TCS Daily

Run Away, Jury

By Stephen Bainbridge - March 1, 2004 12:00 AM

The government's case against Martha Stewart is going to the jury this week. As I'm sure you know by now, Stewart was a close friend of Samuel Waksal, former CEO of ImClone. According to the government, Waksal learned that the FDA had refused to approve ImClone's cancer drug Erbitux, after which Waksal dumped his ImClone shares and tipped off his father and daughter, who dumped their shares. (Ironically, some months after Waksal pled guilty to insider trading, the FDA approved Erbitux.)

Nobody claims that Waksal told Stewart Erbitux had been denied approval. Instead, according to the government, Stewart's broker Peter Bacanovic told Stewart -- via his assistant, Douglas Faneuil -- that Waksal was dumping his shares. In any case, Stewart did sell all her ImClone shares. When the SEC and federal prosecutors investigated, Stewart claimed that she and Bacanovic had a prearranged plan to sell ImClone if the price fell below $60 per share. (Indeed, she set up a web site to publicize her protestations of innocence. For a very funny parody of Stewart's site, check out

The government disbelieved Stewart's $60 story. Instead of indicting Stewart for insider trading, however, the government prosecuted her for obstructing justice by lying to federal prosecutors and for securities fraud in misleading Martha Stewart Omnimedia (MSO) shareholders by her public denials of guilt. (The SEC has brought a civil insider trading claim against Stewart. On my blog, I've explained why that claim is a very aggressive -- and dubious -- extension of existing insider trading law. The Justice Department apparently agrees, as prosecutors explained that indicting Stewart on insider trading charges would be an "unprecedented" expansion of the law.)

The presiding judge dismissed the securities fraud claim last week. The false statement and obstruction of justice charges, however, will go to the jury.

The remaining counts against Stewart thus include: (1) conspiracy to obstruct justice, make false statements, and commit perjury in violation of 18 U.S.C. § 371; (2) making false statements in violation of 18 U.S.C. § 1001; and (3) obstruction of justice in violation of 18 U.S.C. § 1505. After an exchange of blog posts, University of Iowa law professor Tung Yin convinced me that the government's allegations, if proven beyond a reasonable doubt, constitute a technical (arguably hyper-technical) violation of those provisions. Even so, as a matter of sound prosecutorial discretion, those claims never should have been brought.

The government's chief star witness, Douglas Faneuil, should not have been a very credible witness. Faneuil dramatized his performance to the point that a defense lawyer asked whether he had taken acting lessons. If you believe his version of events, Faneuil admits that he lied for months. Why should the jury take the word of an admitted liar? Especially an admitted liar who cut a deal with the prosecution and now has every incentive to sing the song written for him by the prosecutors? On top of which, he's a regular drug user who feared drug prosecution. (Admittedly, however, the press reports seem to indicate that he came across as credible to those who were in the courtroom.)

Another star witness, Mariana Pasternak, a friend of Stewart for more than 20 years, testified one day that Stewart recalled Waksal ''was selling or trying to sell his stock, that his daughter was selling or trying to sell his stock.'' She said Stewart added, ''Isn't it nice to have brokers who tell you those things?" The next day, however, it turned out that Pasternak may be a bit off-center. On cross examination, Stewart's attorney asked whether that conversation had actually taken place or if it was all in her head. Pasternak answered: "I do not know if the statement was made by Martha or if it was thought in my mind." She also said she previously told prosecutors that she was not sure about her recollection of events. Ouch.

Even if the key witnesses were credible, however, the obstruction and false statement charges are pretty pathetic. We have here a case in which is the government flung allegations at Stewart, which they ended up deciding not to charge her with. The government then prosecuted Stewart for having denied the very same allegations the government decided it couldn't prove.

Judge John Sprizzo, who is presiding over Stewart's civil case, opined from the bench that:

"I read this indictment. I tell you something ... we have seen a lot more serious obstruction cases. This is not the strongest obstruction case I have ever seen. This is not John Gotti," the judge said, according to a transcript of the pretrial hearing, referring to the notorious Mafia figure.

By bringing such weak charges the prosecution undercut the requirement that the government prove guilt beyond a reasonable doubt. Granted the 5th amendment only gives you a right to remain silent, but shouldn't you be allowed to tell the cops "I didn't do it" without getting hauled up on charges later -- especially if they end up deciding not to charge you with the underlying crime? How many times have you told a copy you didn't see that stop sign? Should you have gone to jail for doing so?

The government is asking us to believe that Martha Stewart, TV show host, corporate president and directors, and multi-millionaire risked her reputation, livelihood, and fame to avoid losing the whopping sum of $45,673 on ImClone stock. The government decided not to charge Stewart with insider trading; instead, the government decided to claim that Stewart's protestations of innocence to investigators and the public violate the law. I can understand why the government would want to hang a high profile scalp on the wall, but this is a case that never should have been brought.


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