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dispatches from the martha stewart trial:

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from: Henry Blodget

The "Cover-Up," Part 4: Attorney-Client Miscues?

Posted Wednesday, Dec. 10, 2003, at 11:50 AM 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.

Why switch legal teams?

Martha Stewart's current attorneys, Bob Morvillo, Jack Tigue, et al., have conceded that in her Feb. 4 interview with investigators, she identified the person that took her ImClone sell order on Dec. 27 as Peter Bacanovic. Meanwhile, the Wachtell attorneys who advised her when she allegedly made that false statement and others—John Savarese, Lawrence Pedowitz, et al.—have quietly disappeared from the scene. The Wachtell attorneys were representing Stewart while she allegedly committed all of her crimes, so it makes sense to consider more of what she might have discussed with them, why they are no longer leading her defense, and what, by reportedly considering calling them as witnesses, the government might hope to gain.

As they reviewed her circumstances before the U.S. attorney interviews, Stewart and her Wachtell attorneys probably discussed the finer points of insider trading law. If Stewart told them that, prior to selling her stock, she had learned that Waksal was selling, they might have explained, to everyone's relief, that this type of information was not normally treated as illegal to trade on. They might have also explained, however, that just because it wasn't normally treated as illegal didn't mean that it wouldn't be this time (especially given her fame, especially in an increasingly pro-prosecution, anti-Wall Street environment). Given these considerations, the lawyers might have evaluated the pros and cons of having her volunteer to the U.S. attorney's office that she had received the Waksal sale information. (The pros being that it might help squelch the idea that Stewart had been tipped about the FDA decision, and the cons being that the investigators might react by saying, "thank you—and now, although that type of information hasn't been considered illegal to trade on in the past, you're under arrest.") Regardless of their advice on this issue, though, it is extremely unlikely that Stewart's attorneys would have told her to lie; the decision, rather, would have been whether she should go out of her way to volunteer the Waksal sale information or make the investigators do the work.

The Wachtell attorneys might also have explained another fine point of insider trading law, one that might bolster the $60-understanding-is-a-fabrication theory. To wit, Rule 10b5-1, the antifraud provision of the Securities Exchange Act of 1934 that defines what is meant by trading "on the basis of" material nonpublic information, also enumerates a few "affirmative defenses" to this crime, with "affirmative defenses" being situations in which one can trade while in possession of material nonpublic information. One of these defenses is if, before becoming aware of the information, the trader has "instructed another person to purchase or sell the security for the instructing person's account." If Stewart had described her $60 conversation with Bacanovic about ImClone, her attorneys might have said, "so you gave him instructions to sell the stock" (one of the affirmative defenses), at which point, she might have remembered (or decided) that that was just what she had done. (Or, in another interpretation, perhaps Bacanovic and Stewart knew about this affirmative defense from the beginning and concocted the cockamamie $60 story to fit it—although if they did, they did it quickly and, it seems, without having talked to one another.)

And then there is the possibility that Stewart lied to, withheld information from, or simply misinformed her Wachtell attorneys. This might explain why she allegedly managed to commit obstruction crimes while being represented by some of the best lawyers in the world, including making false statements in their presence. (Even honest witnesses make mistakes, and when they do, alert, well-informed attorneys can correct them before the witnesses get accused of perjury.) If the Wachtell lawyers felt that Stewart wasn't being straight with them or was ignoring their advice—or that, because they had participated in her alleged fraud, they could conceivably be called to testify—they might have suggested she find different counsel. To call the Wachtell attorneys as witnesses in the upcoming trial, the prosecution would have to invoke the crime-fraud exception to attorney-client privilege, which would require showing that the attorney-client communications might have been used to perpetrate a crime. (The government wouldn't have to prove that a crime had been committed, but, according to one attorney, the hurdle would still be high.) By doing this, the prosecution might hope to determine what Stewart told her attorneys, and when, and whether she ever changed her story.

Another reason for the representation change might be that, given the outcome of the investigation, Stewart felt that Wachtell and another law firm in Washington, D.C., that is no longer defending her simply did a bad job—if only because they didn't make sure she appreciated how imperative it was that she 1) be brutally honest with her counsel (clients are apparently often evasive with their lawyers, even when the clients haven't done anything wrong); 2) not say anything publicly or to investigators that she wasn't certain was true; and 3) avoid any further conduct that could be construed as improper—such as communicating with, or even attempting to communicate with, Peter Bacanovic. Stewart's failure to appreciate the importance of the latter, for example, led to conduct that might figure prominently in the conspiracy charge.

The same day that Stewart testified at the U.S. attorney's office—Feb. 4—the SEC subpoenaed Bacanovic to testify under oath. In an agonizingly boneheaded move, the day before this testimony, on Feb. 12, Stewart placed multiple calls from her apartment to Bacanovic's office—boneheaded because, to anyone familiar with the legal system, this is akin to spotting someone trying to jimmy open the door of your house and, instead of calling the cops, just walking over and handing him or her the keys. Unless Stewart's lawyers had been sleepwalking, they would, at the very least, have urged her not to do anything that could be used to suggest impropriety. And, at first blush, it is hard to imagine how these calls suggest anything but impropriety.

Maybe Stewart was fine-tuning her portfolio? Maybe she was reminding Bacanovic that his subscription to Martha Stewart Living was about to expire? Maybe, in her control-freaky way, she was making sure that Bacanovic remembered everything correctly (which would still be a problem, given the pair's later assertions that they hadn't discussed the subject)? No matter how vivid your imagination, if you interpret the indictment to mean that Stewart and Bacanovic spoke multiple times that day, it is hard to presume that these calls were innocuous. A close look at the indictment's wording, however, makes it easier. The indictment states that Stewart "placed multiple telephone calls" to Bacanovic, but not that she reached him. Perhaps the reason she called "multiple" times was that Bacanovic didn't call her back, then or ever—which might well have happened if his attorneys, unlike hers, had managed to convince him how damning such communications might look. In fact, the last time that the government alleges that Bacanovic attempted to speak to Stewart was Feb. 4, nine days earlier. (In the trial, obviously, the duration of all these calls will be critical, as will any testimony about when the two actually spoke.)

Because "boneheaded" doesn't shed much light on why Stewart made the calls (whether or not she "conspired" with Bacanovic that afternoon doesn't mean she didn't want to), let's once again try to put ourselves in her shoes. The calls took place, first of all, about a week after Stewart voluntarily met with investigators—a meeting that she no doubt hoped would put to rest concerns that she had been tipped off about Erbitux. Then, however, she learned (perhaps from her attorneys) that, far from ending, the investigation was gaining momentum—first they had asked for voluntary interviews, and now they were issuing subpoenas! Stewart had probably also learned that, to her surprise and dismay, being innocent of the crime you are suspected of having committed is, at best, only tangentially relevant to whether you might get accused of and/or prosecuted for it. This realization—that, in our system, prosecutors possess such power that, for all intents and purposes, for a while (sometimes forever), the truth will be whatever they say it is—probably carried with it a wave of humiliation, outrage, and fear: "I didn't do what these bastards think I did, but they are still going to wreck my life!" And amid this surge of emotion, perhaps, any act of self-defense (if that's what it was), illegal or not, seemed justified. In any case, the next morning, Feb. 13, before Bacanovic headed to the SEC to testify, Stewart called his office one more time.

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

The "Cover-Up," Part 4: Attorney-Client Miscues?

Posted Wednesday, Dec. 10, 2003, at 11:50 AM 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)