Back-Room Deals and Heads on Platters
Reports on the antitrust suit.
Jan. 26 2004 9:46 PM

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And so it begins ...
And so it begins ...

A trial that crept along at a glacial pace for a week has suddenly accelerated. By noon on Monday, 12 jurors (eight women and four men) and six alternates (four women and two men) had been seated, sworn in, given instructions, and excused until Tuesday's opening statements. Then Judge Cedarbaum ruled on four government motions—and her rulings will probably have a "chilling effect" on the rhetoric the defense team can employ in the courtroom. Specifically, Judge Cedarbaum ruled that the defense can't argue, as it has, repeatedly and effectively, since the indictment was filed last summer, that:

1. The investigation and prosecution of Martha Stewart was "selective" or otherwise "improper." On one hand, this ruling is unfair. Of course the investigation and prosecution were selective. Would the government have us believe that it reviewed every sale of ImClone stock on Dec. 27 and 28, 2001, and then determined that, of the 15million shares sold, only the hundred thousand or so sold by the Waksals and Martha Stewart appeared suspicious? Please. Even the government's claim that Stewart is not being prosecuted for who she is but for what she did seems, at one level, absurd. On the other hand, the judge's ruling was simply that the issue was a question for the court, not the jury, which seems fair.

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2. The fact that the government didn't charge Stewart or Bacanovic with insider trading shows that the government doesn't believe they committed this crime. This has been another indignant defense contention. More likely, the prosecutors didn't charge Stewart and Bacanovic with insider trading because they didn't believe they could prove it. Even this interpretation damages the alleged motive, of course: If the government can't prove the trade was illegal, it is harder to argue that Stewart and Bacanovic were desperate to cover it up.

3. Stewart is being prosecuted for asserting her innocence and exercising free speech. This is additional defense spin that is not, strictly speaking, true. As discussed in a previous dispatch, I think the securities fraud charge against Stewart is unfair and sets a troubling precedent. The charge is not, however, based on Stewart's assertion of innocence.

4. The securities fraud charge is a novel use of securities laws. Judge Cedarbaum herself described the charge this way on Nov. 18. Now, however, she has ruled (fairly, I think) that the charge's "novelty," or lack thereof, is also not an issue for the jury.

Morvillo vs. Faneuil, Round 1. Today's electrifying moment came just before lunch. After the jury had been excused, in the middle of an otherwise hair-splitting argument about whether Douglas Faneuil had waived attorney-client privilege with regard to communications with his first attorney, Jeremiah Gutman, Martha Stewart's lead attorney, Bob Morvillo, suddenly lurched out from behind the defense table and, in mid-oration, marched alone up the courtroom aisle. Bob Morvillo is described as "volcanic" in part because his temper is explosive and in part because his shape is not dissimilar to that of a mountain. So imagine a small volcano barreling up the aisle, pausing in front of Judge Cedarbaum's bench and threatening to erupt.

Morvillo related a story that Douglas Faneuil supposedly told the government last year, a story that the government subsequently passed on to the defense team: After Faneuil's first interview with the SEC on Jan. 3, 2002, Faneuil retained Jeremiah Gutman and told him that, in his interview with the SEC, he had withheld information. Upon hearing this (according to Morvillo's description of Faneuil's story), Gutman immediately advised Faneuil to come clean. Then, however, Faneuil said that Gutman learned that Merrill Lynch was negotiating a back-room deal with the government in which the firm would serve up Sam Waksal's "head on a silver platter" in exchange for the government's looking the other way with regard to Martha Stewart. In light of this development, Faneuil said, Gutman changed his tune and advised Faneuil not to tell the SEC investigators what he had withheld in the interview.

Not surprisingly, Morvillo's story hit the courtroom like a shot of espresso. A secret deal? Backroom horse-trading? The government promising Stewart for Waksal and then stabbing everyone in the back? As Morvillo returned to his seat, the scandal meter flashed red.

In reality, Faneuil's story—at least as articulated by Morvillo—is implausible. Leave aside the fact that such blatant (and high-profile) inside dealings are less common in the real world than in movies, and just focus on motives. First, in terms of prosecutorial bragging rights, one Martha Stewart head is worth a dozen Sam Waksals, so no ambitious prosecutor would make this exchange. Second, the prosecutors would have had no incentive to trade anything for Waksal until they determined that they couldn't get him any other way (and Waksal gave them a mind-boggling array of ways). Third, Merrill Lynch would have had no reason to protect Martha Stewart, Peter Bacanovic, or anyone else; the firm's conduct in this matter appears to have been exemplary.

So, rather than to suggest there is veracity to Faneuil's tale, Morvillo probably told it for a more prosaic—and relevant—reason: to lay the groundwork for his first major whack at Faneuil's credibility. Faneuil will take the stand as early as Tuesday. If, indeed, he told such a story, Morvillo will probably argue 1) that it was to fabricate a self-serving excuse for not telling the truth earlier; and therefore, 2) that, as this and other instances show, Faneuil is clearly willing to lie whenever it benefits him.

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