Dueling Ink Guys
Reports on the antitrust suit.
Feb. 23 2004 11:59 PM


Today's Martha Meter reading: 32 percent

Chance of conviction
Monday, Feb. 23, 2004: 30 percent
A defense witness recalled Bacanovic's intention to get Stewart to sell her ImClone if it ever fell to $60, and the defense's ink guy was credible. Stewart's chances of conviction drop slightly, to 30 percent (Bacanovic's remain significantly higher).

As expected, when the prosecution rested, the defense filed motions requesting that the entire case be dismissed. The government, meanwhile, cited "overwhelming evidence that the defendants committed [all] the crimes charged" and offered to strike only one overt act from the conspiracy charge. In the oral arguments on the subject, Judge Cedarbaum seemed tempted to dismiss the securities fraud charge—the most serious Martha Stewart faces—as well as some of the false-statement specifications. She confirmed, however, that at least some of the case will go to the jury.

Regardless of how Judge Cedarbaum rules, Peter Bacanovic's defense team burst out of the starting blocks late Friday afternoon. The first witness was another longtime Bacanovic client, a California entrepreneur whose wealth apparently rivals that of Stewart's. Kenneth Rainin testified that Bacanovic had always been meticulous, honest, and dependable and that he was testifying for him because it was "the right thing to do." Rainin said Bacanovic had never told him what another client was doing—or even who his other clients were—and that, if he had, he'd have fired him. He also articulated the difference between "stop-loss orders," "limit orders," and "target prices," and said that, although he and Bacanovic often used target prices, they never used limit or stop-loss orders. (During prior testimony, the government successfully created the impression that such distinctions were a pathetic defense attempt to bamboozle the jury with technicalities.)


This morning's first witness was Jeremiah Gutman, the octogenarian civil rights attorney who acted as Douglas Faneuil's first counsel. Gutman looks like a cross between Yoda and Sigmund Freud: His scrawniness made the witness chair seem as big as a throne. According to Faneuil, remember, Gutman described a "secret deal" that Merrill Lynch was negotiating with the government in which Merrill would deliver Sam Waksal's head in return for the government not laying a finger on Martha Stewart (see Back-Room Deals and Heads on Platters). The defense, presumably, was hoping that Gutman would cackle at the absurdity of this Faneuil claim (Gutman had rebuffed all interview attempts), but he didn't. He testified, in fact, that he had told Faneuil "something like that."

The "secret deal" Gutman described amounted to a conversation with Merrill attorney David Marcus in which Marcus said he was "working something out with the government by which the whole investigation would go away and that there would be nothing to worry about." This is more plausible than the conspiracy-theory horse-trading that Faneuil described, and if the defense extracts any benefit from Gutman it will be to suggest that Douglas Faneuil leads a vivid fantasy life (a suggestion far more persuasive than that he's lying because he doesn't want to be prosecuted on drug charges).

The dramatic highlight of the day (if not the legal highlight) was the testimony of Dr. Albert H. Lyter, III, aka, the defense's ink expert. The prosecution's ink expert, remember, was the "national ink expert" Larry Stewart, who testified last week that the "@60" entry on Bacanovic's allegedly altered worksheet was written with a different ink than all the other entries on the page ("entries," not "marks"), thus bolstering the prosecution's theory that Bacanovic forged the "@60" as false corroboration for the $60 story. Stewart also testified that the mysterious dash in the upper right corner next to Apple Computer might or might not be the same ink as the "@60" and that using a "densitometer" to attempt to distinguish between different batches of ink was akin to measuring out baking ingredients by weighing them on a bathroom scale.

Last week, when Larry Stewart described his résumé, it seemed inconceivable that anyone could be more qualified—masters degrees in forensic science, decades in government labs, the largest ink collection in the world, etc.—but Albert Lyter, it turns out, meets that bar. Lyter doesn't just have masters degrees: He has a Ph.D. He, too, has published articles. He, too, is a member of prestigious-sounding ink societies. He, too, was a government ink guru: In fact, he was manning the government's ink lab back when Larry Stewart was a summer intern. (We "instructed" him, Lyter said casually, when asked to describe their interactions, as if Stewart had been little more than a warehouse laborer. "[W]e would also give him various projects to work on.")

All confrontations are better face to face, and while his former boss and mentor testified, Larry Stewart was not back in his lab, but on the government's bench in the rear of the courtroom. Lyter believes that densitometers can be used to distinguish between ink batches—the same process that Larry Stewart denigrated as the height of quackery. Throughout the cross-examination, therefore, as Lyter defended the densitometer practice (and, thereby, cast implied aspersions on the national ink expert), handwritten notes emanating from Larry Stewart's bench were walked forward and placed on the lectern beside prosecutor William Burck for use in the interrogation.

Ultimately, the densitometer debate didn't matter much (whether or not Bacanovic used one, two, or more Paper Mate pens while making the bulk of the entries on the page is less important than why the ink in the "@60" mark and the dash is altogether different from that of the other marks). As expected, Lyter testified that the "@60" and the dash—the dash that Larry Stewart did not initially test—were written in the same ink. In last week's dispatch, I speculated that the defense might say that this was because Bacanovic had made the "@60" mark while selling Apple and Nokia a few days after the initial selling discussion. I still think the defense might say this. Upon further reflection, I also think I know what the government might say.

Suppose that you wanted to fabricate corroborative evidence for a bogus $60 sale agreement. Suppose that, when you examined a worksheet you had used in a portfolio discussion a month earlier, you saw dozens of handwritten notes, checks, circles, and marks. Suppose that it occurred to you that one way to forge corroboration would be to make a simple notation after the stock: "@60." Would you just pick up your pen and add the "@60"? No. You would first make sure that the ink used to make your new mark looked enough like the old marks that no one would get suspicious. How would you do this? You would make another mark, somewhere else on the page, far from the area where you want to forge your notation but close enough to an existing mark that you could easily compare them. And once you had confirmed that they looked similar, you would confidently jot down your "@60" and march the document into your boss's office as proof of your alleged agreement. This, I imagine, is what the government is going to say Peter Bacanovic did.

The day's last witness, Heidi DeLuca, helped the defense. As a Martha Stewart Living Omnimedia administrative manager—a job that, strangely, seems to consist mainly of handling Stewart's private financial affairs—DeLuca participated in much of the back and forth with Bacanovic's office during the Stewart ImClone and tax-loss selling discussions. She testified that, in late October, when ImClone's stock seemed to be acting poorly, she expressed her concern to Bacanovic, and he agreed to speak to Stewart and try to get her to put a floor on the stock at $60-$61 (i.e., to agree to sell if the stock dropped below this price). The alleged $60 agreement is the single most critical fact in this case, and DeLuca's recollection seems to show not only that Bacanovic felt that $60 was the right exit level, but that he planned to talk to Stewart about it.

Henry Blodget is the founder, editor, and CEO of Business Insider. Follow him on Twitter.