These Are Prosecution Witnesses?
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Feb. 3 2004 12:07 AM

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Today's Martha Meter reading: 18 percent

Chance of conviction Today: 18 percent Based on today's proceedings, the Martha Meter's chances of conviction remain at 18 percent. The "Peter Bacanovic Meter," if there were such a thing, would have dropped precipitously.

This phase of the trial—the parade of prosecution witnesses—is the government's chance to bludgeon the defendants beyond all hope of recovery, so I keep waiting for the knockout blow(s). So far, however, each witness mostly confirmed my initial impression: that the government's evidence is thin. Sometimes this impression is made on cross-examination. Sometimes it is even made before then.

Today's first witness, for example, was Emily Perret, Sam Waksal's former assistant at ImClone. A very pregnant Perret (Karen Patton Seymour asked when the baby was due, and Perret's answer was "Friday") testified that, on Dec. 27, 2001, when Stewart left her infamous "something is going on with ImClone and she wants to know what" message for Waksal, "she seemed very hurried and harsh and direct." The prosecution's motive for eliciting this answer, presumably, was to suggest that Stewart was agitated because she had just committed a crime. Since Martha Stewart is famous for her impatience however, and since she called from the San Antonio airport just before jetting off to Mexico, a follow-up question seemed in order. On cross-examination, Bob Morvillo asked it: Did Martha Stewart sound different than usual on Dec. 27? Nope, said Perret. Most of the time, she sounded the same.

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Next up was Brian Schimpfhauser, a compliance officer at Merrill Lynch. Schimpfhauser described why several ImClone trades on Dec. 27 and 28 raised his suspicions. Schimpfhauser then walked through the investigatory calls and meetings that followed: a conversation with Peter Bacanovic on Jan. 2, a meeting and Securities and Exchange Commission interview with Douglas Faneuil on Jan. 3, a meeting and SEC interview with Peter Bacanovic on Jan. 7.

One assumes the prosecution's main goal in calling Schimpfhauser and the next witness, a Merrill administrator named Judy Monaghan, was to illustrate that Peter Bacanovic and Douglas Faneuil initially lied to Merrill and the SEC and then changed their stories. The testimony of neither Schimpfhauser nor Monaghan confirmed this theory, however, and Monaghan's seemed to contradict it. Schimpfhauser and Monaghan also demonstrated that the focus of the early Merrill and SEC investigations was the Waksals' trades, not Martha Stewart's. Regarding the compliance conversation with Peter Bacanovic on Jan. 2, for example, Schimpfhauser couldn't remember whether Martha Stewart even came up, let alone what was said. As for the subsequent meetings, he testified that, on Jan. 3, Faneuil said that Stewart's sale was related to discussions about tax-loss selling; he didn't, however, say that Faneuil said the reason Stewart sold was to take a tax loss (the government's apparent interpretation). Schimpfhauser did testify that, in the Jan. 7 meeting, Bacanovic stated that he, and not Douglas Faneuil, took Stewart's sell order. Schimpfhauser's notes of the meeting, however, indicated simply—and more ambiguously—that "Stewart called FA [financial adviser] back and told him to sell." To me, at least, it seems conceivable that what Bacanovic actually said was "Stewart called us back …" and that Schimpfhauser understood this to mean me.

On cross-examination, moreover, Schimpfhauser's fuzzy testimony got fuzzier. He admitted that his notes didn't record the meetings and conversations verbatim. He also admitted that his recollection about at least one of these meetings, Bacanovic's, was "hazy" and getting "hazier." He admitted that Faneuil had said that Stewart placed her order with him (Faneuil), thus contradicting Bacanovic's alleged assertion from the outset (something that, presumably, would at least have triggered a clarifying question from the compliance officers). Schimpfhauser did provide clear testimony about one of the forthcoming defense arguments, though. Referencing a document on which Schimpfhauser had scribbled black marks, blue marks, and yellow highlighter marks, a Peter Bacanovic attorney asked whether, when making notes on a single document, it was "not out of the ordinary to use multiple pens." "Not at all," Schimpfhauser replied, cheerfully.

Most of Judy Monaghan's testimony was, from the government's perspective, equally tepid. She testified that when she first asked Douglas Faneuil about Stewart's trade, he said it related to a conversation that took place earlier (similar to what Schimpfhauser said, consistent with Bacanovic's SEC testimony, and not inconsistent with the $60 agreement, which Faneuil probably wouldn't have known about). Monaghan further testified that, on Jan 7, the same day that Peter Bacanovic first spoke to the SEC, she met with him in her office. In this meeting, Monaghan testified, Bacanovic "gave me more details about the sale" than he had when they initially discussed it on Jan. 2. The additional details included the $60 agreement and an assertion that, in my analysis of the evidence, I argued (and still think) might be a problem for Bacanovic: an implausible description of the message he left for Stewart on Dec. 27. Importantly, Monaghan did not say Bacanovic "contradicted his earlier story," or even, "told me something a little different than he had told me before"—either of which would have bolstered the government's case. She just said he "gave [her] additional details." Most important, Monagahan testified that, in this meeting, Bacanovic said that Martha Stewart had given her sell order to Douglas Faneuil. The government, remember, is arguing that, this very day, with the aim of deceiving Merrill Lynch and the SEC, Bacanovic told roomfuls of people at both organizations that Stewart gave the order directly to him.

Finally, toward the end of the day, Monaghan described an event that, at least pre-cross-examination (which hasn't happened yet), might prove incriminating: At the end of March 2002, around the time that the SEC subpoenaed documents relating to Stewart's account, Peter Bacanovic asked Monaghan to give Faneuil a raise. According to Monaghan, Bacanovic first asked that the raise be granted immediately, and then, when Monaghan explained that it couldn't take effect until July, he asked that Monaghan process the paperwork now so that Faneuil would know the raise was on its way. The prosecution suggests that the timing of this raise indicates that it was hush money. Other possible explanations come to mind, but I do want to hear what Bacanovic has to say about this. I also want to hear his explanation for why he bought a call option on ImClone in his personal account (a bullish move) on Oct. 23—around the time that Stewart was allegedly selling ImClone, in part on his recommendation.

The government's last goal of the day, apparently, was to counter a suggestion that the defense made in opening statements—that some investors, Martha Stewart included, didn't like to use stop-loss orders because they entailed a loss of control. To make this point, the prosecution used Judy Monaghan to describe several examples of "limit orders" that Stewart placed while selling ImClone stock from a defined pension fund. To those who view "stop-loss orders" and "limit orders" as the same thing, this presentation probably raised the intended questions: If Stewart often used such orders, why didn't she use one for her Dec. 27 ImClone sale? The trouble is "limit orders" and "stop-loss orders" aren't the same thing. A "limit order" means "sell, but only at or above this specified price" (in other words, sell if you can get, say, $60 or better). A "stop-loss order," meanwhile, means "sell if—and only if—the stock drops to or below this specified price" (in other words, don't sell unless the stock drops to $60 or below). Investors use limit orders when they want to hold a stock until they can get a desired price. They use stop-losses, meanwhile, when they want to protect their downside risk. If you're confused about the difference, you're not alone: The prosecution may be, too.

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

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