By John Byczkowski
The Cincinnati Enquirer

At 3:20 p.m. Wednesday, we all missed a chance to make a lot of money.

That's when a textile workers union reported the National Labor Relations Board had filed a complaint against Cincinnati's Cintas Corp. for unfair labor practices.

Martha Stewart

Within 20 minutes of the announcement, about 2.5 million shares of Cintas stock changed hands, driving the stock down $3.30 a share.

Had any of us known about that a few hours earlier, all it would have taken is a call to a stockbroker and we'd have hit the lottery by betting against the stock through options.

Provided, of course, we weren't caught doing it. Which brings us to Martha Stewart.

Stewart, who's made millions selling her version of better living in America, is scheduled to go on trial Jan. 20 on charges related to insider trading. She's accused of trying to cover up sales of stock she made after getting a tip about news that was sure to drive the stock's price down.

Her "crime" is small potatoes: The $45,000 she saved by selling her stock early is peanuts compared to the billions that evaporated in the Enron and WorldCom scandals.

INSIDER TRADING

The Securities Exchange Act of 1934 Section 10(b) says: "It shall be unlawful for any person, directly or indirectly by the use of any means or instrumentality of interstate commerce or of the mails, or of any national securities exchange ... to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the (Securities Exchange) Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." As a general rule under SEC regulations, "manipulative and deceptive devices" "include, among other things, the purchase or sale of a security of any issuer, on the basis of material nonpublic information about that security or issuer, in breach of a duty of trust or confidence that is owed directly, indirectly, or derivatively, to the issuer of that security or the shareholders of that issuer."

But Stewart before her arrest was a lightning rod for everything that was right and proper in American homes. Heading into trial, she remains a lightning rod, but in a different discussion - about the frequency of insider trading, the favoritism played by Wall Street, and the dubious honor of being a symbol.

"What she represents is the fact that the system by which investment opportunities come to the public has not, is not and probably won't be fair moving forward," said Nathan Bachrach, a managing partner for Financial Network Group LTD of Cincinnati. "The money business attracts greedy people. It attracts people who are looking for an easy buck," and any reforms won't change that, he said.

But why make an example of Stewart? "I think there's a lot of people out there who are very sympathetic to her," said Lou Ginocchio, a broker at A.G. Edwards in Cincinnati. "They think she's been singled out because she's a celebrity, maybe because she's a woman, maybe because she has a seat on the New York Stock Exchange, and maybe that her sins or whatever she's accused of pale in comparison to some of the other abuses that have taken place."

The Securities and Exchange Commission alleges that Stewart sold shares in drugmaker ImClone Systems Inc. in December 2001, after learning that ImClone founder Sam Waksal - a friend of Stewart's - and his family were selling their shares. The sales came just days before federal regulators would deny approval of the company's experimental cancer drug, after which ImClone stock fell more than $10 a share. Waksal pleaded guilty in October 2002 to six felony counts related to those sales.

Stewart and her broker, however, are not charged with insider trading. Stewart faces charges of conspiracy, obstruction of justice and making false statements. The SEC alleges she and her broker conspired to cover up the ImClone stock sales and lied to investigators.

That she's not charged with insider trading shows how difficult it is to prove that, said Jim Cummins, a securities law attorney with Waite Schneider Bayless & Chesley in Cincinnati. What's insider information, and what's merely confidential? This case won't help settle that question, Cummins said, in part because Stewart - if it's true she lied to investigators - gave the SEC enough rope to hang her with.

"We always tell our clients who are in situations like this: Whatever you do, tell the agencies and the enforcement people the truth," he said.

Beyond that, however, remain the questions of insider trading and preferential treatment. "Is this kind of trading of information common among broker dealers with preferred customers? I'm afraid that it is," Cummins said.

Brokers often try to ingratiate themselves to clients, particularly their richest ones, he said, and their best tool is information. "If that broker has information that may not be insider information, the broker will be tempted to yield it, even though it's confidential though not technically 'inside.' That broker will try to gain favor. It's not an uncommon occurrence," he said.

Michael Brautigam, an attorney with Gene Mesh & Associates in Cincinnati, said the Stewart case confirms the notion that brokers give some clients better treatment than others. "It raises the question of a level playing field in the market," he said. "The evidence strongly suggests that if you're a famous person who has the ear of the CEO, you don't have to play by the rules that everyone else plays by."

Brautigam said he's working on a local lawsuit where he's trying to show insider trading. "I think it's rampant in the marketplace, and I think Cincinnati is probably no better or no worse than any other city where this takes place," he said.

People who trade on insider or confidential information are essentially playing a market timing game - trying to gauge when the market will be hot or cold, and trading accordingly. That's a game that, long term, investors can't win. "When all is said and done, it never has been nor probably will it ever be the way to make money long term. It's the mirage on the horizon," said Financial Network Group's Bachrach.

That's why big, serious investors are concerned about the issues raised by the Stewart case. "We've had many conversations with prospects who are much more probing about conflicts of interest," said Tim Johnson, president of Johnson Investment Counsel Inc. of Cincinnati, which manages nearly $3 billion.

"They want firms that have no conflicts of interest, who do not sell commission-based products, who do not get any kind of kickback fees," he said. "That concern has been heightened considerably, and we're delighted people are asking those questions."

Local stockbrokers disagree that insider trading is rampant here. There may in fact be loose information floating around about Cintas, Procter & Gamble or Fifth Third Bancorp, but investors know the risks of acting on it, and it's rare when they do.

"In the New York area, insider trading was almost trendy at one point," but Cincinnati isn't trendy, said Tom Carns, a senior vice president for investment broker Morgan Stanley in Cincinnati. "I think people here abhor the thought. I don't think anyone wants any part in it. ... It's incredible the integrity of Cincinnati companies."

Declan O'Sullivan of RiverPoint Capital Management in Cincinnati said any insider trading here is "minor." The big companies are careful how they distribute information, and are so complex that one tidbit isn't likely to move the stock much.

There's greater danger, however, at smaller public companies, because they may not have such stringent controls. "The less-followed a company is by Wall Street, the greater the possibility of abuse of insider information," he said.

Many firms have tight controls on stock trading by key employees, and those restrictions have gotten tighter since the Sarbanes-Oxley Act of 2002, which enacted new controls and criminal penalties for a range of corporate misdeeds.

Johnson, for instance, is on the board of directors of Kendle International Inc., a publicly traded contract research company based in Cincinnati. Kendle restricts when officers and directors can trade the company's stock.

"There's only four times a year, for a couple weeks, that I can get in and out of that stock," he said. "Those windows are very helpful, because it totally releases you from conflict. I think that's a very responsible thing for companies to do."

Maybe 2003's stock market gains after three years of losses have eased some of the tension over these scandals. "I'm certainly delighted this last year we had a pretty significant rise in the market, which has helped everybody through this," Ginnochio said. "I think a fourth consecutive down year would not have been a good thing."

In light of these scandals, should investors change their approach? "Absolutely not," Bachrach said. The recent scandals in the mutual fund industry, for instance, don't change the fact that for many investors, mutual funds are the best way to diversify, he said.

"The investment system we have today is like what Winston Churchill said about democracy," Bachrach said. "He said it's a horrible system and it's absolutely the best one we got."