutors do sometimes uncover boardroom skullduggery, as evidenced by the successful prosecutions of Enron.

But lawyers themselves are not immune to base motives, whether it be a lust for political advancement by a prosecutor or attorney general, the enjoyment found by a bureaucrat in the exercise of petty regulatory powers, or the simple pleasures some trial lawyers find in making huge piles of money.

Well, America is not only a land of opportunity but a land of opportunists, so why not? But opportunists in the field of law are different from those who seek their fortunes in commerce. The rule of law is vital to the proper functioning of a democracy. If it is corrupted, the system itself is threatened.

One might ask what benefit the prosecution of Martha Stewart had for investors in the company she built, Martha Stewart Living Omnimedia. The value of their stock fell by over $400 million in eight months after she came under suspicion. MSLO stock rose last week after Ms. Stewart asked her public as she left the courthouse to show their support by continuing to patronize the company's products. Some big retailers, such as K-Mart, are sticking with MSLO brands out of recognition that Ms. Stewart's ordeal has generated sympathetic customer responses. But on the whole, MSLO, its investors and employees have been seriously damaged by the bad publicity. All this for a company whose only crime was bearing the "big name" of Martha Stewart.

Some lawyers see the danger inherent in the abuse of legal processes for private gain or to satisfy political ambitions. Lawyers charged with defending honest businesses from predatory attacks are particularly concerned about the rapacious conduct of their fellow lawyers and the extent to which judges have condoned such practices, or in some cases are suspected of collaborating with them.

But the populist arguments still have a broad appeal. Rich folks are, as ever, an easy mark, even in cases where they have built businesses through hard work and personal risks. Indeed, it would seem that these capitalists are a more frequent target than politicians who have built their careers with the fortunes of a wealthy tycoon parent or partner.

Democratic vice-presidential candidate John Edwards' success in getting his fellow rich trial lawyers to pony up for John Kerry's campaign is the latest invocation of lawyer power. Perhaps the "two Americas" he preaches about should be construed as the one he represents, powerful lawyers, and the rest of us, including the unfortunate Martha Stewart.

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Updated Media Analysis of Appalachian Law School Attack

Since the first news search was done additional news stories have been added to Nexis:

There are thus now 218 unique stories, and a total of 294 stories counting duplicates (the stories in yellow were duplicates): Excel file for general overview and specific stories. Explicit mentions of defensive gun use increase from 2 to 3 now.

Journal of Legal Studies paper on spoiled ballots during the 2000 Presidential Election

Data set from USA Today, STATA 7.0 data set

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