Morvillo's Faneuil Solution and Armstrong's Tears
Reports on the antitrust suit.
Feb. 10 2004 11:42 AM

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Today's Martha Meter reading: 30 percent

Chance of conviction
Monday, Feb. 9: 30 percent
Based on Bob Morvillo's effective cross-examination of Douglas Faneuil, as well as Martha Stewart's assistant's tearful breakdown on the stand, Stewart's chances of conviction drop to 30 percent.

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It wasn't that Bob Morvillo destroyed Douglas Faneuil on the stand on Monday—he didn't. It wasn't that he found a new motive to suggest that Faneuil was lying—he didn't. It wasn't even that he seriously undermined Faneuil's credibility—he didn't. It was more that Morvillo, unlike David Apfel, found ways to make Faneuil look like what he is: a 28 year-old former stockbroker's assistant who may be well-meaning and charming but who doesn't really know what, if anything, Martha Stewart, did wrong.

Morvillo: Spotlighting Faneuil's weakness
Morvillo: Spotlighting Faneuil's weakness

Morvillo came off as tough but nicer and fairer than David Apfel (ironic, according to someone who has worked with the two men). He didn't bully Faneuil, and he saved his indignation for when he needed it. He listened to Faneuil's answers and considered them before continuing—a canny response to Faneuil's own thoughtfulness. He often paused for seconds at a time, letting the silence generate tension that no question could have (What is he going to ask next? What is he going to ask next?) As Morvillo knows, Faneuil is more dangerous to Peter Bacanovic than to Martha Stewart, and, by the end of Morvillo's cross-examination, the jury knew this, too.

Morvillo grouped his questions into series, each of which had a message. The message was usually left unsaid, but still resounded through the courtroom.

1. On Martha Stewart's role in the alleged conspiracy [Note: All italicized testimony is paraphrased]:

Q: Did you ever speak to Martha Stewart about the agreement you had with Peter Bacanovic to commit a crime?

A: No.

Q: You were never asked by Martha Stewart to tell a lie?

A: Correct.

Q: You were never threatened by Martha Stewart?

A: Correct.

Q: You were never personally intimidated? ...

A: No.

Message: If there was a conspiracy, Martha Stewart had nothing to do with it.

2. With regard to Dec. 27, 2001, which Morvillo postulated was a "very hectic day," Morvillo led Faneuil through all the calls and conversations he had had, between 75 and 100 by Morvillo's count:

  • Aliza Waksal (two or three calls),
  • Elana Waksal (two or more calls),
  • Sam Waksal's accountant (30 calls, plus faxes),
  • Merrill employees in Hopewell, N.J. (a handful of calls),
  • Merrill administration and compliance people (two in-person conversations, one call),
  • Peter Bacanovic (five to six calls),
  • Merrill's credit administration risk desk (one call),
  • the office of general counsel at ImClone (one call), and
  • other Peter Bacanovic clients (unspecified number of calls).

Message: For Douglas Faneuil, Dec. 27, 2001, was beyond hectic: It was insane.

3. On Faneuil's most important call of Dec. 27, 2001, a two-minute call from the San Antonio airport:

Q: When you talked to Ms. Stewart, you had lots of information about the Waksals.

A: Correct.

Q: How much of the information that you had about the Waksals did you NOT pass on to Ms. Stewart? Most of the information?

A: I would say I did not pass on all of the information.

Q: You didn't tell Ms. Stewart about your conversations with Elana Waksal, did you?

A: I can't recall telling her that.

Q: You didn't tell her about how Sam Waksal was trying to transfer shares to Aliza?

A: Correct.

Q: Did you tell Ms. Stewart how many shares Sam Waksal had in his Merrill Lynch account?

A: No.

Q: You didn't give her the exact number of her shares?

A: Correct.

Q: So, from Ms. Stewart's perspective, it could have been 5 or 5 million?

A: I don't think that's fair.

Q: So Ms. Stewart knew the precise number of shares owned by Sam Waksal?

A: No.

Message: For all Martha Stewart knew, Sam Waksal was trying to sell an immaterial number of shares, so this couldn't possibly have been material, nonpublic information.

4. On the most important point about Faneuil's Dec. 27, 2001, call with Martha Stewart:

Q: You recall the entirety of the conversation or just part of it?

A: I would say I recall most of the conversation.

Q: Were there things in the conversation that you don't recall?

A: I don't think so.

Q: You recall that conversation verbatim? Word-for-word?

["Verbatim" and "Word-for-word" were drawn out as if they were sentences, to highlight their absurdity].

A: Almost word for word.

Q: And in order?!

[And there are cows on Mars?!]

A: I'm not sure I understand the question.

Q: You recall the precise order in which the words were spoken on the phone that day?

A: Correct.

Q: Your recollection is so precise that you can recall the exact words?

A: I don't remember the exact words.

Message: Faneuil's conversation with Martha Stewart was one of 75 or more he had that day—and he says he remembers it almost word for word. Even he, however—he, Douglas Faneuil, of the elephantine memory—admits he doesn't remember the exact words. The exact words matter, and Faneuil admits he can't recall them.

5. On Faneuil's integrity—a subject that, Morvillo astutely observed, is a source of great pride to Faneuil:

Q: On Dec. 27, 2001, did you think that the Waksals engaged in insider trading?

A: I would have to say yes.

Q: When did it dawn on you that the Waksals had engaged in insider trading?

A: I didn't think about it too hard, but I had a sense that something not entirely proper was going on.

Q: Did you tell Peter Bacanovic that you were concerned that the Waksals had engaged in insider trading?

A: No.

Q: Did you tell [Merrill administrator] Julie Perez?

A: No.

Q: Did you tell the loan desk at Merrill Lynch?

A: No.

Q: Did you tell anyone at Merrill's offices in Hopewell, N.J.?

A: No.

Q: Did you think it was your responsibility to tell Merrill Lynch that one of their clients might be breaking the law?

[Your "responsibility … "Morvillo let that word sink in.]

A: I was telling Peter when he said "Oh my God, get Martha on the phone."

Q: Did you tell Peter that you had a suspicion that the Waksals were trading on insider information?

A: No.

Q: Had you read Merrill Lynch's compliance manual?

A: Yes.

Q: And did you know that the issue of insider trading is addressed in the compliance manual?

A: Yes.

Q: [Morvillo reads:] "About insider trading … if you are concerned that a client is trading on improper information, ask the client if the client has information that is material and nonpublic, and if the answer is 'yes', then decline the order." Did you remember that on Dec. 27?

A: Not specifically.

Q: Did you discuss your concerns that the Waksals had material, nonpublic information with [Sam Waksal's accountant]?

A: No.

Q: Did you ask [Sam Waksal's accountant] a question that would satisfy your suspicions that Sam Waksal had material, nonpublic information?

A: No.

Q: Did you ask Aliza Waksal?

A: No.

Q: Elana Waksal?

A: No.  

Message: You, Douglas Faneuil, had ample opportunities to protect the integrity of yourself, your boss, your boss's clients, and your firm on Dec. 27, 2001—and you squandered them. With each answer, Faneuil sounded more and more ashamed, his voice softer and softer. This, it turns out, was how you rattled Faneuil … you suggested that he had not lived up to his towering sense of integrity in a situation in which he has not yet admitted, even to himself, that he did not live up to it.

6. On Faneuil's knowledge that Faneuil (and, therefore, Martha Stewart) was doing something wrong. Morvillo asked whether, when Faneuil told Martha Stewart about the Waksals' sales, he thought this was wrong. After a brief exchange, Faneuil said no, because Peter Bacanovic had told him to do it, he did not think it was wrong. Blending this with the prior theme, Morvillo then amplified what this meant for his client:

Q: Did you tell Ms. Stewart you shouldn't be giving her this information?

A: No.

Q: Did you tell her that she should keep it confidential?

A: No.

Q: Did you tell her that she shouldn't premise any trade on that information?

A: No.

Q: Indeed, weren't you trying to induce her to trade?

A: That's fair to say.

Q: At the time, did you believe that she was then precluded from trading?

A: Maybe I suspected so.

Q: What did you say to her about your suspicions?

A: Nothing.

Message: Douglas Faneuil didn't know he was giving Stewart privileged information, and he didn't tell her it was privileged—so how was she to know? To have a motive for a cover-up, Stewart has to believe she did something wrong.

7. On Faneuil's deal with the government, Morvillo's closing sequence. Like other areas of the cross-examination, this ground had already been plowed by David Apfel. Unlike Apfel, however, Morvillo didn't give Faneuil room to explain:

Q: Mr. Faneuil, in the years 2001 and 2002, you committed a number of crimes?

A: I wouldn't say a number, but…

Q: More than one?

A: Yes.

Q: Breaching your fiduciary duty at Merrill Lynch … was that a crime?

A: I suppose it was.

Q: Do you know that that's a felony?

A: I trust it is.

Q: With a maximum term of incarceration of five years?

[Objection]

Q: Your making false statements to the government in January and March of 2002 … that was a crime?

A: Correct.

Q: A felony?

A: I believe it was.

Q: And you told us here that you were involved in conspiring to cover up this crime?

A: Yes.

Q: And you know that that's a second crime?

A: Yes.

Q: A felony?

A: I'm not sure.

Q: And you know of a crime called obstruction of an agency proceeding?

A: Yes.

Q: And you know that's a felony?

A: Yes.

Q: And your use of narcotics—you know that was a crime?

A: Yes.

Q: A felony?

A: Yes.

Q: And now all of those felonies are not being prosecuted?

A: Right …

Q: After all those felonies you committed, you pled guilty to a single misdemeanor.

A: Correct.

Q: Your Honor, I have no further questions.

Message: Draw your own conclusions, folks.

After Faneuil stepped down, two other things happened, one minor, one potentially major. First, the government examined a witness named Thomas Reese, a former Merrill Lynch broker who sat next to Faneuil. The purpose of calling Reese was simply to demonstrate that Faneuil had called Peter Bacanovic on Reese's cell phone (Faneuil testified that he borrowed cell phones when talking to Bacanovic about Dec. 27 because he thought Merrill might record land-line calls). In the process of making this point, however, Reese implied that Faneuil had swiped his cell phone and used it without permission—which probably wasn't the message the government was looking for.

Lastly, Ann Armstrong, Stewart's assistant at Martha Stewart Living Omnimedia, took the stand. Armstrong is a key witness because she is the one who took Bacanovic's message on the 27th—"Peter Bacanovic thinks ImClone is going to start trading downward"—and the one who changed this message back to its original wording after Stewart altered it. When asked about her conversation with Bacanovic on the 27th, Armstrong said that Bacanovic did not give her the price of the stock, an assertion that contradicts Bacanovic SEC testimony (an area where, in a previous dispatch, I suggested Bacanovic might have a problem). Armstrong also implied that Bacanovic gave her the message verbatim, which could hurt him (the message sounds calculated to send another, more meaningful message).

Armstrong's big moment, however, came later, when Assistant U.S. Attorney Michael Shachter asked her to describe the conversation when Martha Stewart called in to get her phone messages on the 27th. Armstrong said that she hadn't spoken with Stewart since before Christmas and that the first thing she did was thank her for sending the plum pudding … and then, suddenly, she, Ann Armstrong, started sobbing on the stand. Sobbing: both hands over her face, then one hand reaching for a paper towel and wiping away streaming tears, then both hands over her face again. I thanked her for the plum pudding, Armstrong said again, when she had recovered enough to speak, and then immediately began sobbing again. Bob Morvillo stood up twice and requested a recess, and the second time, Judge Cedarbaum adjourned the session for the day.

In my opinion, this moment could be huge for Martha Stewart. The impression of Stewart so far—courtesy of Sam Waksal's assistant Emily Perret and Douglas Faneuil—is that Stewart treats anyone whose social and/or professional status isn't CEO or better like dirt. And yet, here was her administrative assistant of six years, a woman who still works with her today, bawling on the stand because she was so moved that Stewart gave her a plum pudding for Christmas and, perhaps, so upset that she was having to testify against her. Ann Armstrong seems to like Martha Stewart—seems, more importantly, to care about Martha Stewart—and her tears did more to convey this than 100 years of verbal testimony would have.

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

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