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dispatches from the martha stewart trial:

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from: Henry Blodget

The "Cover-Up," Part 2: Martha (Temporarily) Rewrites History

Posted Tuesday, Dec. 9, 2003, at 12:09 PM ET

Henry Blodget, a former securities analyst, lives in New York City. Read his full-disclosure statement about his potential conflicts of interest in covering the Martha Stewart trial here. For a complete listing of Blodget's dispatches, see Slate's Guide to the Martha Stewart Trial, which also has links to related Slate articles.

What was she thinking?

Altering her Dec. 27 phone message from Peter Bacanovic was Martha Stewart's first suspicious move. On its face, it suggests a guilty conscience: If Stewart did nothing wrong, why would she be messing with evidence? Given that she changed the message immediately after a conversation with her attorney(s), moreover, it is also reasonable to wonder what he or they told her. And as we consider these questions, we should keep in mind that Stewart's Wachtell, Lipton attorneys, John Savarese and Lawrence Pedowitz, would eventually be supplemented and then replaced with Bob Morvillo and Jack Tigue from Morvillo, Abramowitz, and that, in a further twist, the government has reportedly considered calling Savarese, Pedowitz, and a third Wachtell lawyer as witnesses against Stewart, despite the claims of lawyer-client privilege this would likely invoke.

With regard to the altered message, here's an alternative to the "guilty conscience" theory: In the Jan. 31 conversation, Stewart and her attorneys presumably discussed her upcoming interview with the U.S. attorney. They also, presumably, discussed the circumstances of her ImClone trade. If Stewart was acting wisely, she would have honestly related everything she remembered about the trade—which, incidentally, would probably have been less than it might seem she should have remembered. She decided to sell her stock, after all, during a two-minute call at the San Antonio airport, after being out of touch for four hours and exchanging nine minutes' worth of information with her assistant. Although prosecutors tend to view any haziness with skepticism—you were committing a crime here, you must remember!—details can be surprisingly fuzzy, especially if it never occurred to one that one might be doing something wrong.

Stewart and her attorneys would also, presumably, have discussed what the FBI and U.S. attorney suspected her of—which, at that point, was almost certainly what the world eventually suspected her of: classic insider trading. Given Stewart's friendship with Sam Waksal, Waksal's having urged at least two people to dump ImClone before the FDA announcement, and the timing of Stewart's sales, investigators probably assumed that Waksal (or their shared stockbroker, Peter Bacanovic) had also "tipped" Stewart about the FDA decision—a possibility that, in all likelihood, was greeted with great excitement by the investigators. This was January 2002, after all: The S&P 500 was down nearly a third from its peak, Enron had blown up, the euphoria of the late '90s had morphed into outrage, and the bounty for bagging a white-collar trophy as big as Stewart was swelling by the day. On Jan. 31, therefore, just before she temporarily altered the phone message, Stewart and her attorneys probably discussed the "FDA tip" theory at length.

Stewart's attorneys likely would have asked whether Stewart had any notes of conversations that might suggest she had been tipped, or any phone messages or e-mails. And to this question, Stewart might initially have responded, "Of course not. I wasn't tipped." But then, after the call, perhaps dismayed at how a minor, split-second decision was snowballing into a multi-agency government investigation (and also, perhaps, dismayed that her lawyers hadn't assured her that this was just a crazy misunderstanding that could be cleared up with a phone call), she began to worry that maybe there were some notes, etc., that could support the theory. So she browsed through her phone log and came upon the Dec. 27 message, a message that, quite probably, she had never seen before (her assistant, Ann Armstrong, gave Stewart her messages orally that day). And, perhaps, to her horror, Stewart realized that the message's phrasing—"Peter Bacanovic thinks ImClone is going to start trading downward"—made it sound like Bacanovic had known something, especially in hindsight (in context, he might just have been considering the stock action and rumors, but now that the FDA had rejected the drug application and the stock had cratered … ). The message, in fact, was just the type Bacanovic would have left if he had known that the Erbitux application was about to be rejected—and now it might help her get convicted of a crime she hadn't committed! Perhaps, staring at the computer screen, her heart pounding in panic, Stewart wondered why Armstrong had phrased the message that way. Why hadn't she just written "Peter Bacanovic re ImClone"? Why hadn't … and, perhaps, in an instant, Stewart had reached for the keyboard and changed it.

Then, later, perhaps, in her office, thinking everything over, she remembered two things: 1) that her lawyers had probably urged her not to throw anything away or do anything else that could later be construed as "tampering with evidence"—advice that, at the time, probably sounded so formulaic that she barely heard it (of course she wouldn't tamper with evidence—evidence of what?); and 2) that computers have a nasty habit of recording, forever, every keystroke and mouse-click. At which point, perhaps, she (wisely) told Armstrong to change the message back.

dispatches from the martha stewart trial
entries
12345678910111213
from: Henry Blodget

The "Cover-Up," Part 2: Martha (Temporarily) Rewrites History

Posted Tuesday, Dec. 9, 2003, at 12:09 PM ET
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Henry Blodget is the editor of Silicon Alley Insider.
Photograph of Martha Stewart (Nov. 20) by Peter Morgan/Reuters. Photographs of: Stewart and Sam Waksal by Chip East/Reuters; Douglas Faneuil by Doug Kanter/Agence France-Presse; and Peter Bacanovic by Stan Honda/Agence France-Presse (Dec. 3). Photograph of Martha Stewart by Anthony Bolante/Reuters (Dec. 19).
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Remarks from the Fray:

Prosecution could have brought attention to insider trading without a full blown witch hunt attitude. Martha may have had sweet deals whispered in her ears and responded but isn't that more common than we would like to admit? Since she is not being charged with the insider trading the decision to charge her for an obscure related crime is probably not a good idea.

Martha should have spilled the beans immediately as the amount we are talking about is minuscule to her wealth but there was more at stake in poor publicity so she made a serious mistake in judgment. Charge her for being stupid so everyone can move on.

That mistake empowered the government and the SEC who were under staggering pressure from the Enron situations to go for the throat of someone, or anyone but should they have picked Martha? I think the answer is no simply because instead of exonerating the SEC and government, it only spotlights the weakness of the enforcements and laws. The Ken Lay's of the CEO world walking around after cheating people of millions if not billions simply because no provable law has been broken becomes highlighted by the pack attack of one woman being destroyed with something akin to joy...

--Meta4

(To reply, click here)


While I agree that there are parts of the case against Martha that are hard to understand, Blodget's theorizing on her behalf seems quite implausible. Sure, it was possible that Stewart and her brokers discussed the sale without transmitting any material nonpublic information. But think about it: Why would she buy shares in Waksal's company using Waksal's own broker, and call that very broker about selling decisions, if she didn't hope to get inside information?

For Stewart to be innocent, the call would have to go something like this: "Douglas, this is Martha. Before you say anything, shut up and listen. You know I'm calling about ImClone. I know that you are Sam's personal broker. This means that you must be very careful not to divulge any material information you have learned from Sam, not even in a wink-wink-nudge-nudge way, because then I might be guilty of insider trading. Instead, I want you to pretend you are not Sam's broker, and please give me only publicly available information. Oh, and please don't think it's strange that I'm calling you about selling at 59 after having previously instructed you to sell at 60." Not very likely.

--Scythe

(To reply, click here)

(12/4)