Corporate Scandals

What's the Price? Sixty Twice!

Former lawyer lays an egg; jury takes bath in ink; Heidi preempts offensive drive

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These are Elizabeth Koch's notes on the Martha Stewart trial.

The courtroom this morning anxiously awaits Judge Cedarbaum's decision whether or not to toss the charges filed against Martha Stewart and Peter Bacanovic. Out of the five counts against Martha Stewart—conspiracy, two counts of false statements, obstruction of justice, and securities fraud—she seems most ambivalent about the last. Prosecuting attorney Karen Seymour, eager to safeguard the conspiracy charges, holds Stewart's SEC testimony as undeniable proof of wrongdoing:

"On February 4, 2001, Ms. Stewart said that her managing accountant, Heidi Deluca, and her broker, Peter Bacanovic, would back up her $60 agreement story. THEN," Seymour aggressively recounts her theory, "she immediately recanted her assertion that Peter would concur, because she realized it contradicted what she'd just confirmed—not having spoken to Peter about ImClone in January." Of course that's Seymour's interpretation: when Heidi Deluca testifies later today, we'll see another.

Both Michael Strassberg (Bac's attorney) and Robert Morvillo (Stewart's attorney) insist that the government has yet to come up with independent proof that the defendants spoke on Jan 7, 2001, as prosecution contends. As Morvillo puts it, "Just because Stewart and Bacanovic said the same thing about the $60 agreement is not sufficient evidence of conspiracy."

An hour later, Cedarbaum puts a stop to the arguments: "I will reserve decision on all these matters." For when? The longer she puts off her verdict, the more time and money we waste listening to testimonies that could be rendered moot.

Witness: Jeremiah Gutman, Douglas Faneuil's attorney from January '02 to March '03

Gutman's fifteen minutes were more like five. He'd refused to meet with defense prior to testifying, so Strassberg wasn't sure what he'd get from the witness. It showed. Most of Gutman's testimony confirmed rather than contradicted Faneuil's statement, off by mere degrees.

Strassberg asks, "Did you ever tell Douglas Faneuil that, according to Merrill Lynch's in-house attorney, David Marcus, the brokerage firm had made a deal with the government: As long as they hand over Waksal's head on a silver platter, the government would ignore any Stewart wrongdoings?"

"Not quite," Gutman corrects. "I told him that the deal involved getting Merrill Lynch employees off the hook. Not Martha." Either way, Faneuil thought there was an arrangement, and therefore was persuaded to keep his mouth shut for a time—precisely the story he testified to weeks ago. But here's where degrees matter: Faneuil remembers the bargain not in terms of "Merrill Lynch employees" but in terms of its affect on Martha; considering who gave her the tip, "Martha" quickly translates into himself. This distinction seems inconsequential until we review the defense's main gripe against Faneuil—that he's a self-serving liar who'd do or say anything to save his own butt, even if it means pleading guilty to something he's innocent of, like, say, accepting bribes from Bacanovic in exchange for keeping quiet. Bribes the defense proved did not exist. Sure, why not accept a misdemeanor slap when you're looking down the felony barrel?

Nevertheless, Gutman's testimony is not going as planned; Strassberg's agitation is mounting. "Mr. Gutman, did you tell Faneuil in March '02 to go forward and [simultaneously] not lie but also stick to your story [about the $60 sell agreement]?" he asks hopefully.

"I told him to not lie but that if he came up with a different story, he'd be sticking his neck out. I recommended he get independent council to accompany him [to his SEC confession]," Gutman says. Strassberg paces, rakes his fingers through his hair, but doesn't interrupt his witness. "Faneuil got upset, said he was afraid to go forward, that he was afraid of them all, that [everyone at Merrill Lynch] was merciless and amoral. He cried and kept repeating he was afraid." That does it. Defense ushers Gutman off the stand, before he could do any more damage. Too late: the jury will come away thinking that Faneuil was more afraid of Merrill Lynch's wrath than either the government or jailtime, a belief that flies in the face of the defense's whole argument.

Witness: Dr. Albert Lyter, forensics chemist, self-employed at Federal Forensics Associates consulting firm

Bacanovic attorney David Apfel spends over ten minutes extracting credentials from Dr. Lyter, a necessary move considering the government's ink expert, Larry Stewart, dubbed himself "the national ink expert." Lyter may not be as engaging or slick as Stewart, but he also appears less biased: whereas Stewart works for the secret service, a government agency well-known for its shady dealings, Lyter is an independent contractor. But no hack, as prosecution would have it. Prior to opening his own lab in'82, Dr. Lyter worked for Alcohol, Tobacco, Firearms and regularly examined ink samples for federal, state, and local agencies. He left ATF when the secret service opened an internal lab and soaked up the bulk of ATF's clients.

Oh, and national ink expert Larry Stewart was Lyter's intern.

Lyter testifies that unlike Larry Stewart, he labeled all the marks on the page as "entries" and tested each and every one of them. Using a method called densitometry, Lyter concluded that at least three pens were used on Bacanovic's document: One for "@60 and the dash after ImClone; one for the circle around ImClone and the question mark after Apple computers; and at least one more for the remaining circles and check marks."

"Can you tell us with certainly which marks were made with the same pen?" Apfel asks.

"I can only say with certainly which marks are made with different pens." He clarified that since ink is made in batches, it's almost impossible to distinguish between the pens filled with ink made from the same batch. "Just because density between ink marks is the same doesn't guarantee they were made with the same pen."

Prosecuting attorney William Burke saunters up to the stand, leans casually on the podium, and tries gutting Lyter with tone rather than substance. "So," he says with disgust, "how often do you adjust this densitometer?" Stick it to him, Burke.

In the end, it comes down to whose "expert testimony" and ink analysis equipment the jury trusts more: that of the government, the defense, or neither.

Witness: Heidi Deluca, Martha Stewart's business manager since 2000

Deluca, looking homespun and girly in a carnation pink sweater, her long blond hair pulled back in a headband, would have flattened Faneuil's testimony if Cedarbaum hadn't ruled 70 percent of her testimony hearsay. What she did eke out without objection was that on November 8, Heidi called Peter regarding tendering Martha's ImClone shares. She says Peter told her "ImClone was a dog" and that, once Martha's Morgan Stanley account was transferred to Merrill, he intended to "set a floor price on ImClone of $60 or $61," as a safeguard.

"He said he'd speak to Martha about [the $60 floor] personally," Heidi testifies. Which is precisely what Martha told the SEC during her February 4, '02 interview. It seems that Peter's January 7 testimony—that the two didn't actually set the sell price until December 21, '01—is merely a clarification of Martha's.

As for the confusion about the tax-loss selling plan, Heidi explains that she had consulted with an outside accountant by the name of McCallister or McAllister about balancing out Martha's '01 tax-loss plan. Ms. Deluca returned from vacation on Dec 26, tallied up the total and realized neither Apple nor ImClone had been sold yet. She assumed they wouldn't be part of the '01 plan. She left again and returned on Jan 2, '02, when she received the ImClone December 27 sale confirmation sheet from Faneuil. The settlement date said January 2, '02. Deluca testified that the accountant had advised her to rely on the settlement date for tax-loss planning, not the date of transaction. So she didn't include ImClone in the '01 report. She did, however, call Faneuil twice during the first week of January, presumably to go over the other stocks Martha sold while Heidi was out. Prosecution objects on hearsay grounds, an objection lost on me. If the purpose is to impeach a previous witness's testimony—which is obviously the case here—hearsay technically should not apply.

Two weeks ago, Faneuil testified that Bacanovic first insisted that tax-loss selling was the reason for the hasty ImClone sale. Faneuil said he knew at the time the story didn't make sense, considering ImClone sold for a gain, but that when Heidi called him ranting and raving in early January about the ImClone sale screwing up Martha's tax-loss plan, he knew without question that Bacanovic was lying. It turns out Faneuil was the one lying, either that or he got his dates mixed up: Until February, Heidi believed she was correct in leaving off the ImClone sale in her 2001 report. It wasn't until February that Heidi realized the accountant had given her bum advice, and that the ImClone sale applied to 2001. That's when she called Faneuil, that's when she was apoplectic. Of course she was—she'd already submitted the '01 tax-loss report to accounting.

But the jury's only heard bits and pieces of this. Cedarbaum, predictably, is worried that if she allows Heidi's complete testimony, the jury will consider her interpretation of events as true rather than testimony only to be used to impeach Faneuil's statement. "Your honor," Morvillo says, "why don't you just instruct the jury to disregard the truth value of Deluca's Faneuil testimony, just like you instructed them with regard to the bad press Martha received after the SEC leaks? You always say you have tremendous faith in the jury's ability to compartmentalize." Ouch. Cedarbaum, for the first time in this trial, is stunned silent.

Deluca ends the day scoring big points for her boss. Prosecuting attorney Seymour repeatedly points to Stewart's Feb 4 testimony—"Heidi and Peter will agree with my testimony as to the $60 sale agreement"—as proof of conspiracy. But then we learn about a conversation between Deluca and Stewart on January 29. Apparently on Jan 28, Martha requested that Heidi compile a list of phone calls made and received from October 2001 to the present (January 2002). Deluca brought the package to Martha the following day, January 29. "Wait," Martha called out before she left. "Heidi, what do you remember about our ImClone conversations?"

"I told her I remembered three things," Deluca testifies. "That ImClone was in her pension plan, that it was part of her tender offer, and that Peter said he'd touch base with her regarding setting a floor price of around $60." This conversation occurred less than a week before Martha's SEC interview; it's this recent discussion with Heidi, Morvillo wants permission to argue, that Martha was drawing from when she testified that, "Heidi and Peter will agree."

Cedarbaum will make her hearsay decisions Tuesday.