Reflections on Scienter (and the Securities Fraud Case Against Martha Stewart that Never Happened)

Abstract

This paper considers what research in cognitive psychology and behavioral economics has to say about one of the basic state of mind constructs in the law of fraud: scienter. It takes a clinical approach, examining the securities fraud case that never happened against Martha Stewart. In granting a judgment of acquittal in Stewart's favor on the securities fraud charge, the court seemingly misunderstood the law of scienter, which turns on awareness rather than purpose. But that simply provides an opportunity to think about what awareness means in the context of financial transactions. From publicly available sources, interesting inferences can be drawn about what Martha Stewart was thinking (and feeling) during the events at issue.