Corporate Scandals

Heidi Boils

Stewart factotum drawn and quartered by legal smoothie: Memories turn to jelly-"Get Martha on the phone!"

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

Theoretically, Judge Cedarbaum made her hearsay rulings this morning; in practice, they had little to do with Heidi Deluca, Martha's Connecticut office administrative business manager, and everything to do with defense attorney David Apfel. The judge did not rule in his favor.

Apfel does his best to question Deluca, but can hardly cough up two words without Cedarbaum blasting him. He asks about Stewart's money transfers: "You cannot lead the witness!" About Heidi's part in the January 3, '03 phone conversation with Doug Faneuil: "I already ruled on that!" About an e-mail Deluca received from Marylin McCallister, an outside accountant, in the beginning of January. "Mr. Apfel, I don't know why you can't abide by what I rule." About anything and everything in between: "Will you just ask the question?"

All of this in the first 10 minutes. The jury looks embarrassed, the press bench holds its collective breath, I have an empathetic panic attack. Apfel, trooper that he is, just keeps on going.

And apparently commits a major blunder, that doesn't make itself known until prosecuting attorney Michael Schachter's cross.

The first part of Deluca's testimony goes much like yesterday, with Heidi now testifying in front of the jury. Apfel asks her about an ImClone conversation that took place between she and Stewart on January 29, 2002.

"Martha asked me, 'What do you remember about ImClone?'" DeLuca says. "I reminded her that ImClone was part of her pension plan, that she tendered shares out of her personal account, and that Peter said he'd talk to her about setting a price bottom of $60 or $61."

So far so good. Just wait.

Michael Schachter has never looked so good. "I've never seen a better cross," a veteran court reporter and legal expert announces at lunch today. Schachter reels Deluca in with a seemingly innocent question about her job requirements. She happily answers.

He continues, "About what percent of you workday do you spend on Martha Stewart Living Omnimedia, and what percent for Ms. Stewart's residential services?"

"I'd say 30 percent MSLO, and 70 percent personal."

"Who pays you?"

"MSLO," she blinks without a thought.

"In full?" he reiterates.

"In full." Advice on how to burn a frog suddenly pops in my head. You start out with the temperature on low, so it's sitting all warm and comfy, and slowly turn up the flame.

Deluca testifies that as of late October 2001, Stewart had 51,800 ImClone shares in her Merrill Lynch pension account, and 5000 ImClone shares in her Morgan Stanley personal account. Heidi insists that on November 8, 2001, she spoke with Peter Bacanovic on the phone about the ImClone stock Martha held in her personal account at Morgan Stanley. Deluca testifies that although Peter thought ImClone "was a dog," he said he'd talk to Martha about setting a floor price at $60 or $61—"when her Morgan Stanley shares arrived at Merrill Lynch."

Schachter: "About Ms. Stewart's pension account—tell us again how many ImClone shares she had there?"

"51,800."

"When were those sold, and for how much?"

"In late October 2001, for around $61," Heidi recalls.

"Isn't is possible, Ms. Deluca, that the Nov 8 conversation you remember actually took place on October 24, '01, the day before Ms. Stewart sold the stock in her pension account? Didn't the $60 conversation you had with Peter refer to her pension plan and not her personal account?"

She blinks, this time thinking. "Will you repeat the question?" she asks, a request she'll make of Schachter more than once. And not because he's being unclear. Quite the opposite. He's polite, considerate, and almost humble throughout his cross. No one objects, no one stirs.

"No. I had several conversations with Peter about ImClone. The one in October was about the pension plan; the one in November was about Martha's personal account," she insists.

"And how are you so certain, Ms. Deluca?"

"I know we spoke about the $60 or $61 floor on November 8 because I'd checked on the price the day before—I was regularly checking up on ImClone's price—to see if it had gotten closer to the tender offer. I recorded the price at $61.52 on November 7 and asked Peter about it the next day. He said he'd speak to Martha personally."

"Did you talk to Stewart about the $60 floor? Did you follow up with her regarding ImClone's stock price? Did you ever warn her when the price hit $60 and then dipped below as it did several times between November 8-12?" Schachter asks.

"No, it was taken out of my hands at that point [i.e., after her November 8 conversation with Peter]. Peter said he'd take it up with Martha."

Unfortunately for the defense, Schachter enters into evidence Heidi's message log. On a note dated October 25, 01, 2001, the day the pension shares were sold at $61, Heidi writes: "I know Martha wants me to stay out of it, but I wanted to remind her one last time of the 5000 ImClone shares in her Morgan Stanley account. Now it's out of my hands." This admission makes Heidi look perilously confused. Basically, she claims haphazardly that events which occurred on October 25 actually took place on November 8, and further muddles matters by attributing dates and conversations to activity in Martha's personal account when they can more logically be connected to her pension account. As we'll continue to see.

Schachter remains patient and focused as he simmers the defense witness. He asks about Martha's MSLO stock sale on October 24, 01, insinuating that Deluca spoke to Bacanovic on the phone on October 24, '01, at 2:19 p.m. for 21 minutes, about Martha's tax-loss selling plan, about which stocks to sell at a loss to offset her MSLO gains. He enters into evidence the Quicken worksheet on which Heidi noted Peter's suggestions, as well as the e-mail Deluca sent Stewart October 25, 2001, the following day, filling her in on Bacanovic's suggestions.

On a document also dated October 24, 2001, a document listing the same stock with the same prices as the e-mail Heidi sent Martha on October 25, Heidi scrawls at the bottom, "Wednesday. Im-Clone: $61.52. Tender offer not responding." This is the note Heidi claims to have written on November 8, 2001. But once again, the document is dated October 24, not November 8. It's baffling how defense missed this, and more baffling that no one asks Heidi why on November 8 she wrote such a note on a seemingly unrelated document, one dated two weeks prior to her claim. There are feasible explanations—mine would be complete guesses—but the fact that defense doesn't take this one on isn't a good sign. Schachter does: he believes Deluca's note was referencing a tender offer Bristol Meyers made on September 28, 2001, a bid to buy 20 percent of ImClone shares @ $70. By "tender offer not responding," Heidi—the prosecution contends—must have been comparing the $61.52 price she recorded off NASDAQ to the $70 Bristol Meyers was offering.

And to sum up the coincidences, bringing Heidi to a full boil: Bristol Meyer's tender offer expired at 5:00 p.m. on October 26, 2001, just two days after Heidi's phone conversation with Peter. Schachter enters phone logs into evidence that record a 10 a.m. phone call Peter made to Heidi on October 25. "Isn't it true that Peter called you on October 25 because he wanted Martha to tender the ImClone stock in her pension account at $61?" Schachter asks again.

"No, I recall something different about the conversation." Schachter, of course, doesn't give her an opportunity to share. It's hard to argue with the facts: During the 21 minutes Peter and Heidi communicated in October 24, 2001, ImClone hit $61.52. Martha sold the shares in her pension account on October 25 and 26, at almost exactly that price.

On redirect, the only thing defense lawyer John Tigue gets out of Deluca is that Stewart reimbursed MSLO for Deluca's salary in '02.

The only other witness of the day is John DeMaine, a retired stock broker. He now acts as an independent consultant and has testified in over 300 trials. Today he demonstrates the extreme volatility of ImClone on December 27, claiming the stock "fell out of bed" immediately after NASDAQ opened. Even as the volume of stocks fell in the market at large—an event you'd expect during the Christmas holidays, he testifies—ImClone's volume spikes, as early as 9:30 a.m. He says target pricing makes sense with an unstable stock like ImClone. Defense seems to be using DeMaine's testimony to recall Bacanovic's assistant, Doug Faneuil, who also testified about ImClone's December 27 activity. In his statement, Faneuil quoted Bacanovic as shrieking into his cell, "Oh my God, the stock is going crazy, get Martha on the phone," a statement consistent with DeMaine's observations. Take it a step further, and we recall the message Faneuil left Martha's assistant, Amy Armstrong, on December 27, 2001, which said, "Peter Bacanovic says ImClone is selling downward." Which it was, at an alarming rate. Even if Martha did erase then put back the message, one could easily make the case that she knew how such a note could be interpreted. And it turns out she was right.

Bacanovic's defense team rests. Robert Morvillo is calling one witness to testify on Stewart's behalf: Martha's MSLO attorney, the one who actually took notes during her Feb 4, 2002 interview with the SEC.

Prediction: Both parties will rest tomorrow; Cedarbaum will hold the charge conference on Thursday; and closing arguments will be Monday and Tuesday.

Cedarbaum has yet to rule on which charges, if any, she'll drop.

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