Dispatches From The Martha Stewart Trial

The Charges Against Martha

In January, Martha Stewart will be tried for allegedly lying about, and conspiring to cover up, the reason she sold a quarter-million dollars of ImClone stock on Dec. 27, 2001. Stewart has always asserted that she sold the stock because it fell below a “predetermined price [$60] at which she planned to sell.” The U.S. attorney, in contrast, alleges that Stewart sold because she heard that Sam Waksal, ImClone’s CEO, was trying to sell his own stock in the company. The alleged crimes, in any event, took place after the sale. In a nine-count indictment, the U.S. attorney alleges that Stewart:

  • conspired with her stockbroker, Peter Bacanovic, to obstruct justice, make false statements, and commit perjury (Count 1);
  • made false statements (Counts 3 and 4);
  • and, in so doing, obstructed justice (Count 8).

Bacanovic has been charged with the same crimes (Counts 1, 2, and 7). Unlike Stewart, he has also been charged with making and using false documents (Count 5) and perjury (Count 6).

Now that her motion to dismiss has been denied, Stewart will also be tried for a more serious and controversial charge: criminal securities fraud (Count 9). In June 2002, amid widespread speculation that Stewart had been tipped off about the Food and Drug Administration’s impending refusal to review ImClone’s cancer drug Erbitux—speculation that hit the stock of Stewart’s company, Martha Stewart Living Omnimedia, like a pipe to the forehead—Stewart issued publicly the same “predetermined price” explanation that she had already given the U.S. attorney, the FBI, the Securities and Exchange Commission, and a congressional subcommittee. Because the prosecutors believe this explanation is hogwash, they charge that, by issuing it, Stewart swindled investors in her company.

Contrary to what some have suggested, the securities fraud charge is not based on Stewart’s denial that she committed insider trading. It is based on her having gone beyond a denial to offer what the prosecution regards as a false explanation for the trade. Still, as Judge Miriam Cedarbaum observed in the Nov. 18 hearing, the charge is, at the very least, a “novel” application of securities law. Typical securities fraud cases are based on false statements about a company’s business, financial performance, or products. In this case, Stewart’s statements were not about her company but about her personal sale of stock in another company. The prosecutors argue that, because Stewart’s reputation is (or was) critical to the business of her company, reasonable investors would have viewed her explanation as having altered the “total mix” of available information about the company’s stock, and, therefore, because it was allegedly false, it would have defrauded them.

What Martha Stewart won’t be tried for (in January) is the crime that she was originally assumed to be guilty of: insider trading. The indictment repeatedly implies that Stewart committed this offense—she is said to have possessed “material nonpublic information” when she sold her stock and to have known that this information had been “misappropriated” (the two prerequisites)—but she is not charged with insider trading, perhaps because the prosecutors do not believe they can prove it beyond a reasonable doubt. Stewart has, in fact, been charged with insider trading, but by the SEC, not the U.S. attorney, and in a civil case, not a criminal one. (Civil charges require a lower burden of proof: “more likely than not” or “by clear and convincing evidence,” instead of “beyond a reasonable doubt.”) As explained in my first dispatch, the SEC will likely face a challenge in proving the charge because the type of “material nonpublic information” that Stewart allegedly possessed has not, in the past, been treated as illegal to trade on (and, arguably, was neither material nor nonpublic, according to the technical definitions of those terms).

Let me state at the outset that the prosecution’s theory is plausible. It is conceivable that, as alleged, Stewart and Bacanovic conspired to obstruct justice, fabricated the $60 agreement and other assertions, and then baldly lied to U.S. attorney, FBI, and SEC investigators; Congress; and the public to save their butts. It is also possible that Stewart and Bacanovic were tipped off about the Erbitux news and, therefore, committed the classic insider-trading crime of which they were initially suspected—and that the U.S. attorney can’t nail them for this simply because they were clever enough not to leave (or to destroy) any evidence. On the other hand, it is also plausible that Stewart committed no crimes and that, as many observers have argued, she is being prosecuted primarily because she is famous and rich—prosecuting famous, rich executives being a sure-fire way to incite riotous public support, remedy the perceived mistakes of the past (toothless regulation and/or spineless enforcement), and advance careers.

At this stage of the game, only a fraction of the evidence has been released publicly, so it would be premature to draw conclusions. What I hope to do over the next couple of weeks is analyze the evidence we do have in order to put the disputed events into context. The actions and charges that comprise United States v. Martha Stewart and Peter Bacanovic break down into three parts: the trade, the alleged coverup, and the alleged securities fraud. Drawing on the indictment, motions, available evidence, public statements, and other sources, I will try to assemble as complete and accurate a picture as possible (and where facts are disputed, I will attempt to note this). As the trial progresses and more evidence is released, this picture may change, perhaps radically.