Judge Drops Most Serious Stewart Charge
The federal judge in Martha Stewart’s trial Friday threw out the most serious criminal charge against her, ruling that the government had failed to prove that Stewart intended to commit securities fraud.
“No reasonable juror can find beyond a reasonable doubt that the defendant lied for the purpose of influencing the market for the securities of her company,” U.S. District Judge Miriam Goldman Cedarbaum wrote in a 23-page ruling, which Stewart’s public relations team posted on her “Martha Talks” Internet site hours after it was handed down.
“Winning is always a good thing for the defense,” said Howard Schiffman, a Washington-based securities lawyer who is not connected to the case. “This certainly casts some doubt on the credibility of the prosecution.”
The U.S. attorney’s office in Manhattan had no comment on the ruling, a spokeswoman said.
Stewart, 62, and codefendant Peter E. Bacanovic, 41, her former stockbroker, still face four felony counts -- each carrying a sentence of up to five years in prison -- in a trial that probably will go to the jury Wednesday after closing arguments Monday and Tuesday. The fraud charge carried a 10-year sentence.
The two are accused of lying to investigators and conspiring to obstruct justice by inventing a phony cover story about why Stewart sold 3,928 shares of ImClone Systems Inc. stock Dec. 27, 2001.
Stewart and Bacanovic insist that they had a prior agreement to sell the stock if it fell to $60 a share. The government says Stewart sold because Bacanovic ordered an aide to pass her a tip that ImClone founder Samuel D. Waksal was trying to unload his shares. A regulatory setback that caused ImClone stock to plunge came a day after Stewart’s sale.
The fraud charge -- leveled against Stewart alone -- accused her of intentionally misleading investors in her public media company, Martha Stewart Living Omnimedia Inc., by repeating the false story about the prior agreement. Her motivation, according to the government, was to keep the company’s stock from slipping.
One of Stewart’s three allegedly fraudulent public statements came in a June 19, 2002, conference for securities analysts in Manhattan. Judge Cedarbaum noted that Stewart’s statement regarding her ImClone trade “constitutes approximately one-half of one page of the 18-page transcript” of her company’s 45-minute presentation, and that there were no follow-up questions on the subject.
The judge also pointed out that the government presented no evidence that Stewart had ever expressed concern to anyone about how her company’s stock was responding to the negative publicity about her ImClone trade.
Cedarbaum’s ruling is a setback for the government that goes beyond this case, Fordham University law professor Steve Thel said.
“In the past in a case like this, the government would have had to show that Stewart knew her statements were false and knew they would affect the securities’ price,” Thel said. “But Judge Cedarbaum said it was not enough to show that she knew it would affect the price; they also had to show that that was her purpose.”
Such a test may raise the bar for prosecutors in future cases, Thel said.
Cedarbaum had long telegraphed her skepticism about the fraud charge, at one point calling it “a novel application of the securities laws” and later referring to it as “the most problematic” of the charges.
But instead of declaring that the government’s legal theory was wrong, which would have been appealable, Cedarbaum said prosecutors didn’t provide enough evidence to support the contention. Such a finding of fact is not subject to appeal, Thel said.
Wall Street applauded Cedarbaum’s ruling. Martha Stewart Living shares surged as high as $15.25 on the news, then closed up $1.43, or 9.2%, at $14.53 on the New York Stock Exchange. The stock is up 48% this year after falling for four straight years through 2003.
