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Tuesday, April 29, 2003

Column: Mostly Martha

Schadenfreude is not a legal term, but perhaps it should be.

It was the word used by Martha Stewart in a recent New Yorker interview to describe the SEC’s investigation into her trading of ImClone stock. Taken from German, Schadenfreude is defined as a malicious pleasure in the misfortune of others.

What could be more legal than that? The law is all about the misfortunes of others, and it is not too much to imagine a cynical lawyer rubbing his hands with glee when he learns of new opportunities to ply his trade. Think of the proverbial “ambulance chaser” as the poster child for Schadenfreude. It was that kind of lawyer that made the poet Carl Sandburg ask: “Why does a hearse horse snicker hauling a lawyer away” – a rare instance of non-human Schadenfreude.

This “malicious pleasure” arises because the law tends to be a zero-sum game – either the plaintiff wins or the defendant does, either the kids inherit the farm or the wicked widow does, either the corporate raider takes over, or management remains in control – meaning that one party’s loss is another party’s, well, Schadenfreude.

At the time of writing, federal authorities are mulling whether to bring charges against Stewart. Because of her preternaturally perfect reputation, Stewart now finds herself at the receiving end of a lot of Schadenfreude, which, as she tells the New Yorker, is not a good thing. And, just for the record, no matter what Conan O’Brien says, Stewart never actually advised people that “a subpoena should be served with a nice appetizer.”

Schadenfreude, by the way, comes from the German Schaden (damage) plus Freude (joy). Following German grammar, it is often capitalized. Oddly enough, there is no equivalent word in English.

The Tipping Point

But I digress. Stewart’s alleged problem is insider trading – a phrase that instantly conjures up images of Gordon Gekko, the slick-haired villain from the 1987 movie Wall Street. But whereas Gekko declared “greed is good,” Stewart tends to say things like “a trellis organizer is a good thing.”

“Insider trading” actually describes two kinds of behavior. In its narrower sense, insider trading refers to trading by a corporation’s insiders, i.e., its directors, officers, and employees in their company’s stock. Such trading can be perfectly legal, provided the insider makes the necessary disclosures to the Securities and Exchange Commission.

The illegal version of insider trading is buying or selling a stock based on inside information, that is, material, nonpublic information about the security. Because that’s a mouthful, people have come to use the term “insider trading” to refer to this kind of illegal behavior.

Insider trading has a rich vocabulary. When you get “inside information” from somebody with a duty not to disclose, that’s called a tip. Most people think that there’s nothing wrong with tipping, as long as you give 15 percent.

As that last sentence reveals, “tip” is a homograph: a word with multiple meanings. It can mean the extreme end (spear tip); shifting the balance (the tipping point); revealing information (tipping one’s hand). Because we also “tip” waiters, a theory developed that the word stands for “to insure promptness.” Nope. Actually, tip comes from Middle English tippen (to touch), which is related to our “tap.” It was a slang term used by English thieves to mean “to pass from one to another,” which is strikingly similar to its use in insider trading.

The person who discloses the information is a tipper. The recipient of a tip, naturally, is a “tippee.” In the current ImClone controversy, Stewart’s former broker, Douglas Faneuil, has pleaded guilty to participating in an insider trading scheme with an “unnamed tippee.” This unnamed tippee, whoever he or she is, joins a distinguished roster of anonymous parties in criminal law, including unnamed defendants, confidential sources and unindicted co-conspirators.

Of course, there are those who would like to give a name to the unnamed tippee: Stewart’s name, to be precise. If Stewart is the tippee – and again, no charges have been brought – she would presumably be what is known as a “remote tippee” because she would have received a second-hand tip, the ultimate source of which was former ImClone C.E.O. Sam Waksal.

Fancee Phrases

The term “tippee” follows a tradition of creating legal neologisms (new words) by adding the suffix “ee” to denote the human object of an action. Somewhere in the hypothetical legal universe, tippees rub shoulders with lessees, licensees, payees, grantees, and the like – all attendees at the same cocktail party.

These words come to us via Law French – the language that dominated English courtrooms for centuries after the Norman Conquest in 1066. In Law French, the past participle was formed by adding “ee” to the ends of words. In French, the verb lesser (to lease) would take the past participle lessee (leased), which eventually came to stand for the person to whom property was leased. Meanwhile, the suffix “or” came to represent the person effecting the action; hence “lessor.”

Just like lessor and lessee, the “or/ee” constructions tend to come conveniently packaged in matched sets: bailor/bailee, mortgagor/mortgagee, employer/employee, and so on. And since the law must constantly respond to new problems, there is a seemingly endless number of new variations on the “ee” theme: asylee; discriminatee; optionee; and, of course, ee cummings.

Tried-and-true frauds

Beyond mere “tipping,” there are a variety of more exotic frauds; for example, the “pump and dump” in which a shareholder tries to “pump up” the price of a stock (by encouraging others to buy), and then “dumps” the stock at its elevated price.

Pump and dump schemes are often operated out of boiler rooms – firms of telemarketers using high pressure tactics. If you’ve ever been told that an investment is a “sure thing” or a “once in a lifetime opportunity,” then you were probably speaking to a boiler room. The general idea is to get you to buy the stock without asking too many questions.

Such tactics are best suited to a bull market. In the halcyon days of “irrational exuberance,” investors were inclined to believe every piece of good news about a stock, whether the source of the information was a broker, analyst, or a guy you just met on the bus. It was easy work for the dumper; bad news for the dumpee.

Now that the bull market is over, fraudsters are having a hard time with the pump and dump – investors are not so optimistic. For our more skeptical era, fraudsters have a different scam, the “short and distort.” That is, traders will take a “short” position (a bet that a stock will decrease in price) and then start spreading false rumors to try to make sure that the stock tanks. For the practitioners of short and distort, the only way to get rich is to make sure that the target company, and all of its shareholders, lose their shirts. Talk about Schadenfreude.

Phrases like “pump and dump” and “short and distort” reflect the law’s longstanding love of rhyming couplets. In the ancient tradition of the Anglo-Saxons, legal maxims were reduced to simple rhymes for ease of memorization. Thus, as linguist Peter Tiersma records, Old English farmers learned about the law by a rhyme: Wo so boleth myn kyn/ewerc is the calf myn, which roughly translates to “no matter who impregnates my cow, the calf is mine” – a phrase that speaks volumes about what the Anglo-Saxons did to pass the time.

To this day, trial lawyers will often come up with memorable rhymes for the jury, Johnnie Cochran’s “if it doesn’t fit, you must acquit” being only most annoying example of this technique. That sort of thing might be your cup of tea, but it’s not myn.

If the Martha Stewart saga continues, then let the above be an unofficial phrasebook for following the proceedings. Enjoy – but not to the point of Schadenfreude.

(This column originally appeared in the April 2003 issue of New York Law Journal Magazine)