Martha Can Breathe Easier
First Lady Martha Washington never had to worry about her husband George telling a lie. While Martha Stewart probably doesn't sleep so well, the case against her own honesty got a little less thorny heading into the Presidents Day weekend.
Stewart, the first lady of domestic perfection, got a boost on Friday when prosecutors in her obstruction trial barred the government from calling expert witnesses who would testify that her many claims of innocence amounted to a plot to mislead her own investors.
The ruling by U.S. District Judge Miriam Goldman Cedarbaum was a blow to the government, which is trying to convict Stewart of securities fraud for her alleged failure to tell the truth about her sale of
ImClone
stock in December 2001.
Thrown out was "any expert testimony on whether a reasonable investor would have considered the statements important in making an investment decision" about
Martha Stewart Living Omnimedia
(MSO)
, where Stewart was formerly CEO, Cedarbaum ruled.
"It helps Martha Stewart to the extent where you don't have a respected expert telling the jury that her statements were material," says Bruce Carton, a former
Securities and Exchange Commission
Senior Counsel and currently executive director of the Securities Class Action Services group. "They have to draw their own conclusions."
Government lawyer Karen Seymour told the court she expects to rest late next week. Stewart attorney Robert Morvillo said he would be able to estimate the length of his defense at that time. On Wednesday Morvillo said he believed Stewart's defense could range from two days to three weeks.
Like most legal analysts, Carton felt the government's securities fraud case was shaky at best.
"The securities fraud claim is a novel and weak claim, and I suspect she won't get convicted on that," says Carton.
Upon leaving the courtroom, Morvillo noted his pleasure with Cedarbaum's decision, saying, "Anytime the judge rules my way I'm pleased."
Criminal Defense Attorney Labe Richman agreed that Cedarbaum's ruling helped Stewart, but believes the government was most probably prepared for it.
"Expert testimony is often excluded when it gives a conclusion which constitutes a finding on one of the key elements of the crime," says Richman. "You are usurping the role of the jury to decide whether Martha Stewart's claims of innocence were material to a decision to buy MSO."
Instead of stock analysts and trading experts, Richman thinks the government might introduce an accounting summary of the ups and downs of Martha Stewart Living stock to show how it benefited from Stewart's statement of innocence.
But what the government really needs to swing the jury to their side, according to Richman, is a victim.
"Don't you usually put the victim on the stand? Juries like victims and where is the victim?" said Richman. "In this case, the victims are all the owners of MSO, including Martha Stewart herself when the stock went down as a result of her indictment."
Stewart and her former broker at Merrill Lynch, Peter Bacanovic, are also charged with obstruction of justice for allegedly lying about the reason behind her ImClone sale, which occurred the same day ImClone founder Sam Waksal tried to unload his own shares through Bacanovic's office.
From a sentencing perspective, securities fraud is the more serious crime, carrying a potential for 10 years. While Stewart isn't charged with insider trading, prosecutors said she propped up the stock of Martha Stewart Living and committed securities fraud with a series of statements proclaiming her innocence.
Stewart and Bacanovic said the fortuitous stock sale occurred under an informal agreement between them to dump it when it fell below $60 a share. That in fact happened on Dec. 27, 2001, the date of the sale. But prosecutors say Stewart sold when Bacanovic's assistant alerted her to Waksal's selling.
The investigation of Stewart became public in June 2002, at which time the stock was trading for more than $19. It fell sharply following word of the probe, rarely going above $10 in the ensuing months until December 2003, when it perked up on optimism Stewart might be acquitted, going as high as $13.40 on Feb. 2, 2004.
Friday's proceedings also consisted of testimony from Catherine Farmer, an FBI agent who was present when investigators interviewed Stewart about her ImClone trade on Feb. 4, 2002. Farmer was asked about a phone log that Stewart's assistant testified Tuesday was changed by her former employer.
Farmer testified that one investigator asked Stewart, "Is there a message log?"
"She said she didn't know," Farmer said, adding that her lawyer said, "If there is a log we will provide one."
Stewart lawyer Jack Tigue said the absence of a court reporter meant that Farmer's notes -- the only notes kept by the government of the meeting -- were fallible. Tigue asked Farmer, "The statement that she didn't know there was a log was not in your notes?"
"No," Farmer said.
"And you were the only one there from U.S. government there taking notes?"
"Yes," Farmer said.
The notes taken by SEC and FBI agents who interviewed Stewart and Bacanovic have become a large part of the defendant's defense strategy. Both Stewart's and Bacanovic's attorneys have been quick to point out any discrepancies between the memories of the agents who took the notes and the notes themselves.
The defense also pushed the fact that neither the Feb. 4 nor April 10, 2002, conversations between Stewart and investigators were tape recorded.
Carton, who used to perform such interviews for the SEC, said the government's procedures were standard.
"It's quite common when you talk to someone prior to testimony to call them right away to lock their story in at an early stage. And they don't tape record conversations because it is at a very early stage," says Carton.
In both meetings with Stewart, there was only one person taking notes, but Carton says the agencies always have two people take part in an interview, so one agent can corroborate the other's notes if a problem arises.
Also discussed was Marina Pasternak, Stewart's best friend and her travel companion for the Dec. 27, 2001, trip to Mexico. Farmer testified that Stewart discussed what she told her friend on the tarmac in San Antonio, where she was finally reached by Bacanovic's office and agreed to sell the ImClone shares.
Farmer said Stewart was asked by investigators what she told her friend, to which she replied, "I may have told her the reason, but I don't remember."
FBI special Agent Michael Ryan also testified briefly as to phone records from Stewart and Bacanovic's offices during the period in question. Due to the magnitude of the calls -- 3.5 million calls total -- the defense fought the government on submitting all the calls with some success.
Some of the calls that were rejected by Judge Cedarbaum might help Bacanovic and Stewart with regard to conspiracy charges against them. The judge will take the issue of telephone calls up again on Tuesday when the trial resumes.
Meanwhile, Martha Stewart Living was also sued Friday by
Kmart
(KMRT)
, one of its distributors, in an effort to amend a royalty agreement. Kmart wants to reduce the total guarantees due Martha Stewart Living this year from about $52.0 million to $47.5 million. It also wants to slash their joint advertising layouts by up to $2 million a year.
The company said it would oppose the complaint.