More Than Stewart's Sale Could Be Off

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If you get a call from a broker telling you to sell a stock, you are not deemed an insider.

That's where Martha Stewart was before she started what now looks like a ridiculous stop-loss charade with Peter Bacanovic, the recently suspended Merrill broker.

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SEC Mulls Civil Action Vs. ImClone

Stewart had claimed that she sold shares of ImClone (IMCL - commentary - Cramer's Take) on a stop-loss order one day before the company announced the Food and Drug Administration rejected its application for cancer drug Erbitux. But former CEO (and close friend of Stewart's) Sam Waksal is under arrest for insider trading during the same period, and for tipping off family members. A story in this morning's Wall Street Journal casts doubt that Stewart had a stop-loss order in on the stock at that time. That's not good.

That makes it look like the stop-loss order claim was a charade, and it puts Martha in huge trouble, so much trouble that I think Martha Stewart Omnimedia (MSO - commentary - Cramer's Take) could turn out to be an interesting short here.

As is often the case, it is what you do after the regulators call that matters. Had Stewart simply said "I sold ImClone at the suggestion of my broker," you could imagine that she might have sold it because of:

1. the technical breakdown of the stock
2. biotech analyst Hecht's misgivings
3. lots of public reports that the drug might not have worked

Any one of those reasons would have washed with the regulators. But now it looks like a fourth didn't exist until after the regulators called, so now the turmoil begins.

How unfortunate.

This isn't the first time we have seen something like this since the witch hunt began. The reason Arthur Andersen went down so fast is that it shredded documents after the feds called. The Andersen people knew, as anyone who is a pro in this business is supposed to know, that once the feds have called, they own you until they tell you otherwise. You may think it is unfair, but your time is now their time until you are dismissed. Lots of powerful people don't seem to understand this, and I think it is because either they have crummy lawyers or evil intent, one or the other.

So, as the witch hunt continues, remember this: When called, freeze and stop talking, or, freeze and show them everything. But don't make stuff up; you always will be caught.

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James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS by clicking here. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to [e-mail]. Click here to get Cramer's book, "Confessions of a Street Addict."