The Rittenhouse Review

A Philadelphia Journal of Politics, Finance, Ethics, and Culture

Friday, February 13, 2004  

Critical Ruling Goes in Publisher’s Favor

Good news today for Martha Stewart. The Associated Press reports (“Judge Blocks Testimony in Stewart’s Trial”) U.S. District Court Judge Miriam Goldman Cedarbaum blocked any expert testimony on whether investors in Martha Stewart Living Omnimedia Ltd. would have considered important Stewart’s public statements proclaiming her innocence amid an investigation of her sale of shares in ImClone Systems Inc.

The testimony, which was to have been presented by witnesses called by federal prosecutors, relates to the securities fraud charges against Stewart, the most serious and, according to many, if not most, commentators, the most specious charges at trial. (Not coincidentally, in my opinion, prosecutors have little direct and material evidence on point and will be relying largely on circumstantial evidence, some of the most important of which Judge Cedarbaum dispensed with today, and none of which has yet to be presented to the jury.)

A.P. reports:

The securities fraud count, the most serious charge against Stewart, accuses her of propping up the stock price of her own company, Martha Stewart Living Omnimedia, by claiming in 2002 that her ImClone sale was proper and that she was cooperating with authorities. […]

The ruling, issued before jurors were in the courtroom, blocks testimony on “whether a reasonable investor would have considered the statements important in making an investment decision,” the judge said.

Meanwhile, the government’s charges of conspiracy, obstruction of justice, and making false statements were badly damaged earlier this week by aggressive questioning from Stewart’s attorneys that produced testimony from prosecution witnesses Catherine Farmer, special agent at the FBI, and Helene Glotzer, an investigator with the Securities and Exchange Commission, that provide more than ample room for reasonable doubt.

Elsewhere, in an editorial published today The Wall Street Journal said, in relation to, among other things, the securities fraud charges, though before Judge Cedarbaum’s decision (“The Trials of Martha”):

From the day the indictment was handed up, we’ve thought there was something strange about prosecuting someone for obstructing justice over a crime that the government doesn’t claim happened. With every day of this trial, our doubts have only grown.

Already the government’s star witness, Doug[las] Faneuil, has admitted that Miss Stewart never asked him to lie or do anything illegal. We know too that the original premise of the investigation turned out not to be true: that ImClone CEO Sam Waksal had tipped her off about an imminent and damaging FDA report about its wonder drug Erbitux. And even in one of the most damning allegations against her -- that she altered a phone message from her broker about her shares in ImClone -- her assistant testified that Miss Stewart immediately thought better of it and ordered her to restore the message back to the original.

In other words, this is looking more and more like a case that should never have been brought. Most troubling is the accusation of securities fraud, if only because the penalties here are the most severe. The heart of the prosecution charge is that in declaring her innocence (and specifically by offering her own version of events), Miss Stewart’s intent was to “defraud and deceive” her own shareholders by “preventing a decline in the market price” of Martha Stewart Living Omnimedia.

Miss Stewart lost in court when she protested that this charge raised First Amendment concerns back in the fall. But even U.S. District Court Judge Miriam Goldman Cedarbaum, who allowed the charge to proceed, conceded that it was a “novel application of the securities laws.”

Remember, unlike other CEOs who have been put through the perp walk, Miss Stewart has not been accused of hiding expenditures off the books, inflating her earnings or raiding the corporate kitty for her personal enrichment. In fact, the stock at issue here (Martha Stewart Living) isn’t even the one she sold (ImClone). Unlike ImClone founder Sam Waksal, moreover, Miss Stewart had no fiduciary obligations to ImClone.

Notwithstanding Judge Cedarbaum, we believe Americans ought to worry about “novel applications” of securities law. That should be especially true in a case such as Miss Stewart’s, where it represents the most serious charge against her. And in an environment in which prosecutors bet that most accused CEOs will prefer a quiet settlement to a messy public fight, we ought to be careful about putting Americans in a position where a charge itself makes them afraid to defend themselves or their institutions. Even the rich and famous.

I don’t want to jump the gun, because if I do I might regret it later and I hate the taste of crow, fowl upon which I have feasted too many times, but will this be one of those cases in which the jury emerges after deliberations and says, “I’m not sure what we were here for”?

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