A Bad Day for the Government
Reports on the antitrust suit.
Feb. 13 2004 11:41 PM

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Chance of conviction
Friday, Feb. 13, 2004: 22 percent
Judge Cedarbaum ruled that the prosecution cannot use experts to support the theory that Stewart's allegedly false public statements about her ImClone trade were "material," thus hurting the government's ability to prove securities fraud; the defense further damaged the credibility of the false statement charges; and Assistant U.S. Attorney Schachter lost a blustery appeal to Judge Cedarbaum about inferences that might be drawn from certain phone calls. Stewart's chances of conviction drop to 22 percent.

Friday began the way Wednesday ended: with the defense chipping away at the credibility of FBI agent Catherine Farmer's handwritten notes and "302s" (typed summaries) of unsworn, unrecorded, and untranscribed witness interviews. Peter Bacanovic attorney Richard Strassberg got Farmer to acknowledge a discrepancy between her notes and the 302 from an interview with Merrill Lynch administrator Judy Monaghan, in which the notes said "FA" (financial adviser) and the 302 said "CA" (client associate). This sounds trivial until one recalls that Bacanovic, an "FA," has been charged with a felony, in part, for allegedly saying that he took Stewart's sell order on Dec. 27, 2001, when, in fact, as he later testified, his "CA," Douglas Faneuil, took it. Stewart attorney Jack Tigue, meanwhile, observed that Farmer's notes were unclear as to who made certain statements in Stewart's Feb. 4 interview regarding the Dec. 27 Bacanovic message in Stewart's phone log: Stewart herself or her attorney John Savarese.

My recollection, Farmer said, is that Stewart said she would check to see if the message was in the phone log, and that John Savarese said, if it exists, we will provide it. [Italicized testimony is paraphrased.]Tigue then asked Farmer to confirm that Stewart's alleged statement that she "didn't know" if the Bacanovic message was in the log—one of the felony "false statements" she's charged with—doesn't appear anywhere in the agent's notes. Farmer confirmed that it did not. (After Ann Armstrong's testimony, when we learned that the original message took several days to restore, this alleged false statement took an additional hit: the Feb. 4 meeting in which Stewart supposedly said she "didn't know" came four days after she altered the message; because Armstrong might not yet have restored the message, Stewart may well not have known whether it was actually in the log. For more on the temporarily altered message, see the "Annie Incident."

Tigue finished his Farmer cross-examination by returning to his overall theme:

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Q: Is there an FBI policy against taping interviews?

A: That is my understanding.

Q: So you can't have a court reporter or a tape recorder?

A: That is my understanding.

Q: So you just have to rely on notes.

A: That is my understanding.

At the end of my previous dispatch, I ranted a bit about the outrageousness of charging someone with a felony for statements recorded only via handwritten notes. A Slatereader who is both a former prosecutor and a former journalist took issue with this, arguing that I was suggesting that, prior to the invention of the tape recorder, no event had ever been accurately recorded. I wasn't suggesting this (and am embarrassed that the dispatch could be read that way). What I was suggesting is that, in the case of a felony false statement charge, the hurdle should be higher than a single set of handwritten notes.

The defense implied today that the reason the FBI doesn't use tape recorders or court reporters is that, in Big Brother fashion, it wants to maintain control of the record: This way, forever after, the witness said what the FBI says the witness said. An FBI spokesperson I talked to said that the agency doesn't use tape recorders because: 1) with 56 regional offices, 440 satellite offices, and approximately 11,800 agents, it would be expensive (tapes require transcription and transcription is "manpower intensive"); and, 2) if the FBI did institute a recording policy, then in cases in which recording was impossible, defense attorneys would argue that its absence was significant.

Back to U.S. v. Stewart and Bacanovic: For the government, the day ended as poorly as it began. In preparation for this trial, the prosecution has allegedly reviewed records of more than 3.5 million telephone calls made over the last few years. The records, not surprisingly, cover the office phones, home phones, country home phones, cell phones, and car phones of Peter Bacanovic, Martha Stewart, Douglas Faneuil, the Waksal family members, and every other player in this drama. Telephone calls are critical to the government's "conspiracy" theory—you can't conspire without communicating—and today, the prosecution began the process of entering some of the records as evidence.

The trouble, as the government's phone-expert witness immediately testified, is that these records only reveal so much. Specifically, they reveal that a call was placed and how long it lasted but not who was speaking, what was said, or even, in some cases, whether the call went through. Complicating matters is that calls from the offices of Martha Stewart Living Omnimedia apparently register only on the company's "trunk line" number, leaving investigators with no way to tell which extension the calls originated from. In any case, to get calls admitted as evidence, the government has to draw an inference that they are relevant. The arguments began after lunch.

One of the first ones discussed was between Peter Bacanovic's office and Martha Stewart's office at 5:45 p.m. on the evening of Jan. 31, 2002, shortly after Stewart altered the message in her phone log. The argument, surprisingly, was not between Assistant U.S. Attorney Michael Schachter and the defense, but assistant U.S. Attorney Michael Schachter and Judge Cedarbaum.

Schachter: Your Honor, the inference this shows is what is on Ms. Stewart's mind. … Within minutes after altering the phone log, Ms. Stewart spoke to Mr. Bacanovic for 3.1 minutes.

Upon hearing this, we got the impression that Stewart rushed into her office, dialed frantically, and, for three minutes, yelled at Peter Bacanovic to erase his hard drive and throw all of his files out the window. Judge Cedarbaum, meanwhile, studied the phone record Schachter had given her.

Cedarbaum: Wait just a moment. This is not a call from her to Peter Bacanovic. It is a call from Peter Bacanovic to her office. Is he a mind-reader that he called at that moment? Is that what you're saying?

Schachter: Your Honor, the inference can be drawn that minutes after Ms. Stewart erased the message she talked to Mr. Bacanovic about the ImClone investigation.

Cedarbaum: Oh, please… speculation is not an inference. You are talking about the content of the message. You are inviting the jury to speculate.

Schacter: Your Honor, there are repeated inferences as to the content of this conversation.

Cedarbaum: There are no inferences. We do not know, for example, whether this call was received by Ms. Stewart or by her assistant, Ann Armstrong. Why should we have to infer? You had a witness on the stand [Ann Armstrong] you could have asked. And then we would have known whether Peter Bacanovic spoke to Ms. Stewart.

Throughout this argument, of course, the defense attorneys were standing up, champing at the bit. Gradually, however, they realized that the conversation was going better than it would if they said anything—and they managed to keep their mouths shut. Schachter eventually pointed out that the call was made to Stewart's direct line, the one she usually answers herself. Even here Judge Cedarbaum shut him down.

Cedarbaum: Assume for the moment that Mr. Bacanovic talked to Ms. Stewart on that day—what does that signify? If one of the two had said, "We didn't talk on the 31st," then that fact might conceivably have some relevance, but they didn't. Let's assume they talked. You still can't infer what they talked about.

Schachter: Your Honor, at 5:45 p.m., just after Ms. Stewart altered the message, they spoke for three minutes. We know what is on Ms. Stewart's mind, Your Honor. We believe there is an inference.

Cedarbaum (increasingly agitated): No inference about the content of that conversation can be drawn. … The evidence has to provide a basis for the inference. This does not provide a basis for ANY inference except that Mr. Bacanovic telephoned Ms. Stewart's office at 5:45 p.m. on Jan. 31st.

Schachter (sounding like a red-faced 7-year-old stomping his foot in the toy store because his mom won't buy him what he wants): Your Honor, on Jan. 31st, 2002, at 5:45 p.m., Peter Bacanovic telephoned Ms. Stewart and they spoke for three minutes. … This is minutes after Ms. Stewart alters the message and asks to speak to her attorney. … At that moment she has lots of things to be concerned about, and yet she takes the time to talk to him.

Cedarbaum (exasperated): This is not even a call PLACED by her. At best, it is a call RECEIVED by her.

Eventually, finally, Schachter gave up and moved on to another call. This call, Stewart apparently placed to her Wachtell attorney John Savarese on Jan. 31, around the time that she and Peter Bacanovic apparently spoke for 3.1 minutes. The reason Schachter wanted to highlight this call, it soon emerged, was to draw the inference that Stewart told Savarese that she altered the phone message. This was important, Schachter argued, because Savarese is a top-notch criminal defense lawyer, and, therefore, if he knew the phone message had been altered, he never would have said, "If the message exists, we'll get it to you." This, in turn, was important, Schachter argued, because it proved that Stewart had made the statement about "if it exists, we'll get it to you" in the Feb. 4 interview, not Savarese.

This brought the day full circle: Suddenly the prosecution itself seemed to be arguing that Catherine Farmer's 302 about the statements Stewart made and didn't make in her interviews was unreliable. Not only this, but Schachter seemed to be saying that the prosecution's own witnesses were unreliable: SEC attorney Helene Glotzer and Catherine Farmer both testified that it was Savarese who made the statement. The jury wasn't present for the telephone discussion, but it was still one of the prosecution's lowest moments of the trial.

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