Former SEC chair on the Martha Stewart verdict

Harvey Pitt is the former chairman of the SEC, the Securities and Exchange Commission. MSNBC's Chris Matthews spoke to him last night, following the Martha Stewart verdict for his reaction, and to find out what message he thinks this conviction sends to the rest of corporate America.

CHRIS MATTHEWS, HOST: Mr. Chairman, is this a case that makes sense to you?  Does this seem like justice to you?

HARVEY PITT, FORMER SEC CHAIRMAN:  It makes absolute sense and it is justice. 

MATTHEWS:  How often does the SEC go so far as to threaten and convict a person of prison time?  This is serious business.  Perhaps on the books, it’s up to 20 years. 

PITT:  Well, of course this was the Justice Department not the SEC.  But the lying took place before the SEC.   If you don‘t have a system in which people have to tell the truth, you kill the entire system.  The SEC would be rendered powerless if people were able to lie at will. 

MATTHEWS:  Explain in street language, if you can, you know, as Denzel Washington said in “Philadelphia,” explain it to my grandmother what did this woman do wrong?

PITT:  What this woman did wrong was she concocted a story.  The allegations are that she made up a story for her trades, she lied about it and then she tried to hide evidence. All under oath.  And the hiding of evidence, she apparently changed some documents on a computer and then ultimately switched them back.  But it was a clear indication of what her mindset was.  She didn‘t want to go to jail. 

MATTHEWS:  What do you make of this general, sort of blanket defense that “Nobody that smart makes these stupid moves?”

PITT:  That‘s the mistake, I think, that you find in every criminal case.  If that were really true there‘d be no convictions and no guilty pleas. 

MATTHEWS:  Let me talk to you about the stock market.  A very wealthy friend of mine says, “I never put money in the stock market, because the only people who make money in the stock market are people that know something you don‘t know.”   Inside trading is endemic.  The rich people, the smart people that know the market, know something is going on in some company, are the ones that make the money.  How is Martha Stewart different than anyone else who got a tip?

PITT:  She isn‘t in this particular case, although I‘m not quite as cynical about the markets.  I think there‘s a lot being done to make the markets level and fair for all investors. 

MATTHEWS:  But don‘t big shots who live in Manhattan—suppose you live in Omaha or you live in Manhattan.  And you have one guy works on the street and the other person doesn‘t work on Wall Street. 

The one who works on Wall Street hears the buzz, has cousins, has brothers, brothers-in-law, fathers-in-law who call up and say, “Guess what?  This guy has a problem here with the regulators, sell.” 

Do you think that happens a lot or just in Martha Stewart‘s case?

PITT:  No, I think it happens more frequently than anyone would like, but I don‘t think it just happened in Martha Stewart‘s case.  And I think it also happens in Omaha. 

MATTHEWS:  What is illegal?  Define the illegality if you can. What’s the borderline.  When do you cross the border into illegality in insider trading?

PITT:  If you know information that is sensitive that can move the market, that is the kind of information that would make a reasonable person like you or me decide to buy or sell a security. And it‘s not publicly known, then you violate the law if you trade while you know that information. 

MATTHEWS:  How about if you hear it from somebody and they never ask for the information.  They just walk in and say, “Guess what? Nothing, it‘s my birthday tomorrow, but you‘ve got to sell ImClone because they‘re not going to get this regulation approved.” 

PITT:  The courts in New York have called that “conscious avoidance,” and that doesn‘t work either.  You can‘t put your head in the sand.  If you know that you‘re getting information you‘re not entitled to, the fact that you didn‘t ask for it doesn‘t mean that you can then go out and trade on it. 

MATTHEWS:  How about if it‘s done by two people.  In this case, one person tells another person, that person tells you?

PITT:  That‘s also...

MATTHEWS:  Isn‘t that insider trading?

PITT:  That is insider trading and the tipees and the tippers are all liable under the law. 

MATTHEWS:  Suppose she had been caught in this mousetrap, like Bill Clinton got caught with the Paula Jones mess, and said, “Wait a minute, I made a mistake here,” called back the attorney and say, “I want to amend.” 

Suppose she realized she made a mistake in her first interviews with the prosecutors.  Could she have gone back and amended, or was it already too late?  Was there a point of no return for her when she lied the first time?

PITT:  Well, there is a point of no return.  But I think that she could have done things differently.  Of course, the best approach is either say nothing, say you‘re not going to tell people anything, or tell the truth.  But even if you have told a lie, if you immediately correct it, if you immediately show remorse over it, you can avoid prosecution. 

MATTHEWS:  In a normal case, I‘m told that she would have gotten in that kind of a situation, either the first or second instance, after either not telling the truth in the first instance, but in dealing with the original charge that if she‘d said, “All right, I‘ll pay you $200,000.  Fine, I‘ll accept that,” had her lawyers say that, she would have been all right?

PITT:  It‘s hard to say.  What she did here is very, very serious, because it goes to the integrity of the entire system.  Once she started down the path of lying, she basically poisoned the SEC‘s inquiry, and the SEC cannot allow that to happen. 

MATTHEWS:  So you see she‘s guilty as charged?

PITT:  I believe she is. 

MATTHEWS:  If you were on the jury and heard this testimony, you would have gone for conviction?

PITT:  Based on what I‘ve read and seen, yes. 

MATTHEWS:  And you‘re chairman of the SEC?  At least you were, recently.

PITT:  I was. 

MATTHEWS: Some people like Martha Stewart because she‘s a woman.  Some people say women are under attack.  I mean, Rosie O‘Donnell, for what it‘s worth, was out there claiming that today. 

Again, had this been Madame X, Mrs. Nobody, would she have gotten the same treatment?

PITT:  Absolutely.  But even if she hadn‘t, the government still would have to prove its case beyond a reasonable doubt. 

This was a very thoughtful jury.  She had a woman as a judge.  She had eight women on that jury.  She couldn‘t persuade them, and the reason was the government had a compelling case. 

MATTHEWS:  And they had two corroborating witnesses who were independent of the prosecution, and they were associated with Martha Stewart.  And she had nothing to show. 

Do you think it was important that she not testify?  Some people tell me her testimony might have been worse than her absence. 

PITT:  Well, these are judgments that only the lawyer on the scene can make, and she had a great one.  But looking at it from afar and obviously now knowing the outcome, I was surprised.  She had to defend herself, because people wanted to hear it from her own lips. 

MATTHEWS:  What will be the reaction on the market?  I think the market did OK today.  What is it going to be over the next couple of weeks?  Are regular people that go to this Schwab and other investing, and just go bet, you know, on something because they believe in it or hold on to a stock. 

Is the market going to be more reliable now as an investment?

PITT:  Well, I think this will make people realize that the government is out there trying to keep everyone honest and that no matter how powerful or how famous or rich you are, you can‘t cheat, you can‘t break the rules.  The government‘s going to go after you.  That‘s a positive. 

But beyond that, I‘m not sure that this case is going to have any great impact on any stocks other than Martha Stewart Living. 

MATTHEWS:  You deal with business people all the time.  Do you think they are generally about as honest as most people with less money?

PITT:  I think they are, and in some cases they‘re even more honest because they know what the penalties are.  That doesn‘t mean there aren‘t any bad apples.  There are in any kind of group: lawyers, consultants, newsmen.  You can always find that.  But I think businessmen generally are honest. 

Some of the problems are when greed takes over, people stop thinking that they are working for others, the shareholders of companies.  That‘s when they start to...

MATTHEWS:  The basic definition of an honest person, whether it‘s Martha Stewart or Mrs. Nobody, as I said, is if they see a stop sign out in the middle of nowhere, and nobody else is around, they stop at it.  Is that what we mean by honesty? 

But the fact that there‘s a red light there and a cop five feet away?  What is honesty in business?  The cop being there, or the willingness of people to obey the law without the cop there?

Martha Stewart‘s situation, she thought there wasn‘t a cop there. 

PITT:  I talk about this a lot, and I have to say it doesn‘t really matter why people do the right thing, as long as they do the right thing.  Some people do it because they‘re afraid.  But the most important factor is that people who believe that it‘s in their own interest will be encouraged to do the right thing, and that‘s what government has to try and do. 

MATTHEWS:  More so now, you think?

PITT:  Much more so now. 

MATTHEWS:  Great to have you on.  Harvey Pitt, former chairman of the SEC.

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