“A TERRIBLE IDEA”: Grundfest on terrorism futures. Stanford Law School/Linly Harris

a mannequin’s right arm and right leg protrude from filing cabinets in Joseph Grundfest’s office. Proof, he says, that he knows where the bodies are buried. A former Securities and Exchange Commissioner and former senior economist on the national Council of Economic Advisers, Grundfest, JD ’78, teaches Law School courses on capital markets and securities regulation, venture capital and fraud.

STANFORD: What can we learn from actress Winona Ryder’s shoplifting spree?

If you understand Winona’s afternoon at Saks, you understand 95 percent of what you need to know about the recent spate of corporate frauds. I take the view that Ms. Ryder did what she did because she calculated that the probability of her getting caught was sufficiently low, and that if she got caught, all she would have to do was put the cashmere back on the rack, and maybe there would be the equivalent of a parking ticket.

Now, if you think about the people who are committing some of these accounting frauds, I think they were going for the Winona Ryder calculus. They figured that the odds that they would get caught were sufficiently low, and that if they got caught, the corporation would have to pay hundreds of millions or billions on a settlement, but they themselves wouldn’t have to reach into their pockets, sell their vacation homes or impair their lifestyles as a result of their wrongful conduct.

And that’s the calculus that the legal system has to change. If you rely too heavily on punishing the corporate entity, what you’re really doing is punishing innocent shareholders and creditors of the entity, and you’re not holding accountable the people whose fingers were on the triggers.

And what’s the lesson of Martha Stewart’s upcoming insider-trading trial?

The case, I think, is driven primarily by Ms. Stewart’s behavior in the course of the government’s inquiry, where she appeared to try to cover up whatever was involved. It leads me to think that this really is a case about what I call “crimes of upholstery”—that she engaged in a bad and transparent cover-up. The irony may well be that there was nothing that she needed to cover up. It’s entirely possible that the information that was given to her by Merrill Lynch was not material nonpublic information.

In July, the Pentagon proposed, then promptly quashed, an online futures trading market to predict terrorist attacks, assassinations and coups. What’s going on here?

Even for those of us who know and love markets, it was a terrible idea. We might as well have a market in which people buy and sell futures on whether string theory is true or false. I mean, what the heck do we know about that? But it’s even worse than that, because it would be an ideal market for manipulation. Suppose you were a terrorist. If you wanted to blow up a bridge, you would try to get everybody to look everyplace else by buying the futures that would say, “No, what we’re going to do is blow up a power plant.”

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