Judge Tosses Fraud Charge Against Stewart
Updated from 12:58 p.m. EST
Judge Miriam Goldman Cedarbaum's decision to dismiss criminal securities fraud charges against Martha Stewart on Friday was bold jurisprudence with implications for her civil case, lawyers said.
The count might have been a legal long-shot, but Cedarbaum's dismissal also took the stock market off guard, igniting a short squeeze in
Martha Stewart Living
(MSO)
on the single heaviest day of trading in its public history. Shares closed up $1.43, or 10.9%, to $14.53 after touching a 52-week high of $15.25 earlier.
In the securities fraud charge, prosecutors had alleged Stewart's many claims of innocence following her now-famous sale of
ImClone Systems
stock in December 2001 amounted to a plot to boost shares of Martha Stewart Living.
Of all the charges against Martha Stewart, the securities fraud allegation was most perilous because it carried the most jail time: 10 years.
"In assessing the sufficiency of the evidence, I have concluded that no reasonable juror can find beyond a reasonable doubt that the defendant lied for the purpose of influencing the market for the securities of her own company," Judge Cedarbaum wrote. "Another way of putting it would be that in order to find the essential element of criminal intent beyond a reasonable doubt, a rational juror would have to speculate."
Cedarbaum had previously said the allegation was problematic and relied on a novel interpretation of existing law. The government's case suffered a fatal blow two weeks ago when Cedarbaum refused to let expert witnesses testify on the matter.
Legal observers said Cedarbaum's ruling was daring this late in the trial.
"It took a lot of guts for the judge to dismiss that count at this stage of the proceedings," says defense attorney Labe Richman. "Most judges would have waited for the jury to reach the issue so as to avoid a decision against the government and to protect the government's right to appeal."
Now, no appeal of the fraud count is possible, since double jeopardy would forbid a second trial, and that's the only possible relief when a judge dismisses a charge. The ruling could also affect civil litigation against the company itself, as most of the class-action suits Martha Stewart Living faced were predicated on the fraud charge.
In essence, the government was arguing that Stewart knew her prosecution would be a media circus that could hurt the stock of the company she founded.
"While the government has presented evidence about Stewart's financial stake in Martha Stewart Living Omnimedia and her awareness that her own reputation was crucial to the company, the government has offered no evidence that Stewart evinced a concern for the price of MSLO stock at any time during the relevant period," Cedarbaum wrote.
"Indeed, the only evidence that executives at MSLO were concerned about the negative publicity came from
CFO Gregory Blatt, who spoke specifically of the questions from MSLO's advertisers, business partners, and the consumers of MSLO's partners," she wrote.
Stewart and her former
Merrill Lynch
broker, Peter Bacanovic, still face charges of obstruction of justice and making false statements, counts that carry potential five-year prison terms. They are charged with making up a story to explain away Stewart's sale of about 4,000 shares of ImClone on Dec. 27, 2001, one day before a regulatory setback routed the shares.
Volume in Martha Stewart Living was 6.6 million shares Friday, eclipsing the 5.8 million shares the stock traded on June 4, 2003, when criminal charges emerged against then-CEO Stewart. Shares of
Kmart
(KMRT)
, which distributes a line of Stewart-branded products, rose $1, or 3.5%, to $30.
Closing arguments in the case are scheduled for Monday and Tuesday of next week.