Anything You Do Say May Be Used Against You …
Reports on the antitrust suit.
Dec. 22 2003 10:57 AM

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Damned if you do ...
Damned if you do ...

In an article in the Wall Street Journal on June 7, 2002, Martha Stewart's then-attorney, John F. Savarese, was paraphrased as explaining that Stewart sold her ImClone stock on Dec. 27, 2001, because she had a predetermined price ($60) at which she planned to sell. He also said there was "absolutely no evidence whatsoever that she spoke to Sam [Waksal], or had any information from anybody from ImClone during that week." The government alleges that Savarese's paraphrased $60 explanation was a false statement that Stewart "caused to be made" to defraud her company's shareholders and prop up the value of her Martha Stewart Living Omnimedia stock. To prove this allegation, presumably, the government will have to show not only that the $60 story was a lie but that the Journal accurately paraphrased Savarese, that Stewart "caused" him to describe the $60 agreement, and lastly (and importantly), that a reasonable investor would have regarded this explanation as having altered the "total mix" of information about MSLO's stock (materiality is a key component of securities fraud—simply proving that a statement was intentionally false and misleading isn't enough).

Five days later, on June 12, just after Sam Waksal was arrested for insider trading, Stewart released her first public statement about the trade. "In response to media inquiries," she began (in the understatement of the decade), "I want to reiterate the facts surrounding my sale of ImClone stock." She described the Bristol-Myers tender offer, then continued as follows:

For the remaining 3,928 shares, I agreed with my broker several weeks after the tender offer, at a time when the ImClone shares were trading at about $70, that, if the ImClone stock price were to fall below $60, we would sell my holdings. On December 27, I returned a call from my broker advising me that ImClone had fallen below $60. I reiterated my instructions to sell the shares. The trade was promptly executed, at $58 per share. I did not speak to Dr. Samuel Waksal regarding my sale, and did not have any nonpublic information regarding ImClone when I sold my ImClone shares. After directing my broker to sell, I placed a call to Dr. Waksal's office to inquire about ImClone. I did not reach Dr. Waksal and he did not return my call.

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This paragraph's overriding purpose was to deny that Stewart had been tipped off by Waksal—and it was written carefully. It didn't identify Bacanovic as the "broker." It didn't say that Stewart didn't have any nonpublic information about ImClone's stock (just about ImClone). It said that, when Stewart' broker called, she "reiterated her instructions to sell the shares" (the use of "reiterated" and "instructions" probably not being accidental, given that one of the affirmative defenses to insider trading is having previously given instructions to sell the stock). The government alleges that the statements pertaining to the $60 story were fraudulent, but if one allows that the agreement might have existed, nothing about the paragraph is materially false (in June 2002, congressional investigators and others harped on minor discrepancies between Stewart's and Bacanovic's accounts of the date of the agreement, but Stewart's statement about this is vague enough that it isn't materially inaccurate).

The June 12 statement concluded with two more sentences: "In placing my trade, I had no improper information. My transaction was entirely lawful." Assuming Stewart and her attorneys were tiptoeing around her having heard that Waksal was selling, "improper" was a poor word choice. Whether or not the Waksal information was illegal, it might well have been "improper." Stewart's second statement, on June 18, which reiterated that the trade was "entirely proper and lawful," replaced the word "improper" with "insider." It also added two additional assertions that the government contends were fraudulent: that the ImClone sale was "based on information that was available to the public that day" (a statement that, in a minor way, appears to contradict the assertion that Stewart sold because of a private pre-existing agreement) and that Stewart had cooperated with the U.S. attorney and SEC "fully and to the best of my ability."

It is certainly true that Stewart's June statements don't tell the whole truth about her trade. They don't mention that Stewart (allegedly) knew that Waksal was trying to sell some stock. They also don't describe the sharp decline in the stock price that morning, or the extreme volume and negative rumors, or the fact that the Erbitux decision was due in three days. Assuming Stewart and her attorneys believed that her trade was "entirely lawful," however (and past insider-trading precedent would have given them a basis for believing this, whether or not she knew about the Waksal sales), one could argue that Stewart had no duty—legal or moral—to include all thesetruths in her descriptions of the trade. Her statements were issued to deny a specific accusation and to offer an alternative explanation, not to provide a comprehensive list of every factor Stewart might have considered before deciding to sell. Assuming the alternative explanation was true, throwing Stewart in jail because she didn't also mention the other stuff is, as some have suggested, preposterous. If not telling the whole truth in all public communications is against the law, then most companies and executives in this country will soon be indicted (along with most journalists, politicians, prosecutors, pundits, doctors, lawyers, teachers, regulators, and central bankers).

Which isn't to say that, if Stewart knew about the Waksal sales, she might not have been better off just saying so. In fact, given the disastrous outcome of the proceedings, she might have been well-advised to add the following to her statement: "When my broker called, he said that ImClone was trading down sharply on high volume, that people were saying the Erbitux application was going to be rejected, and that Dr. Sam Waksal was even trying to sell some stock. I did not consider any of this inside information, and my attorneys have since assured me that my trade was entirely lawful. The sale has created an appearance of impropriety, however, and I deeply regret this. I am therefore donating the entire proceeds to charity."

Such an approach might have calmed the riot—might have. On the other hand, it might have just prompted more intense catcalling: the Queen of Propriety didn't consider learning that the CEO of the company was selling stock inside information!? It might also have been viewed as a clever way to defuse the more serious allegation, that she had been tipped off about Erbitux. And if, amid the spreading prosecutorial fever, the SEC suddenly got an urge to expand the definition of insider trading (which, in fact, is what it did), this "admission" would have been Government Exhibit A. So perhaps telling the whole truth in the June statements wouldn't have been such a good idea.

In any event, to prove that Stewart's June 12 and June 18 statements constituted securities fraud, the government will, again, have to demonstrate that they were issued with the intent to deceive investors, contained materially false and misleading facts or omissions, and, in the opinion of a reasonable investor, materially altered the total mix of information about MSLO's stock. Because the statement's primary assertions were apparently accurate, moreover—Stewart wasn't tipped about Erbitux and her trade was legal (she is innocent until proven guilty, and the U.S. attorney hasn't formally charged that the trade was illegal)—the government will presumably also have to 1) distinguish between the materiality of Stewart's correct denials and assertions and her allegedly materially false and misleading facts or omissions; and 2) prove that the latter facts or omissions alone altered the total mix of information. No wonder the trial is expected to take five to six weeks.

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