UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
UNITED STATES OF AMERICA
-v.03 Cr. 717 (MGC)
MARTHA STEWART and
PETER BACANOVIC
Defendants.
MEMORANDUM OF LAW IN SUPPORT OF
MARTHA STEWART’S OMNIBUS PRE-TRIAL MOTIONS
MORVILLO, ABRAMOWITZ, GRAND,
IASON & SILBERBERG, P.C.
Attorneys for Martha Stewart
Robert G. Morvillo
John J. Tigue
Rebecca A. Monck
Gregory Morvillo*
565 Fifth Avenue
New York, NY 10017
(212) 856-9600
EMERY CELLI CUTI BRINCKERHOFF
& ABADY PC
Attorneys for Martha Stewart
John R. Cuti
Ilann M. Maazel
545 Madison Avenue
New York, New York 10022
* Not yet admitted in the Southern District of New York.
TABLE OF AUTHORITIES
FEDERAL CASES
In re Ames Department Stores Inc. Stock Litigation, 991 F.2d 953 (2d Cir. 1993) . . . . . . . . . . 69
Anderson v. Abbott Laboratories, 140 F. Supp. 2d 894 (N.D. Ill. 2001) . . . . . . . . . . . . . . 34, 73
Baggett v. Bullitt, 377 U.S. 360 (1964) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Basic Inc. v. Levinson, 485 U.S. 224 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29, 30, 46, 52
Bates v. State Bar of Arizona, 433 U.S. 350 (1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Bifulco v. United States, 447 U.S. 381 (1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Bigelow v. Virginia, 421 U.S. 809 (1975) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Board of County Comm'rs of Wabaunsee County, Kansas v. Umbehr,
518 U.S. 668 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Bose Corp. v. Consumers Union of United States, Inc., 466 U.S. 485 (1984) . . . . . . . . . . . . . 85
Brady v. Maryland, 373 U.S. 83 (1963) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Brighton Building, 435 F. Supp. 222 (D.C. Ill. 1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Bronston v. United States, 409 U.S. 352 (1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102, 103
Brown v. Hartlage, 456 U.S. 45 (1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79, 80
Butterworth v. Smith, 494 U.S. 624 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Carney v. Cambridge Tech. Partners, Inc., 135 F. Supp.2d 235
(D. Mass 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44, 45
In re Carter-Wallace, Inc., 150 F.3d 153 (2d Cir. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Chambers v. Mississippi, 410 U.S. 284 (1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Chatin v. Coombe, 186 F.3d 82 (2d Cir. 1999) . . . . . . . . . . . . . . . . . . . . . 62, 63, 67, 68, 71, 74
Chemical Bank v. Arthur Andersen Co., 726 F.2d 930 (2d Cir. 1984) . . . . . . . . . . 60, 61, 69, 70
vi
Citibank v. K-H Corp., 1991 WL. 35951 (S.D.N.Y. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
City of Houston, Texas v. Hill, 482 U.S. 451 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Coffin v. United States, 156 U.S. 432 (1895) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Crandon v. United States, 494 U.S. 152 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Crane v. Kentucky, 476 U.S. 683 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Cyber Media Group v. Island Mortgage Network, Inc., 183 F. Supp.2d 559
(E.D.N.Y. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 37
In re Donald J. Trump Casino Sec. Litigation, 7 F.3d 357 (3d Cir. 1993) . . . . . . . . . . . . . . . . . 31
Feinman v. Dean Witter Reynolds, Inc., 84 F.3d 539 (2d Cir. 1996) . . . . . . . . . . . . . . . . . . . . . 30
First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978) . . . . . . . . . . . . . . . . . . . . . . . . 76
Gallagher v. Abbott Laboratories, 269 F.3d 806 (7th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . 34
Ganino v. Citizens Utilities Co., 228 F.3d 154 (2d Cir. 2000) . . . . . . . . . . . . . . . . . . . . 30, 31, 52
Gentile v. State Bar of Nevada, 501 U.S. 1030 (1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Gertz v. Robert Welch, Inc., 418 U.S. 323 (1974) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 77
Halperin v. eBanker USA.com, Inc., 295 F.3d 352 (2d Cir. 2002) . . . . . . . . . . . . . 30, 31, 37, 48
In re IBM Corp. Sec. Litigation, 163 F.2d 102 (2d Cir. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . 31
Ieradi v. Mylan Laboratories, Inc., 230 F.3d 594 (3d Cir. 2000) . . . . . . . . . . . . . . 35, 36, 38, 40
42, 45-47, 73
In the Matter of Winship, 397 U.S. 358 (1970)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Kolender v. Lawson, 461 U.S. 352 (1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63, 66
Kungys v. United States, 485 U.S. 759 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Landmark Communications Inc. v. Virginia, 435 U.S. 829 (1978) . . . . . . . . . . . . . . . . . . . 77, 78
Lewis v. Chrysler Corp., 949 F.2d 644 (3d Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
vii
Liparota v. United States, 471 U.S. 419 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Longman v. Food Lion, Inc., 197 F.3d 675 (4th Cir. 1999) . . . . . . . . . . . . . . . . . . 35, 44, 48, 52
54, 55
Lowe v. SEC, 472 U.S. 181 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Lurie v. Wittner, 228 F.3d 113 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Manufacturers Hanover Trust Co. v. Smith Barney, Harris Upham & Co.,
770 F. Supp. 176 (S.D.N.Y. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Members of the City Council of Los Angeles v. Taxpayers for Vincent,
466 U.S. 789 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Milkovich v. Lorain Journal Co., 497 U.S. 1 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
United States v. Miller, 26 F. Supp.2d 415 (N.D.N.Y. 1998) . . . . . . . . . . . . . . . . . . . . 104, 106
Mills v. Alabama, 384 U.S. 214 (1966) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Moskal v. United States, 498 U.S. 103 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
NAACP v. Button, 371 U.S. 415 (1963) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 81
NAACP v. Claiborne Hardware Co., 458 U.S. 886 (1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Nebraska Press Associate v. Stuart, 427 U.S. 539 (1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
New York Times v. Sullivan, 376 U.S. 254 (1964) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76, 81
In re Nice System, Ltd. Sec. Litigation, 135 F. Supp.2d 551 (D.N.J. 2001) . . . . . . . . . . . . . . . 31
Nike, Inc. v. Kasky, 539 U.S. __, 123 S. Ct. 2554 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
In re Nokia Corp. Sec. Litigation, 1998 WL. 150963 (S.D.N.Y. Apr. 1, 1998) . . . . . . . . . . . . 30
In re Northern Telecom, 116 F. Supp.2d 446 (S.D.N.Y. 2000) . . . . . . . . . . . . . . . 45, 53, 56, 57
In re Northern Telecom Ltd. Sec. Litig., WL 455534 (S.D.N.Y. 1994) . . . . . . . . . . . . . . . . . . 47
Pennekamp v. Florida, 328 U.S. 331 (1946) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
viii
Pettibone v. United States, 148 U.S. 197 (1893) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89, 90
Phillips v. LCI International, Inc., 190 F.3d 609 (4th Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . 31
Police Department of the City of Chicago v. Mosley, 408 U.S. 92 . . . . . . . . . . . . . . . . . . . . . . 85
R.A.V. v. City of St. Paul, Minnesota, 505 U.S. 377 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Republican Party of Minnesota v. White, 536 U.S. 765 (2002) . . . . . . . . . . . . . . . . . . . 77, 78, 79
Rosenberger v. Rector & Visitors of the University of Va., 515 U.S. 819 (1995) . . . . . . . . . . . 85
Rosenblatt v. Baer, 383 U.S. 75 (1966) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) . . . . . . . . . . . . . 59, 61, 69, 70, 79
SEC v. Zandford, 535 U.S. 813 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Sable v. Southmark/Envicon Capital Corp., 819 F. Supp. 324 (S.D.N.Y. 1993) . . . . . . . . . . . . 31
Sedighim v. Donaldson, Lufkin & Jenrette, Inc., 167 F. Supp. 2d 639
(S.D.N.Y. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Sprouse v. Babcock, 870 F.2d 450 (8th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Superintendent of Insurance Of the State of New York v. Bankers Life & Casualty Co.,
404 U.S. 6 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
In re Syntex Corp. Sec. Litigation, 95 F.3d 922 (9th Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . 30
Taran v. United States, 266 F.2d 561 (8th Cir. 1959) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Taylor v. Illinois, 484 U.S. 400 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
The Florida Star v. B.J.F., 491 U.S. 524 (1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Thornhill v. Alabama, 310 U.S. 88 (1940) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 80, 83, 84
United States & ex rel Berge v. Board of Trustees, 104 F.3d 1453 (4th Cir. 1997),
cert. denied, 522 U.S. 916 (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
United States v. Aguilar, 515 U.S. 593 (1995) . . . . . . . . . . . . . . . . . . . . . . 87, 90, 91, 92, 94, 98
ix
United States v. Alsugair, 256 F. Supp.2d 306 (D.N.J. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . 109
United States v. Antique Platter of Gold, 184 F.3d 131 (2d Cir. 1999) . . . . . . . . . . . . . . . . . . . 99
United States v. Batten, 226 F. Supp. 492 (D. D.C. 1964) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
United States v. Beer, 518 F.2d 168 (5th Cir. 1975) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
United States v. Bortnovsky, 820 F.2d 572 (2d Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
United States v. Carey, 152 F. Supp.2d 415 (S.D.N.Y. 2001)
. . . . . . . . . . . . . . . . . . . 102
United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986),
aff'd, 484 U.S. 19 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
United States v. Cassese, 2003 WL. 21710765 (S.D.N.Y. July 23, 2003) . . . . . . . . . . . . . . . . . 6
United States v. Chestman, 947 F.2d 551 (2d Cir. 1991), cert. denied,
503 U.S. 1004 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
United States v. Cohn, 452 F.2d 881 (2d Cir. 1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
United States v. Cordero, 205 F.3d 1325 (2d Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
United States v. Coriaty, 2001 WL. 1910843 (S.D.N.Y. July 16, 2001) . . . . . . . . . . . . . . . . . . 60
United States v. Davidoff, 845 F.2d 1151 (2d Cir. 1988) . . . . . . . . . . . . . . . . . . . . . . . . 118, 120
United States v. DeFabritus, 605 F. Supp. 1538 (S.D.N.Y. 1985) . . . . . . . . . . . . . . . . . . . . . 110
United States v. DePalma, 461 F. Supp. 778 (S.D.N.Y. 1978) . . . . . . . . . . . . . . . . . . . . 109, 110
United States v. Falcone, 257 F.3d 226 (2d Cir. 2001)
. . . . . . . . . . . . . . . . . . . . . . . . . . 41
United States v. Freedman, 445 F.2d 1220 (2d Cir. 1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
United States v. Fruchtman, 421 F.2d 1019 (6th Cir. 1970),
cert. denied, 400 U.S. 849 (1970) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92, 93
United States v. Gaudin, 515 U.S. 506 (1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98, 100
United States v. Greenberg, 735 F.2d 29 (2d Cir. 1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
x
United States v. Handakas, 286 F.3d 92 (2d Cir. 2002) . . . . . . . . . . . . . . . . . . 62, 63, 64, 67, 69
70, 72, 73
United States v. Higgins, 511 F. Supp. 453 (W.D. Ky. 1981) . . . . . . . . . . . . . . . . . . . . . . 96, 114
United States v. Hubbard, 474 F. Supp. 64 (D.D.C. 1979) . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
United States v. Kanchanalak, 37 F. Supp. 2d 1 (D. D.C. 1999) . . . . . . . . . . . . . . . . . . . 112, 114
United States v. Killeen, 1998 WL. 760237 (S.D.N.Y. Oct. 29, 1998) . . . . . . . . . . . . . . 111, 115
United States v. Lanier, 520 U.S. 259 (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
United States v. Laurins, 857 F.2d 529 (9th Cir. 1988), cert. denied
492 U.S. 906 (1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
United States v. Mandanici, 729 F.2d 914 (2d Cir. 1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
United States v. Mango, 1997 WL. 222367 (N.D.N.Y. May 1,1997) . . . . . . . . . . . . . . . . . . . 109
United States v. Reale, 1997 WL. 580778 (S.D.N.Y. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . 121
United States v. Matthews, 787 F.2d 38 (2d Cir. 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
United States v. Miller, 26 F. Supp.2d 415 (N.D.N.Y. 1998) . . . . . . . . . . . . . . . . . . . . . 105, 107
United States v. Mitchell, 877 F.2d 294 (4th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
United States v. Naserkhaki, 722 F. Supp. 242 (E.D. Va. 1989) . . . . . . . . . . . . . . . . . . . . . . 100
United States v. Newman, 664 F.2d 12 (2d Cir. 1981)
. . . . . . . . . . . . . . . . . . . . . . . . . . 41
United States v. O'Hagan, 521 U.S. 642 (1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
United States v. Persico, 520 F. Supp. 96 (E.D.N.Y. 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . 114
United States v. Persky, 520 F.2d 283 (2d Cir. 1975) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
United States v. Pirro, 212 F.3d 86 (2d Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
United States v. Pope, 189 F. Supp. 12 (S.D.N.Y. 1960) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
United States v. Price, 951 F.2d 1028 (9th Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . 89, 92, 94, 96
xi
United States v. Rahman, 189 F.3d 88 (2d Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
United States v. Sattar, 272 F. Supp. 2d 348 (S.D.N.Y. 2003)
. . . . . . . . . . . . . . . . . . . . 63
United States v. Schwarz, 283 F.3d 76 (2d Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
United States v. Senffner, 280 F.3d 755 (7th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
United States v. Shoher, 555 F. Supp. 346 (S.D.N.Y. 1983) . . . . . . . . . . . . . . . . . . . . . 117, 120
United States v. Sprecher, 783 F. Supp. 133 (S.D.N.Y. 1992)
. . . . . . . . . . . . . . . . . . . . 89
United States v. Strawberry, 892 F. Supp. 519 (S.D.N.Y. 1995) . . . . . . . . . . . . . . . . . . . . . . 121
United States v. Teicher, 726 F. Supp. 1424 (S.D.N.Y. 1989) . . . . . . . . . . . . . . . . . . . . . . . . 106
United States v. Thomas, 916 F.2d 647 (11th Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
United States v. Torres, 901 F.2d 205 (2d Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . 120, 121
United States v. Trie, 21 F. Supp.2d 7 (D.D.C. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
United States v. Turkish, 458 F. Supp. 874 (S.D.N.Y. 1978) . . . . . . . . . . . . . . . . . . . . . 118, 120
United States v. Universal C.I.T. Credit Corp., 344 U.S. 218 (1952) . . . . . . . . . . . . . . . . . . . . 74
United States v. Vastola, 670 F. Supp. 1244 (D.N.J. 1987) . . . . . . . . . . . . . . . . . . . . . . 105-108
United States v. Weinberg, 656 F. Supp. 1020 (E.D.N.Y. 1987) . . . . . . . . . . . . . . . . . . 117, 120
United States v. Willis, 737 F. Supp. 269 (S.D.N.Y. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
United States v. Wood, 6 F.3d 692 (10th Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
United States v. Wright, 704 F. Supp. 613 (D. Md. 1989) . . . . . . . . . . . . . . . . . . . . . . . . 96, 114
Upton v. SEC, 75 F.3d 92 (2d Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63, 71, 73
Vulcan Metals Co. v. Simmons Manufacturing Co., 248 F. 853 (2d Cir. 1918) . . . . . . . . . . . . 34
In re Westell Techs. Inc. Sec. Litigation, 2001 WL. 1313785 (N.D. Ill.
Oct. 26, 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 32, 38, 44
45, 73
xii
Winters v. State of New York, 333 U.S. 507 (1948) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63, 72
Wong Tai v. United States, 273 U.S. 77 (1927) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
World Series of Casino Gambling, Inc. v. King, 1986 WL. 12525
(S.D.N.Y. Oct. 30, 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33, 34, 73
STATE CASES
Beam v. Stewart, 2003 WL. 22271421 (Del. Ch. Sept. 30, 2003) . . . . . . . . . . . . . . . . . . . . . . . 7
Pollnow v. Poughkeepsie Newspapers, Inc., 486 N.Y.S.2d 11 (2d Dep't 1985) . . . . . . . . . . . . 76
Preston v. Hobbs, 146 N.Y.S. 419 (1st Dep't 1914) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
FEDERAL STATUTES
15 U.S.C. § 78j(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 65
17 C.F.R. § 240.10b-5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 29, 65
18 U.S.C. § 1001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
18 U.S.C. § 1001(a)(1), (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
18 U.S.C. § 1001(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
18 U.S.C. § 1503 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87, 92, 112
18 U.S.C. § 1505 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 3, 88-89
112-113, 114
18 U.S.C. § 1621 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
18 U.S.C. § 2
.............................................................4
18 U.S.C. § 3500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 116-117
18 U.S.C. § 371 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fed. R. Crim. P. 7(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
xiii
Fed. R. Crim. P. 7(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Fed. R. Crim. P. 7(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
MISCELLANEOUS
C. Edward Fletcher, III, The "In Connection With" Requirement of Rule 10b-5, 16 PEPP.
L. REV. 913, 928-29 (1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Prof. Barbara Black, Commentary: The Second Circuit's Approach to the "In Connection
With" Requirement of Rule 10b-5, 53 BROOK. L. REV. 539, 540 (1987)
. . . . . . . . . . . . . . 70
xiv
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
UNITED STATES OF AMERICA
-v.03 Cr. 717 (MGC)
MARTHA STEWART and
PETER BACANOVIC
Defendants.
MEMORANDUM OF LAW IN SUPPORT OF
MARTHA STEWART’S OMNIBUS PRE-TRIAL MOTIONS
Martha Stewart respectfully submits this memorandum of law in support of her omnibus
pre-trial motions.
PRELIMINARY STATEMENT
The charges against Martha Stewart stem from a seventeen-month investigation into
whether she engaged in insider trading. The Indictment contains no such charge. Instead, the
government brings criminal charges for making false statements to obstruct an insider trading
investigation that concluded that Ms. Stewart did not commit criminal insider trading. These
charges are as unusual as they are unfair.
The government also contends that Martha Stewart's denials of personal guilt constituted
a criminal manipulation of her company's securities. Count Nine is unprecedented,
unconstitutional, and unwise. By expanding the securities laws into a boundless, standardless
catch-all, it violates the Due Process Clause. By criminalizing speech by a woman defending her
reputation, speaking out against false congressional allegations, and asserting her innocence, it
violates the First Amendment. And by claiming that statements of innocence could possibly
mislead investors in the face of a government investigation known to everyone, it ignores the
basic requirements of the securities fraud statute itself. For many other reasons, other counts and
specifications should be dismissed as well.
Ms. Stewart disputes the allegations in the Indictment, but, of course, those allegations
must be accepted as true on this motion. Even under that standard, the Indictment is so deficient
on its face that Ms. Stewart respectfully asks the Court:
•
to dismiss Count Nine on securities law grounds because: (i) the alleged
misstatements were not material as a matter of law; and, in any event, (ii)
statements about Ms. Stewart’s personal sale of ImClone shares were not “in
connection with” the purchase or sale of the securities of Martha Stewart Living
Omnimedia (“MSO”). See Point I, infra;
•
to dismiss Count Nine on constitutional grounds because the prosecution’s
interpretation of the securities laws as applied here: (i) is unconstitutionally vague
and violates the Due Process Clause (see Point II, infra); (ii) violates the Rule of
Lenity (see Point III, infra); and (iii) violates Ms. Stewart’s First Amendment right
to defend herself and to speak out on a matter of public concern (see Point IV,
infra);
•
to dismiss Count Eight because the government has not properly alleged the
essential elements of an 18 U.S.C. § 1505 violation, and has also failed to allege
that Ms. Stewart’s conduct had the requisite nexus to the allegedly obstructed
proceeding, in violation of the Supreme Court’s decision in United States v.
Aguilar. See Point V, infra;
•
to dismiss certain false statement specifications from Counts Three and Four
because they are either not material as a matter of law or are literally true. See
Point VI, infra;
•
to strike certain improper portions of the Indictment as surplusage. See Point VII,
infra; and, finally,
•
for an order requiring the government to provide a bill of particulars. See Point
VIII, infra.1
1
Ms. Stewart joins in the discovery motions of her co-defendant, Peter Bacanovic, including those seeking
early production of: (i) Brady material; (ii) a witness list; (iii) material required to be produced pursuant to
(continued...)
2
SUMMARY OF THE INDICTMENT
On June 4, 2003, a grand jury returned a nine count indictment (the “Indictment”)
charging defendants Martha Stewart and Peter Bacanovic with various crimes arising out of the
investigation into Ms. Stewart’s December 27, 2001 sale of 3,928 shares of ImClone Systems,
Inc. (“ImClone”) stock. Count One of the Indictment charges both Ms. Stewart and Mr.
Bacanovic with conspiracy to obstruct an agency proceeding, make false statements, and commit
perjury in violation of 18 U.S.C. § 371. Count Two charges Mr. Bacanovic with making false
statements during his January 7, 2002 telephone interview with the Securities and Exchange
Commission (“SEC”) in violation of 18 U.S.C. § 1001. Count Three of the Indictment charges
Ms. Stewart with making false statements during her February 4, 2002 interview at the United
States Attorney’s Office (“USAO”) in violation of 18 U.S.C. § 1001. Ms. Stewart is also charged
with violating 18 U.S.C. § 1001 in Count 4 of the Indictment, which alleges that she made false
statements during her April 10, 2002 telephone interview with the USAO.
In Count Five, Mr. Bacanovic is charged with making and using false documents in
violation of 18 U.S.C. § 1001(a)(3). Count Six charges Mr. Bacanovic with perjury during his
February 13, 2002 SEC testimony in violation of 18 U.S.C. § 1621. Mr. Bacanovic is also
charged with obstruction of an agency proceeding in violation of 18 U.S.C. § 1505 in Count
Seven of the Indictment. Count Eight of the Indictment charges Ms. Stewart with the same
substantive violation of 18 U.S.C. § 1505. And Count Nine of the Indictment alleges that Ms.
Stewart committed securities fraud in violation of 15 U.S.C. §§ 78j(b) and 78ff; 17 C.F.R.
1
(...continued)
18 U.S.C. § 3500; and (iv) impeachment, or Giglio, material.
3
§ 240.10b-5; and 18 U.S.C. § 2 when she allegedly issued false statements denying, inter alia,
that she had traded on inside information.
FACTUAL SUMMARY2
In late 2001, a small local biotech company named ImClone was hoping to receive a
favorable decision concerning its application to the Food and Drug Administration (“FDA”) to
approve its pharmaceutical product, Erbitux, as a treatment for colon cancer. On December 28,
2001, however, the FDA rejected the application. That evening, ImClone issued a press release
to announce the negative FDA response. (See Indictment (“Ind.”) ¶¶ 9, 12, 19.)
In the days leading up to Friday, December 28, 2001, certain ImClone employees –
including its former CEO Sam Waksal – learned that the FDA would reject the Erbitux
application. Although this negative news about the FDA decision was not yet available to the
public on Thursday, December 27, 2001, Sam Waksal attempted to sell thousands of ImClone
shares that day. In addition, Waksal encouraged certain of his family members to sell their
ImClone shares based on the non-public news of the FDA decision. (See Affidavit of John J.
Tigue, Jr. (“Tigue Aff.”) ¶¶ 4, 5; Ind. ¶¶ 10,13.)
The Waksals were not the only people selling ImClone on December 27, 2001. Over 7
million shares of ImClone stock traded, and the price dropped significantly throughout the day.
At 1:43 that afternoon, with the stock having fallen to approximately $58.90 from its
approximately $63.50 opening price, Martha Stewart sold 3,928 shares of ImClone stock. As the
government essentially concedes, Ms. Stewart did not make this sale based on information
received from Sam Waksal or anyone else at ImClone regarding the FDA decision. (Ind. ¶ 13.)
2
For the Court’s convenience, this summary provides an overview of the case. Additional facts are recited
within each individual point to support the legal arguments made therein.
4
ImClone’s December 28, 2001 press release, and the sales and attempted sales by Sam
Waksal and his family prior to that release, set off a broad investigation. At some point, the
government focused on whether Ms. Stewart’s sale was triggered by a tip from Sam Waksal
regarding the impending negative FDA decision. (See Tigue Aff. ¶¶ 6, 7.)
As part of the investigation into whether Sam Waksal tipped other people about the
negative FDA decision prior to ImClone’s public announcement, the USAO twice interviewed
Ms. Stewart, once in person and once on the phone. These unsworn, informal interviews were
neither recorded nor transcribed. Ms. Stewart explained to the USAO that prior to December 27,
2001, she and Mr. Bacanovic, her broker, had reached an understanding that he would contact her
if the price of ImClone stock dropped to $60 and that, at that point, she would seriously consider
whether to sell her remaining shares of the stock. Ms. Stewart also told the USAO that during a
brief call on her cell phone from an airport tarmac on December 27, she was told by her broker
that the price of ImClone had fallen below $60, and she instructed the broker (whom she
identified as Mr. Bacanovic) to sell 3,928 shares of ImClone stock, and then continued on her way
to a post-Christmas vacation.
The prosecution contends that Ms. Stewart’s statements during these interviews were
false and misleading and were part of some elaborate conspiracy between Ms. Stewart and Mr.
Bacanovic to conceal the “true” reasons for the sale of Ms. Stewart’s 3,928 share of ImClone
stock. The government also has alleged that she sold because Mr. Bacanovic’s assistant, Douglas
Faneuil, informed Ms. Stewart about Sam Waksal’s attempted sale, and the sales of ImClone by
his family members on December 27. (See Ind. ¶¶ 27, 27(a), 27(d), 36, 37.)
5
In early June 2002, congressional investigators learned of Ms. Stewart’s sale and began to
suggest to the media that Ms. Stewart had sold her shares on December 27 because she had been
tipped by Sam Waksal about the negative FDA decision before that news became public. The
media’s insatiable appetite for this story was eagerly fed by leaks from congressional investigators
throughout the remainder of June 2002 and beyond. In an effort to defend against these false
leaks, Ms. Stewart and her attorneys issued statements to the press. The Indictment alleges that
these statements were intended to manipulate the stock price of Martha Stewart Living
Omnimedia (“MSO”), and, as a result, charges Ms. Stewart with a novel violation of the federal
securities laws. (See Ind. ¶¶ 60, 68.)
ARGUMENT
POINT I
COUNT NINE SHOULD BE DISMISSED BECAUSE MS. STEWART'S ALLEGED
MISSTATEMENTS WERE IMMATERIAL AS A MATTER OF LAW AND WERE NOT
MADE IN CONNECTION WITH THE PURCHASE OR SALE OF MSO SECURITIES
In a novel expansion of the securities laws, the government charges in Count Nine that
exculpatory statements issued on behalf of Martha Stewart in June 2002 defrauded investors in
MSO stock, in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5. See
Ind. ¶¶ 56-68. The SEC decided not to sue Martha Stewart civilly for securities fraud in
connection with her June statements. The SEC is the agency charged by Congress with the
responsibility of enforcing Section 10(b) and setting policy as to the correct application of the
law. In recently dismissing a Section 10(b) indictment, Judge Robert Sweet noted that the “SEC
determined it inappropriate to charge [the defendant] with a Section 10(b) offense in the civil
context.” United States v. Cassese, 2003 WL 21710765, at *4 n.1 (S.D.N.Y. July 23, 2003). In
6
this case too, the SEC determined it inappropriate to bring a civil securities fraud charge parallel
to the United States Attorney's Count Nine. Not only is Count Nine constitutionally
impermissible (see infra, Points II & IV), it is, as the SEC apparently concluded, meritless as a
matter of securities law.
First, Ms. Stewart’s alleged misstatements were immaterial as a matter of law. As
demonstrated in the factual background that follows, the immateriality of her June 2002
statements is obvious considering the torrent of negative publicity about Ms. Stewart that flooded
the market at the very time she made these statements. The market was saturated with
devastatingly negative and unrelenting reports and commentary about the congressional, SEC and
USAO investigations into Ms. Stewart’s ImClone transaction. Congressmen appeared on national
television and, not so subtly, called Ms. Stewart a liar. Analysts told investors not to buy her
company’s stock because of the uncertainty the investigations created. Columnists criticized her,
lampooned her, and opined on her guilt.
In recently dismissing a purported derivative action against Ms. Stewart and other
members of MSO’s board of directors, the Delaware Chancery Court confirmed the immateriality
of Ms. Stewart’s June statements: “Stewart’s publicized attempts to quell . . . suspicion were
ineffective at best because they were undermined by additional information as it came to light and
by other parties’ accounts of the events. Ultimately, Stewart’s prompt efforts to turn away
unwanted media and investigative attention failed.” Beam v. Stewart, 2003 WL 22271421, at *3
(Del. Ch. Sept. 30, 2003). As a matter of law and elementary common sense, Ms. Stewart’s
statements – the essence of which were to deny guilt in the face of highly visible government
7
investigations that continued for another year – were incapable of misleading investors about the
nature of MSO stock and, therefore, are immaterial. See infra Point I(B).
There are additional grounds for dismissing Count Nine. As further evidenced in the
factual background, Ms. Stewart’s statements of June 12 and 18 did not alter the total mix of
information available to the public because they merely repeated information already in the public
domain. As such, they were immaterial as a matter of law. See infra Point I(B). Moreover, none
of the statements could have violated Rule 10b-5 because none was made “in connection with”
the purchase or sale of MSO securities. The statements were issued in Ms. Stewart’s personal
capacity, not on behalf of MSO, and they did not discuss MSO or its securities. For that reason,
they cannot satisfy the “in connection with” requirement for Rule 10b-5 liability. See infra Point
I(C).
A.
Factual Background
In early June of 2002, a subcommittee of the House Committee on Energy and Commerce
began investigating Martha Stewart’s sale of ImClone stock despite the fact that the FBI, SEC,
and USAO were already investigating the same transaction. Almost immediately, congressional
representatives began leaking information to the media leading to a cascade of articles suggesting
that Martha Stewart had an insider trading problem.
For corporate executives like Martha Stewart, June 2002 was not a good time to become
embroiled in an insider trading scandal. Beginning with the Enron debacle, a series of high profile
corporate scandals had rocked Wall Street, and negative media coverage abounded. In just the
three weeks leading up to June 6, the media reported that: (1) federal prosecutors, in addition to
the SEC, were investigating possible accounting irregularities at cable company Adelphia
8
Communications, which had disclosed guaranties on $2.3 billion of loans to entities owned by the
family that controlled the company (App. 47-52, 78);3 (2) Merrill Lynch agreed to pay $100
million to settle an investigation relating to analyst conflicts, and other investment banks were
under investigation for similar conflicts (App. 53-60, 78); (3) the SEC and NASD were
investigating Knight Trading, the largest trader of Nasdaq stocks, for improper trading (App. 7178); (4) Dennis Kozlowski resigned as CEO of conglomerate Tyco International and was indicted
on charges of tax evasion the next day (App. 78-88).
1.
Congress Leaks the Investigation and Representatives of Ms. Stewart Respond
On Thursday, June 6, 2002, Congress began leaking to the media information about the
congressional investigation into Ms. Stewart’s ImClone transaction. One of the members of the
media who learned of the investigation – reporter Chris Adams of The Wall Street Journal –
contacted a public relations consultant to MSO and Martha Stewart to inquire about the issue. As
the Indictment alleges, Ms. Stewart’s attorney returned the call and answered questions posed by
the reporter. See Ind. ¶ 61.
That evening, the Associated Press (“AP”) posted on the internet a story concerning Ms.
Stewart’s ImClone transaction. The AP report cited Rep. Jim Greenwood (Chairman of the
House Energy and Commerce subcommittee on Oversight and Investigations) as revealing that
Martha Stewart – who had been falsely “romantically linked” to ImClone CEO Sam Waksal –
sold some 3,000 ImClone shares prior to the FDA’s refusal to accept ImClone’s Erbitux
application on December 28, 2001. The AP report concluded with this quote from a stock
analyst: “In this market[,] you are guilty until proven innocent.” App. 89-91; Ind. ¶ 58.
3
“App.” references the Appendix incorporated by reference as Exhibit E to the Affidavit of John J. Tigue,
Jr.
9
Though the stock analyst was not referring directly to Martha Stewart, his comment about
the market’s presumption of guilt proved ominously prescient. Leaks from the congressional and
accompanying investigations rapidly snowballed, triggering an avalanche of negative publicity for
Ms. Stewart. The media relentlessly pilloried Ms. Stewart and suggested – falsely, as has now
been definitively established – that she sold her ImClone stock on an illegal tip from Sam Waksal
about the FDA action on Erbitux.
On Friday, June 7, 2002, the Stewart/ImClone investigation story hit the newspapers. In
articles with headlines like “Martha Dumped ImClone Shares” and “Martha Stewart’s Sale of
ImClone Shares Faces U.S. House Probe,” the media reported that Ms. Stewart was a close friend
of Sam Waksal’s and sold all of her ImClone shares just before the FDA decision that sent the
stock tumbling. The press cited Rep. Greenwood as saying that the House Committee was
examining Ms. Stewart’s ImClone transaction. See App. 94-104.
The press also quoted Ken Johnson, the Committee's spokesman, who skeptically
questioned the propriety of Ms. Stewart’s sale, along with sales by members of the Waksal family:
“There was a lot of stock dumped in the 48 hours before the FDA acted. . . . Was this all an
extraordinary coincidence, or did someone have insider knowledge?” App. 95, 100. A number of
these same articles also published a statement in defense of Ms. Stewart from her spokeswoman:
“Martha Stewart did not receive any nonpublic information regarding ImClone prior to her sale of
a small number of ImClone shares. Her transaction was entirely lawful.” App. 94-100. This
statement was drafted and issued after Ms. Stewart’s attorney talked to the reporter from The
Wall Street Journal.
10
The June 7 Wall Street Journal reported the same sound bytes from Rep. Greenwood and
Ken Johnson. Making it clear Ms. Stewart was under investigation, the Journal also cited Ms.
Stewart's attorney as saying that Ms. Stewart purchased her ImClone shares on the open market
and made a smaller sale a couple of months prior to December 27. According to the Journal, the
attorney explained that the December 27 sale was executed because Ms. Stewart had a
predetermined price at which she planned to sell the stock if it ever dropped to $60. The Journal
article continued, purportedly quoting the attorney: “‘[t]here is absolutely no evidence
whatsoever that she spoke to Sam, or had any information from anybody from ImClone during
that week. . . . I am absolutely sure that there was no communication of any kind between her
and Sam, no passing of any information from him to her.’” App. 102-04; Ind. ¶ 61.
Despite the proclamations of Ms. Stewart’s innocence and explanation of her sale, MSO
stock reacted to the government’s investigation of Ms. Stewart's securities trade, dropping 8.5%
from its June 6 closing price of $19.01 to a June 7 close of $17.39. App. 1.
2.
Congress Leaks the Phone Message for Waksal
The next day – Saturday, June 8 – media across the country and globe reported on the
already revealed congressional investigation of Ms. Stewart’s ImClone sale, some citing Rep.
Greenwood as saying that Congress “intends to explore whether Stewart dumped her shares after
. . . Sam Waksal tipped her off to the pending FDA decision.” App. 105-24. Rep. Greenwood
told the New York Daily News that he would not rule out subpoenaing Ms. Stewart to testify
before the House subcommittee. App. 109.
Many of the June 8 press reports included what appeared to be a startling new revelation
by congressional investigators: Martha Stewart called Sam Waksal seeking information around
11
the time she sold her ImClone shares, leaving a message that “something is going on with
ImClone and she wants to know what.” App. 111, 117, 122. As the evidence shows, Ms.
Stewart directed her broker to sell her ImClone stock before calling Waksal. Nevertheless, the
June 8 Seattle Times, for instance, ran a story with this false headline: “Stewart Sold Stock After
Calling CEO.” See App. 117-19 (emphasis added).
A New York Times article reported on the phone message and stated: “Ms. Stewart said
she knew nothing about what was happening at the biotechnology company.” It then quoted a
spokeswoman for Ms. Stewart: “Records show that Ms. Stewart’s call came after she had already
placed her order to sell. . . . On its face, the phone message confirms that she knew nothing about
what might be happening at ImClone. She did not speak to Waksal at any time, and he never
returned the call.” The Times further reiterated the explanation of the trade published in the June
7 Wall Street Journal – Martha Stewart had decided to sell ImClone if the price dropped below
$60. App. 111-12.
Under the headline “Martha Stewart’s Call Questioned: Star Called ImClone Chief on Day
She Sold Stock,” the June 8 Washington Post, based on a congressional leak, reported that
“[l]awyers for Stewart and for Waksal have told congressional investigators that Waksal never
returned the Dec. 27 call and did not pass any negative information to Stewart.” Relying on
congressional sources who divulged what they had heard from Ms. Stewart’s attorneys, the article
then disclosed new details about Ms. Stewart’s reasons for selling ImClone – that her decision to
sell below $60 was made in a conversation with her broker and that, when ImClone fell below $60
on December 27, her broker called her and received permission to sell:
Stewart’s lawyers have told congressional investigators that her stock sale
occurred on Dec. 27 because she had decided, in a conversation with her broker
12
some weeks earlier, to sell if ImClone’s volatile stock fell below $60 a share.
When the price dipped below that level, the broker called and got her permission
to sell before she placed the call to Waksal. . . . (emphasis added.)
App. 122-24.
3.
Congress Leaks ImClone’s Advance Knowledge of the FDA Decision
On Monday, June 10, media reports from outlets such as the Wall Street Journal, USA
Today, and CNNfn (a cable TV station) added more fuel to the fire of suspicion. They cited
congressional sources as asserting that ImClone knew as early as December 4, 2001 that its
Erbitux application was in trouble and learned that the FDA would refuse the application on
December 25 – three days before the company received the official decision from the FDA, and
two days before Martha Stewart, “a close friend” of Sam Waksal, sold her ImClone stock. App.
127-32, 137-42.
The Journal reported that Congress was looking into Ms. Stewart’s December 27 call to
Sam Waksal. The article quoted “Ms. Stewart’s representative” reiterating that Ms. Stewart sold
ImClone because it had “fallen below a predetermined price of $60 a share.” The representative
also reiterated that Ms. Stewart’s call to Sam Waksal came after she instructed her broker to sell,
adding further details about the timing of the events: “Ms. Stewart spoke to her broker at 1:41
p.m. . . . after the broker noticed the stock had dropped. She got off the phone with her broker,
who immediately placed the trade, at about 1:43 p.m., the same time Ms. Stewart called Samuel
Waksal.” App. 140-42.
4.
The Media Reports that the SEC Too Is Investigating Ms. Stewart
The New York Post kept the fires burning on June 10 by citing, for the first time, an SEC
source who falsely stated that all of Sam Waksal’s “society chums,” including Martha Stewart,
13
“got the tip to sell before the shares tanked.” The SEC source referred to “various investigations”
into ImClone transactions. App. 133-34. Other media reports on June 11 confirmed that the
SEC investigation of ImClone trading included Ms. Stewart’s transaction. See App. 143-47.
The market appeared to be reacting sharply and negatively to the media coverage of the
congressional and SEC investigations into Ms. Stewart’s ImClone transaction. On June 10,
MSO’s stock closed at $15.96, down 8.2% from its close on Friday, June 7, and 16% from its
close on June 6, before the news of Ms. Stewart’s involvement in the ImClone scandal broke. See
App. 1. MSO stock rebounded a bit on June 11, closing at $17.10, up 7.1% from June 10, but
still down 10% from June 6. See id.
5.
The Government Arrests Sam Waksal on June 12
Speculation about whether Martha Stewart’s ImClone transaction was the product of an
illegal tip from Sam Waksal exploded on June 12, when the FBI arrested Waksal early in the
morning. The USAO filed a criminal complaint charging Waksal with insider trading, conspiracy,
and perjury. The SEC simultaneously filed a civil enforcement action claiming insider trading.
See Complaint, United States v. Waksal (S.D.N.Y. 2002) (No. 02 Mag. 1186); Complaint,
Securities and Exchange Commission v. Waksal (S.D.N.Y. 2002) (No. 02 Cv. 4407); see also
Ind. ¶ 62. U.S. Attorney James B. Comey held a press conference announcing the Waksal arrest,
and television channels such as CNBC broadcast segments of the press conference. In response
to a question about whether Ms. Stewart was a target of his criminal investigation, Mr. Comey
said he could not comment, but also stated, “We’re looking at anyone who might have been
involved in criminal conduct with the defendant”— which some members of the press interpreted
as a “yes.” See, e.g., App. 223-26.
14
News of Waksal’s arrest, and its implications for Martha Stewart, spread quickly on the
internet, radio, and television. See, e.g., App. 153-70, 178-80. After closing at $17.10 on June
11, MSO stock opened at $15.90 on June 12 and closed at $15.00, down 12.3%. App. 1.
That afternoon, Rep. Jim Greenwood appeared on the Fox News channel to discuss the
Waksal arrest. Asked whether it was coincidental that “insiders,” including Martha Stewart, sold
ImClone stock prior to the announcement of the FDA decision, Rep. Greenwood accused Ms.
Stewart of insider trading: “I don’t believe it is coincidental. . . . I believe that . . . these trades
were made on inside information, and that’s illegal.” App. 168-70.
So, by the afternoon of June 12, the market knew the following information about the
Martha Stewart/ImClone matter from Congress and other sources:

Congress and the SEC, and perhaps the U.S. Attorney's Office as well, were
investigating Ms. Stewart's transaction. See, e.g., App. 94-95, 98-126, 133-34.

The Chairman of the congressional subcommittee investigating Ms. Stewart
believed Ms. Stewart's trade was an illegal trade on inside information. See App.
168-70.

Martha Stewart was a close personal friend of former ImClone CEO Sam Waksal
and sold some 3,000 shares of ImClone on December 27, 2001 – the day before
ImClone received an adverse decision from the FDA on its key product, Erbitux,
and its stock began to plummet. See, e.g., App. 89-185.

Ms. Stewart called Sam Waksal around the time of her trade and left the message
that “something is going on with ImClone and she wants to know what.” See,
e.g., App. 111, 117, 122, 125, 182.

Sam Waksal was arrested on charges of insider trading, conspiracy, and perjury.
See, e.g., App. 153-70, 178-80.
From Ms. Stewart’s representatives, the market also knew Ms. Stewart’s position on the
matter:
15

She purchased her ImClone shares on the open market and sold some of those
shares a couple of months before December 27. See, e.g., App. 102-03.

She did not communicate with Sam Waksal, or receive any nonpublic information
regarding ImClone, prior to her December 27 sale. See, e.g., App. 94-104, 10610, 113-16, 120-26, 143-47, 153-54, 171-73.

She knew nothing about what was happening at ImClone. See, e.g., App. 112,
141, 152.

Her sale was entirely lawful. See, e.g., App. 94-104, 106-10.

Her call to Sam Waksal on December 27 occurred at 1:43 p.m., after she placed
her sell order at 1:41 p.m. She did not speak to Waksal, and he never returned her
call. See, e.g., App. 111, 141, 151-52.

In a conversation with her broker some weeks prior to December 27, she decided
to sell ImClone if it fell below $60 a share. When the price dipped below $60 on
December 27, the broker called and got her permission to sell. See, e.g., App.
122-26, 157, 183.
6.
Martha Stewart Issues a Statement
At 5:32 p.m. on June 12, a statement declaring Martha Stewart’s innocence, drafted in
part by Ms. Stewart’s attorneys, was released. The release reiterated the factual points the market
knew from prior statements by Congress and by Ms. Stewart’s representatives. The header for
the statement was: “Martha Stewart Issued the Following Statement.” The statement was not
attributed to MSO, nor was there any mention of MSO or MSO securities in any part of the
statement. See App. 181. The first paragraph of the statement read:
In response to media inquiries, I want to reiterate the facts surrounding my sale of
ImClone stock. I purchased 5,000 shares of ImClone several years ago in the
public market. I tendered all of these shares in the $70 per share tender offer made
by Bristol Myers to all public shareholders of ImClone in October 2001. Because
the Bristol Myers offer was oversubscribed, I was able to sell only about 20% of
my shares.
16
The government does not allege any impropriety in this first paragraph. But it alleges that
much of the remaining two paragraphs criminally violated the securities laws. See Ind. ¶ 63. The
remainder of the statement read as follows (the allegedly material misrepresentations are
underscored):
For the remaining 3,928 shares, I agreed with my broker several weeks after the
tender offer, at a time when the ImClone shares were trading at about $70 that, if
the ImClone stock price were to fall below $60, we would sell my holdings. On
December 27, I returned a call from my broker advising me that ImClone had
fallen below $60. I reiterated my instructions to sell the shares. The trade was
promptly executed, at $58 per share. I did not speak to Dr. Samuel Waksal
regarding my sale, and did not have any nonpublic information regarding ImClone
when I sold my ImClone shares. After directing my broker to sell, I placed a call
to Dr. Waksal’s office to inquire about ImClone. I did not reach Dr. Waksal and
he did not return my call.
In placing my trade, I had no improper information. My transaction was entirely
lawful.
7.
The June 12 Statement Is Met with Skepticism
Martha Stewart’s June 12 statement did nothing to quell the media frenzy concerning her
ImClone transaction or the public doubts about its legality. On June 13, the Waksal arrest and
Ms. Stewart’s sale of ImClone were major stories in newspapers across the country, making the
front page of papers such as the Wall Street Journal, the Washington Post, the New York Post,
and the Daily News. See App. 223-29, 247-58. Notwithstanding Ms. Stewart’s declaration of
innocence in her end-of-the-day June 12 statement, a Chicago Tribune article, for instance, stated
that “the timing of Stewart’s ImClone sale . . . is sure to receive close scrutiny in the wake of the
charges against Waksal. ‘I wouldn’t wish that timing on anybody,’ said Stephen Presser,
professor of law and business at Northwestern University. ‘It sure doesn’t look good.’” App.
194-96.
17
The front page of the New York Post blared: “MARTHA’S STEWING[.] NYSE
PROBES HER STOCK DEALS.” The Post article reported that the New York Stock Exchange
(“NYSE”) was investigating Ms. Stewart and that the SEC would “piggyback” its own
investigation of Ms. Stewart on the NYSE probe. See App. 227-30. (The NYSE later denied it
was conducting an investigation. See App. 367-71, 375-76.) Another Post article –
“MARTHA’S PRISON EVERYDAY COLLECTION” mocked Ms. Stewart with dark humor
about how she might decorate her prison cell if convicted and incarcerated for insider trading.
App. 235-36.
The New York Times ran two articles on the ImClone case, including one entitled
“ImClone Case Drags Martha Stewart Shares Down.” That article recounted Ms. Stewart’s
version of the facts – not from her June 12 statement, but from what “[s]he ha[d] told
Congressional investigators,” asserting that the June 12 statement was “consistent with
information she gave to the House Energy and Commerce Committee.” Again, notwithstanding
Ms. Stewart’s statement, the Times quoted congressional committee spokesman Ken Johnson as
follows: “Martha Stewart is not the focus of our investigation. But certainly the curious timing
of her sale has raised some eyebrows, and we’re digging a little deeper.” An analyst covering
MSO said: “None of this has looked good for Martha Stewart as a person, in an environment
where people are very sensitive to any appearance of impropriety by corporate leaders.” App.
241-42.
Media reports on June 13 further confirmed that Ms. Stewart was being investigated not
only by Congress and the SEC, but by the U.S. Attorney’s Office as well. The Wall Street
Journal read between the lines of U.S. Attorney Comey’s press conference, reporting that
18
“[f]ederal officials said they are still looking at ‘everyone’ involved in ImClone trading that might
be connected to Dr. Waksal. One investor under scrutiny . . . [is] Martha Stewart. . . .” App.
249-51. The Daily News one-upped the Journal, reporting a purported leak from the USAO’s
criminal investigation in an article entitled “MARTHA FRIEND BUSTED IN SCAM. Stewart
tied to biotech firm stock-selling case.” Citing “two sources familiar with the investigation,” the
News revealed that (a federal prosecutor and) FBI agents questioned Ms. Stewart in April 2002
about the timing of her ImClone sale and “pressed” her about “her communications with Waksal
in the days before the sale.” App. 223-26.
On June 13, MSO opened trading at $16.05, after closing at $15.00 the previous day.
App. 1. However, by 10:43 a.m. – after 73 minutes of trading – the stock had fallen back to
$15.00. It hovered around $15.00 into the afternoon and closed down 1.3%, at $14.80.
See App. 1, 5-9.
NBC Nightly News capped off a scathing day for Ms. Stewart by reporting that she
“denies getting any tip. . . . But . . . Waksal’s phone log shows a call that same day from Martha
Stewart. That message raises questions about Stewart’s claim she already had sold her stock when
she called Waksal.” App. 221-22.
8.
Congress and the Government Question Ms. Stewart’s Statement
The next day, Friday, June 14, the media turned up the heat on Ms. Stewart several more
notches. The front page of the New York Post featured a picture of Ms. Stewart with the
headline “MARTHA IN HELL’S KITCHEN.” App. 304. A Post article reported that Martha’s
broker, Peter Bacanovic, was being questioned by the SEC and quoted Robert Heim, a securities
19
lawyer and former assistant regional director of the SEC, as saying things didn’t “bode well for
Martha Stewart.” App. 309-10.
The headline for the New York Times article was “Scrutiny Increases for Martha
Stewart.” The Times reported that “questions remained about the activities of Ms. Stewart” and
that congressional investigators were seeking Merrill Lynch records and Ms. Stewart’s telephone
logs. According to the Times, congressional spokesman Ken Johnson disclosed further details of
what Ms. Stewart’s lawyers had told the congressional committee about her trade and her calls to
Sam Waksal. “‘We’re trying to verify what time the trades were executed and what time the calls
were made,’ Mr. Johnson said.” App. 312-13.
Under the headline “Martha Stewart Sale of Stock Under Inquiry,” the June 14 Wall
Street Journal reported that the criminal investigation of Ms. Stewart was ongoing
notwithstanding her June 12 statement, and that the statement actually “frustrated” congressional
investigators: “Federal prosecutors are actively investigating whether Martha Stewart had inside
information when she sold her shares of ImClone . . . in late December, even though Ms. Stewart
had signaled her intention to sell as early as October.” The Journal stated that prosecutors were
examining telephone records looking for any means of contact between Ms. Stewart and Sam
Waksal. The Journal summarized Ms. Stewart’s June 12 statement but noted that she “hasn’t
described the [$60] agreement in detail and hasn’t said precisely when it took effect . . . . The
sketchy information has frustrated congressional investigators, who are also looking into Ms.
Stewart’s transactions.” The Journal quoted a source on the congressional probe as saying, “‘I
don’t know if anyone has been able to pin Ms. Stewart down on the date’ of the agreement to
20
sell. ‘It’s obviously been thrown out as a vague matter of weeks, different shades of this and
that.’” App. 316-18.
For the second consecutive day, the New York Daily News published a purported leak
from the USAO investigation, this time revealing that the government was also investigating Ms.
Stewart for false statements in her interview with prosecutors. The front-page headline was
“MARTHA STOCK STORY PROBED,” with the lead: “Did the diva of domesticity tell the
truth?” The News stated that – according to “two sources familiar with the investigation” – Ms.
Stewart “denied to prosecutors and the FBI that Waksal illegally tipped her off,” but the
government was putting her statements “under a microscope” and comparing them to her
broker’s version of events. The News further noted that investment bank Davenport & Co.
downgraded its rating of MSO stock from “buy” to “accumulate.” “‘[I]nvestor perception has
taken over and investors are clearly steering away from tainted companies. . . . It’s just hard to
pound the table on it when the leader is suspected of criminal activity.’” App. 300-03.
In the face of the government investigations of Ms. Stewart, Davenport & Co. wasn’t the
only investment bank to downgrade MSO on June 14; the two banks that published analyst notes
that day both downgraded the stock as well. See, e.g., App. 323-24. Merrill Lynch told the
market it was downgrading its short-term rating on MSO from Buy to Neutral and its long-term
rating from Strong Buy to Neutral. Merrill Lynch clearly was not prepared to rely on Ms.
Stewart’s June 12 statement in light of the investigations. The analyst note recorded that “Ms.
Stewart issued a statement on Wednesday indicating that her transaction was entirely lawful” but
immediately added that “[w]e have no knowledge of whether Ms. Stewart committed any
improprieties.” App. 293. William Blair & Company similarly told the market in an analyst note
21
that it was reducing its MSO rating from Long-term Buy to Hold. The note explained: “Our
downgrade is predicated on risks related to what has been reported in the Wall Street Journal
today as an active investigation by federal prosecutors of CEO Martha Stewart’s sale of ImClone
. . . shares.” Despite the declarations of Ms. Stewart’s innocence and her June 12 statement,
William & Blair concluded, “[w]e do not have enough information to guess at the outcome of the
investigation. . . .” App. 303.
On June 14, MSO stock opened trading at $13.50, $1.30 (or 8.8%) below where it closed
the day before. The stock ended up at $15.45 on the day, up $0.65 (or 4.4%) from its previous
close, but still down 18.7% since the scandal broke.
The Friday evening edition of ABC News’s “World News Tonight” encapsulated the
market’s reaction to the week’s developments: “Investigators are now looking into the timing”
of Ms. Stewart’s ImClone sale. “And Martha Stewart’s company is getting pounded, its stock
down 19 percent for the week. Wall Street seems to be assuming the worst.” App. 260-61.
The weekend of June 15-16 afforded Ms. Stewart no refuge from the media onslaught
challenging her June 12 statement. The Saturday, June 15 Daily News, for instance, published
“PROVE IT, STEWART TOLD FEDS DEMAND BACKUP FOR HER STOCK STORY,”
quoting Ken Johnson saying that Congress was demanding “‘written documentation to
corroborate her story. . . . We have no reason not to believe her, but . . . we simply do not accept
‘Take my word for it.’” The article cited a source raising questions about Ms. Stewart’s
arrangement with her broker to sell if ImClone dipped below $60. The source called the
arrangement “unusual,” since stop-loss orders are usually automatic, and said Congress was
looking for a stop-loss order. The News also repeated that federal authorities were investigating
22
Ms. Stewart’s statements to the FBI in April and publicized the fact that analysts had downgraded
MSO stock because of the investigations. App. 353-55.
The New York Post that day ran “CONGRESS PUTS STEWART IN PRESSURE
COOKER,” in which it reported the latest comments from Ken Johnson. It also ran “DEMS
FLEEING MESSY MARTHA: SENATORS CALL OFF FUND-RAISING BASH WITH
TAINTED TRADER,” reporting that “Martha Stewart has turned radioactive for Democratic
senators who have called off a gala fund-raiser” she was supposed to host. A source said that this
“major group of politicians . . . obviously [doesn’t] think it’s prudent to be too closely associated
with Martha at the moment.” App. 358-60; see also App. 378-79, 401-03.
9.
The Media Reports a Discrepancy Between Ms. Stewart’s and Mr. Bacanovic’s
Accounts
By Monday, June 17, media coverage of Ms. Stewart’s role in the ImClone scandal was
nearly ubiquitous. Time magazine reported that despite congressional requests, Ms. Stewart had
yet to produce any evidence of a stop-loss order and sources said there never was one – that her
understanding with Mr. Bacanovic to sell ImClone was only oral. Time observed that Ms.
Stewart’s denial of guilt had not “spared her horrendous publicity. . . . The tabloid press has been
flogging” her. App. 467-71.
That day’s Wall Street Journal gave consumers and investors another reason to discount
Ms. Stewart’s statements, reporting that Peter Bacanovic’s account of the $60 understanding
differed from Ms. Stewart’s. Mr. Bacanovic’s position was that they agreed in mid-December –
not late November, as Ms. Stewart had said – to consider selling ImClone if it dropped below
$60. The Journal cited a source saying that the “exact date – which is difficult to pin down
because the agreement was made orally rather than in writing – is potentially significant to a
23
criminal investigation” since Mr. Bacanovic’s account “leaves open the possibility that Ms.
Stewart could have known before she struck the deal that the FDA might reject the ImClone
application.” The Journal said Mr. Bacanovic had notes of his December conversation with Ms.
Stewart. App. 475-77; see also App. 423-24, 431-34, 440-41.
Also on June 17, in light of the government investigations, another investment bank joined
the chorus refusing to accept Ms. Stewart’s statement at face value. A Brean Murray analyst note
stated: “we have no ability to assess the outcome or the resolution of issues surrounding
Martha Stewart and her personal stock trading. . . . this pending issue creates enormous
uncertainty. . . . Thus, we would be hesitant to make new commitments at this time.” App.
425-26 (emphasis in original). That day, MSO closed trading at $15.03, down $0.42 (or 2.7%)
from the close on Friday, June 14. App. 1.
On June 18, the media broadcast congressional investigators’ reaction to news of the
discrepancy between Ms. Stewart’s and Mr. Bacanovic’s accounts of the $60 understanding and
underscored yet again that Ms. Stewart’s June 12 statement was not being accepted or relied
upon by the media or the market. The New York Post reported that “Martha Stewart is getting
on Congress’ nerves,” in a front-page article entitled “COME CLEAN: CONGRESS IS FED UP
WITH MARTHA.” App. 557-59. Spokesman Ken Johnson was widely quoted as saying that
there were “troubling inconsistencies” between the accounts and that Congress had requested an
interview with Mr. Bacanovic to address those inconsistencies. See App. 504, 527, 557-61, 582.
The New York Times reported that a Merrill Lynch analyst note reiterated its downgrade of MSO
stock – despite positive developments at the company. The analyst noted that ad pages in the July
issue of MSO’s flagship magazine – Martha Stewart Living – rose 26% over the previous year
24
and that he expected MSO to raise its earnings estimate for the second quarter of 2002 by one or
two cents. However, he was maintaining his downgarde of MSO because of the lack of “clarity
on the issue surrounding Ms. Stewart’s sale of her ImClone shares.” App. 560-61.
Between the June 12 statement and the afternoon of June 18 – notwithstanding the
national cascade of false, libelous insinuations of insider trading by congressional investigators,
other government sources, and the press, all of which battered her reputation – neither Ms.
Stewart nor her representatives made any further public statements concerning Ms. Stewart’s
ImClone transaction. In fact, a multitude of media articles during that week noted that Ms.
Stewart’s representatives declined to comment beyond the June 12 statement on Ms. Stewart’s
behalf. See, e.g., App. 223-24, 270-71, 289-92, 300-01, 316, 353-54, 358-59, 478, 489-91, 49899, 554, 560-61, 580. The June 18 Daily News observed that Ms. Stewart had remained silent
since June 12, despite watching MSO’s stock decline by more than 20% since June 6, at a
personal cost to her of more than $130 million. Quoting another expert, the News said that
“[p]eople think silence is an admission of guilt.” App. 554-56. That day, MSO stock closed at
$14.40, down $0.63, or 4.2%. App. 2.
10.
Martha Stewart Issues a Second Statement
At 5:32 p.m. on June 18, a second public statement drafted by Ms. Stewart’s attorneys
was issued over the PR Newswire on behalf of Ms. Stewart. This statement reiterated the content
of Ms. Stewart’s June 12 statement. As with the June 12 statement, the June 18 statement was
not attributed to MSO, nor was there any mention of MSO or MSO securities in any part of the
statement. See App. 567. The statement read as follows (the portions challenged by the
government are underscored):
25
The media focus on ImClone has generated an enormous amount of
misinformation and confusion. Many have speculated about what might have
happened. In my June 12, 2002 statement I explained what did happen. I had no
insider information. My sale of ImClone stock was entirely proper and lawful.
The sale was based on information that was available to the public that day. The
stock price had dropped substantially, to below $60. Since the stock had fallen
below $60, I sold my shares, as I had previously agreed to do with my broker.
These are the facts. I am confident that time will bear them out.
Earlier this year, I spoke with the SEC and the U.S. Attorney’s office and have
cooperated with them fully and to the best of my ability. I am also cooperating
with the House Energy and Commerce Subcommittee.
11.
Doubts About Ms. Stewart’s Account Persist
Like her June 12 statement, Ms. Stewart’s June 18 statement reiterating the explanation
for her trade did nothing to resolve the public doubts about its legality and how investigations
would be resolved. The June 19 Boston Globe, for instance, reported that “Martha Stewart said
again yesterday that she had no inside information from . . . Sam Waksal before selling shares in
[ImClone]. But legal experts said Stewart nevertheless could become a target of an
insider-trading inquiry” by the SEC. App. 594-95; see also, e.g., App. 602-03, 610-12, 638-40.
Congressional investigators took to the airwaves in the morning of June 19 and continued
to blast Ms. Stewart. On the Today show, for example, Rep. Bart Stupak said that trades such as
Ms. Stewart’s “aren’t coincidences” but “calculated financial gains by certain people to take
advantage of a situation.” Speaking of Ms. Stewart’s phone message for Sam Waksal on
December 27, the Today broadcast continued: “Stewart insists she had sold her stock before
calling Waksal, again, Congress isn’t so sure. Rep. Stupak: ‘That’s a message you leave before
you sell your stock and make sure you’re doing the right thing.’” “Stewart insists her trade was
26
entirely legal,” but “[c]ongressional investigators say the verdict on Stewart is still out.” App.
654-55; see also App. 584-85.
Congressional investigators told the print media that Ms. Stewart’s attorneys had faxed
investigators some of the documents they had requested, but the June 19 papers carried this quote
from spokesman Ken Johnson: “The documentation cleared up many of our questions, but not
the most nagging one,” i.e., when Ms. Stewart and Mr. Bacanovic agreed to consider selling
ImClone if it fell below $60. See App. 651-52, 656-57, 660. Notwithstanding Ms. Stewart’s
June 18 statement, New York Newsday ran another article about how she might decorate her
prison cell. App. 670-73. The New York Post ran “SHAREHOLDERS STAY AWAY; MSO
HITS NEW LOW,” in which it quoted an analyst saying, “‘Who knows what happened? The
timing is suspicious, and investors have the jitters with all the CEOs doing bad things these
days.’” App. 663-64.
12.
MSO Increases its Earnings Guidance
While its CEO continued to be lambasted, MSO, as a business, was able to announce good
news on June 19. That morning, MSO issued a press release announcing that its earnings
guidance for the second quarter of 2002 was $0.15 per share (up from previous guidance of $0.14
per share). In a corporate press release, Ms. Stewart said that MSO shareholders “will continue
to benefit from a combination of new product introductions and a strengthening of existing
businesses, which will continue to help deliver future revenue and earnings growth. Martha
Stewart Living, our flagship magazine, continues to deliver strong results, posting a 12% increase
in ad pages in the second quarter of 2002. . . .” App. 649-50.
27
In the early afternoon of June 19, Martha Stewart and other MSO executives delivered a
presentation at the Gannett Media Conference in Manhattan. At the conference, Ms. Stewart
read a version of her June 18 statement (nearly identical to the printed version). See Ind. ¶ 66;
App. 567, 619-20. She and her colleagues confirmed the increased earnings guidance and
discussed other positive aspects of MSO’s performance. See App. 619-36.
There was other good news for Ms. Stewart in the market on June 19. In an article
entitled “MARTHA’S SAFE; Isn’t target of fed stox probers, but may testify,” the Daily News
reported yet another purported leak from the government’s criminal investigation. The News
cited a source familiar with the criminal investigation as saying that “Ms. Stewart is not
considered a target in the ongoing FBI probe that snared her friend, Sam Waksal, and will likely
not face any criminal charges. She is being looked at merely as a potential witness in the case
against Waksal . . . the source said.” App. 656-59.
On June 19, MSO stock opened at $14.40, where it had closed the day before, and
climbed to a closing price of $16.45, up 14.2%. App. 2.
13.
Nearly a Year Later, the Government Files Charges Against Ms. Stewart
Almost a year to the day the investigations became public, on June 4, 2003, the
government indicted Martha Stewart on charges of conspiracy, obstruction of an agency
proceeding, false statements, and securities fraud. The gravamen of the Indictment is that Ms.
Stewart and Peter Bacanovic conspired to cover up what the government alleges are the true facts
of Ms. Stewart’s ImClone transaction on December 27, 2001: that Ms. Stewart placed her sell
order with Douglas Faneuil, Mr. Bacanovic’s assistant at Merrill Lynch, and prior to placing that
28
order, Mr. Faneuil (at Mr. Bacanovic’s direction) told her that Sam Waksal was attempting to sell
his ImClone shares held at Merrill Lynch. See Ind. ¶¶ 15-18.
The securities fraud count (Count Nine) does not allege what the public wildly speculated
back in June 2002 – that Ms. Stewart committed insider trading when she sold her ImClone
shares. There is no insider trading charge in the Indictment. Instead, Count Nine alleges that Ms.
Stewart’s speech in June 2002, asserting her innocence, protecting her reputation, and speaking
out against the false leaks of a government investigation, was itself a federal crime.
B.
The Alleged Misstatements Were Immaterial as a Matter of Law
1.
The Alleged Misstatements Were Immaterial in the Context of the Public Scandal
in Which They Were Issued
a.
If the Alleged Misstatements Could Not Have Misled a Reasonable
Investor About the Nature of MSO Securities, They Could Not Have
Violated Rule 10b-5
The first fatal defect in Count Nine is that it charges securities fraud for statements that
could not have defrauded any reasonable investor and therefore were legally immaterial.
Materiality is an element of a Rule 10b-5 violation, as the rule provides that “[i]t shall be unlawful
for any person . . . [t]o make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the light of the circumstances
under which they were made, not misleading . . . in connection with the purchase or sale of any
security.” 17 C.F.R. § 240.10b-5 (emphasis added).
A misrepresentation or omission is not material unless there is a “substantial likelihood”
that it “would have been viewed by the reasonable investor as having significantly altered the
‘total mix’ of information.” See, e.g., Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)
(emphasis added). According to the Second Circuit, “[t]he touchstone of the inquiry is not
29
whether isolated statements . . . were true, but whether defendants’ representations or omissions,
considered together and in context, would affect the total mix of information and thereby mislead
a reasonable investor regarding the nature of the securities offered.” Halperin v. eBanker
USA.com, Inc., 295 F.3d 352, 357 (2d Cir. 2002) (emphasis added); accord Sedighim v.
Donaldson, Lufkin & Jenrette, Inc., 167 F. Supp.2d 639, 649 (S.D.N.Y. 2001) (Cedarbaum, J.)
(“the question is whether the defendants’ representations, taken together and in context, would
have misled a reasonable investor”) (internal quotation marks omitted).
Dismissal is appropriate when alleged misstatements are “so obviously unimportant to a
reasonable investor that reasonable minds could not differ on the question of their importance,”
see Ganino v. Citizens Utils. Co., 228 F.3d 154, 162 (2d Cir. 2000), and, employing this standard,
this Court and others have repeatedly dismissed securities fraud cases on materiality grounds.4 As
shown below, reasonable minds could not differ on the immateriality of Martha Stewart’s alleged
misstatements in this case.
b.
Statements That Are Subject to Public Controversy – Especially Federal
Investigations – Are Not Material to a Reasonable Investor
Courts understand, and the securities law reflects, that reasonable investors are not easily
misled. They do not believe everything they read or hear, and they can appreciate the risks
attendant upon certain kinds of public statements. As the Supreme Court has held, the “role of
the materiality requirement is not to attribute to investors a child-like simplicity. . . .” Basic, 485
U.S. at 234 (internal quotation marks omitted); accord, e.g., In re Nokia Corp. Sec. Litig., 1998
WL 150963, at *6 (S.D.N.Y. Apr. 1, 1998). And as this Court has stated on more than one
4
See, e.g., Halperin, 295 F.3d at 357-61; Feinman v. Dean Witter Reynolds, Inc., 84 F.3d 539, 540-41
(2d Cir. 1996); In re Syntex Corp. Sec. Litig., 95 F.3d 922, 925, 929-30 (9th Cir. 1996); Lewis v.
Chrysler Corp., 949 F.2d 644, 652-53 (3d Cir. 1991); Sedighim, 167 F. Supp.2d at 644, 647-50.
30
occasion, “corporations are not required to address their stockholders as if they were children in
kindergarten.” See, e.g., Sable v. Southmark/Envicon Capital Corp., 819 F. Supp. 324, 334
(S.D.N.Y. 1993) (internal quotation marks and citations omitted).
Thus, entrenched in Rule 10b-5 law is the notion that certain types of statements, even if
inaccurate, cannot constitute actionable securities fraud because the market discounts them, given
other information in the total mix.5 Investors know quite well that they cannot rely uncritically on
the position of either side in a public controversy. And public controversy is highly relevant to a
determination of materiality. The “total mix of information” for purposes of materiality
encompasses all of the information available to the public; it is not restricted to information
disseminated by the defendant. See, e.g., Ganino, 228 F.3d at 166; Phillips v. LCI Int’l, Inc., 190
F.3d 609, 615 (4th Cir. 1999); In re Westell Techs. Inc. Sec. Litig., 2001 WL 1313785, at *7
(N.D. Ill. Oct. 26, 2001). Accordingly, “[t]he materiality of a statement . . . cannot be determined
in a vacuum. . . . The circumstances in existence at the time that the statement . . . was . . . made
are relevant to determine whether the misstatement . . . was material.” Cyber Media Group v.
Island Mortgage Network, Inc., 183 F. Supp.2d 559, 570 (E.D.N.Y. 2002).
In theory and in practice, Rule 10b-5 case law recognizes that public controversies – even
ones infinitely more mild than the Martha Stewart scandal – can neutralize alleged misstatements
5
See, e.g., In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 364, 368 (3d Cir. 1993) (under the
“bespeaks caution” doctrine, “opinions, predictions, and other forward-looking statements” “must be
considered in context . . . [since] accompanying statements may render [them] immaterial as a matter of
law”); Halperin, 295 F.3d at 357 (applying “bespeaks caution” doctrine); In re IBM Corp. Sec. Litig., 163
F.2d 102, 107 (2d Cir. 1998) (“expressions of optimism” and “[s]tatements that are opinions or
predictions” generally are immaterial and inactionable); In re Nice Sys., Ltd. Sec. Litig., 135 F. Supp.2d
551, 579 (D.N.J. 2001) (“statements of subjective analysis or extrapolation, such as opinions, motives, and
intentions are soft information and hence immaterial for purposes of Rule 10b-5”) (internal quotation
marks and citations omitted).
31
and render them immaterial. For example, in In re Westell Technologies, the district court
dismissed 10b-5 claims based on defendant Westell’s alleged misrepresentations following a stock
analyst’s disclosure of problems with the company’s sales. 2001 WL 1313785, at *3, *7-*8.
Westell executives “downplayed the effect that these problems would have on Westell’s revenue
and falsely assured investors that it would reach predicted levels.” Id. at *3. On the basis of their
misrepresentations, a number of other analysts even issued “buy” recommendations and inflated
price-targets for Westell stock. See id. at *3-*5.
Nonetheless, the court held – as a matter of law – that the prior, single, negative analyst
disclosure was enough to render Westell’s subsequent misrepresentations immaterial. At any
point after that disclosure, Westell’s sales problems “were public knowledge and, therefore, part
of the total mix of information available to the investor who wished to assess the effect on
Westell.” Id. at *8. “Comfort statements made in reaction to acknowledged problems are cold
comfort which a reasonable investor would assess skeptically.” Id.
The power of a public controversy to neutralize alleged misstatements is nowhere stronger
than where the federal government is on one side of the controversy. Cases such as this one,
involving statements by subjects of federal investigations, differ dramatically from the vast
majority of 10b-5 cases – where a company issues statements about itself regarding information
that it is in the best position to know and control and where no contradictory information is in the
mix. Indeed, the securities markets are largely dependent upon the credibility of companies’
statements about their own past performance and future prospects.
Exculpatory statements by persons or companies known to be subjects of federal
investigations are fundamentally different. Even where a subject speaks of something he
32
personally did or did not do, the very fact of the investigation makes the market skeptical of the
truth of the statement. In assessing public statements, the market weighs motive and source in
determining weight and credibility. The government’s credibility invariably is heavily weighted
versus the credibility of the subject of an investigation. The market is well aware that, frequently,
those who declare their innocence ultimately are found culpable.
As the Martha Stewart case illustrates, and as investors know, the mere disclosure of a
federal investigation puts the market on notice that a subject faces serious risks. The
government’s decision to investigate a corporation or its chief executive can have devastating
consequences for a company, regardless of what the truth turns out to be and whether the
defendant ultimately is vindicated. The threat of government prosecution or sanctions frequently
compels companies to pay large settlements even where they dispute the truth of the allegations
against them. Furthermore, an investigation in and of itself can harm a company’s business
through the financial strain of cooperation or the distraction of key personnel. Therefore, it is with
good reason that statements by subjects of federal investigations that are exculpatory, or that
downplay the risks of the investigation, often fall on deaf ears in the securities market.
This is not just common sense; it is the law. This Court has recognized that reasonable
investors discount statements concerning the risks related to a federal investigation. See World
Series of Casino Gambling, Inc. v. King, 1986 WL 12525 (S.D.N.Y. Oct. 30, 1986). In World
Series, the Court dismissed Rule 10b-5 claims based on alleged misrepresentations by Don King’s
attorney during the course of contractual negotiations involving securities. The plaintiff alleged it
was misled when King’s attorney stated that a six year USAO investigation of King was mere
“harassment” and that he did not expect “any problems for King to result from” the investigation.
33
Id. at *2. The Court rejected that claim as a matter of law, holding that “such statements by an
attorney are to be expected, and are akin to . . . the ‘common puff of a salesman,’” which is “not
actionable under section 10(b) or rule 10b-5.” Id. at *4. Quoting Judge Learned Hand, the Court
stated that “[t]here are some kinds of talk which no sensible man takes seriously, and if he does he
suffers from his credulity.” “Such statements, like the claims of campaign managers before
election, are rather designed to allay the suspicion which would attend their absence than to be
understood as having any relation to the objective truth.” Id. at *5 (quoting Vulcan Metals Co. v.
Simmons Mfg. Co., 248 F. 853, 856 (2d Cir. 1918)).
Similarly, in Anderson v. Abbott Laboratories, defendant Abbott Labs (“Abbott”) issued
its first public acknowledgment of a long pending FDA investigation on September 29, 1999, at
which point it “contested the charges” and insisted that it believed it was in “substantial
compliance” with the relevant quality-control regulations. 140 F. Supp. 2d 894, 901 (N.D. Ill.
2001), aff’d on other grounds sub nom., Gallagher v. Abbott Labs., 269 F.3d 806, 810 (7th Cir.
2001). Five weeks later, Abbott entered into a consent decree with the FDA, paid a fine of $100
million – the largest fine ever imposed by the agency – and withdrew 125 products from the
market. Notwithstanding these dramatic facts, the district court held, as a matter of law, that the
September 29 press release did not violate Rule 10b-5; that Abbott was entitled to “express[] its
opinion about its own compliance”; and that “Abbott’s maintenance of its innocence is not fraud.”
Abbott “was entitled to put the FDA to its proof.” Id. at 906-907.
The Fourth Circuit too has held that disclosure of a potentially adverse government
proceeding renders the subject’s denials of wrongdoing immaterial. In Longman v. Food Lion,
Inc., 197 F.3d 675 (4th Cir. 1999), a union representing Food Lion workers publicly announced
34
that it had filed a complaint with the Department of Labor (“DOL”) charging Food Lion with
wage-and-hour violations. See id. at 677-79. Food Lion denied the allegations. Although it
promised to investigate internally, it told the public that it intended to “defend itself vigorously” in
the matter, that its financial success was not based on “illegal employment practices,” and that
claims of wage-and-hour violations were “simply untrue.” Id. at 679, 684. (Food Lion ultimately
settled with the DOL for $16.2 million. See id. at 680.) Over a year later, an exposé broadcast
on ABC’s PrimeTime Live reported that Food Lion employees worked off-the-clock, and Food
Lion’s stock prices dropped 11% and 14% the next day. But when plaintiffs brought a Rule 10b-5
claim for Food Lion’s false denials, the Fourth Circuit affirmed summary judgment for Food Lion.
Id. at 677, 683-84. Despite Food Lion’s denials of wrongdoing and the stock price drop
following the PrimeTime Live broadcast, the Fourth Circuit held as a matter of law that Food
Lion’s statements and omissions were immaterial, as the market was on notice of the risks from
the DOL proceeding prior to PrimeTime Live: “Plaintiffs’ securities fraud claim cannot succeed
because, despite the fact that Food Lion denied the charges, the nature of the off-the-clock claims
and the claims’ risk to earnings were in fact well known to the market before the PrimeTime Live
broadcast, and therefore Food Lion’s omissions were not material.” Id. at 684.
A Third Circuit decision provides perhaps the clearest insight into the market effects of the
disclosure of a federal investigation. See Ieradi v. Mylan Labs., Inc., 230 F.3d 594 (3d Cir.
2000). In Mylan, the Third Circuit affirmed the district court’s grant of a motion to dismiss a civil
securities fraud suit against defendant Mylan Laboratories. The court held that because Mylan
had disclosed the pendency of an FTC antitrust investigation, as a matter of law it did not violate
35
Section 10(b) and Rule 10b-5 by failing to disclose – indeed, even by falsely denying – the key
fact in the case.
In Mylan, the defendant company went beyond issuing a general denial, in which it stated
that it was “cooperating fully” with the FTC and believed the company “ha[d] acted properly and
in full compliance with the Federal Trade Commission Act and all other laws and regulations
governing trade and competition in the marketplace.” 230 F.3d at 597. It also failed to disclose
that it had used exclusive supply contracts to corner the market on the raw materials used to
manufacture certain drugs, for which it had dramatically increased its prices. Later, in a statement
to the Wall Street Journal, Mylan publicly denied cornering the market. See id. The exclusive
supply contracts that enabled Mylan to corner the market became the smoking gun that the FTC
used to force Mylan to disgorge $147 million in illegal profits. Yet, notwithstanding Mylan’s
failure to disclose, and denial of, the critical fact in the FTC’s case, the Third Circuit held that
disclosure of the pending FTC investigation was “more than sufficient” to put Mylan shareholders
on notice that the company’s conduct could subject it to antitrust action by the FTC. Id. at 599.
c.
Martha Stewart’s Alleged Misstatements Could Not Possibly Have Misled
a Reasonable Investor About the Nature of MSO Securities
Martha Stewart’s June statements were not issued in a vacuum. They were issued in a
tempest within a tempest – the ImClone trading scandal, in the midst of a series of scandals that
had cast a pall over corporate America. See supra pp. 8-9. As the Financial Times noted in June
2002: “With controversies erupting on Wall Street, it is not surprising that many investors are
feeling jaded and suspicious about corporate America and the executives running the companies.”
App. 337-39; see also, e.g., App. 78-80, 208-09, 247-48, 282-84, 480-84, 502-03. In June 2002,
36
corporate executives proclaiming their innocence in the face of government investigations had
little chance of having their statements accepted.
And at the height of America’s crisis of faith in corporate executives, the media unfairly
turned Ms. Stewart, a celebrity executive, into the poster child of corporate scandal by
prominently (and daily) publishing her picture along with stories like “Martha’s in Hell’s Kitchen”
(App. 304), which stated or implied she was guilty of insider trading. By giving voice to
congressional spokesmen, leaks from the SEC and government investigations, and analysts
downgrading MSO stock, every national news outlet in America was waving bright red caution
flags warning investors not to rely on Ms. Stewart’s statements. In the context in which they
were issued, the June Statements not only bespoke caution, they “shout[ed] it from the rooftops.”
Halperin, 295 F.3d at 360. The “circumstances in existence at the time that the statement[s]”
were issued render the statements immaterial as a matter of law. See Cyber Media, 183 F. Supp.
2d at 570.
i.
The Alleged Misstatement on June 7
On June 6 and 7, 2002, the market learned that Ms. Stewart was the subject of a
congressional investigation because she was a close friend of ImClone CEO Sam Waksal and,
along with relatives of Waksal, sold her ImClone position right before the FDA decision on
Erbitux that pummeled ImClone’s stock. The market also read a quote from congressional
spokesman Ken Johnson insinuating that Ms. Stewart’s sale likely was not coincidental but was
based on inside information. In response, the market heard from a Stewart spokesperson that
“Martha Stewart did not receive any nonpublic information regarding ImClone prior to her sale of
a small number of ImClone shares. Her transaction was entirely lawful.” It also heard from her
37
attorney that Ms. Stewart’s December 27 sale was executed because she “had a predetermined
price at which she planned to sell the stock. That determination, made more than one month
before that trade, was to sell if the stock ever went less than $60"; and, “There is absolutely no
evidence whatsoever that she spoke to Sam [Waksal], or had any information from anybody from
ImClone” during the week of her ImClone transaction. See supra pp. 9-11.
Especially in the atmosphere of distrust that pervaded the market on June 7, the mere
disclosure of the congressional investigation of Ms. Stewart – coupled with the seemingly
suspicious timing of Ms. Stewart’s sale – sufficed to render the statements on her behalf
immaterial as a matter of law. As Mylan Labs makes clear, that disclosure was “more than
sufficient” to put MSO shareholders on notice that MSO’s CEO confronted a serious risk. See
230 F.3d at 599. In Mylan, the only disclosures about the investigation came from the company;
the investigating authority (the FTC) remained silent. Here, the head of the investigating
subcommittee (Rep. Jim Greenwood) confirmed Congress was investigating Ms. Stewart, and a
congressional spokesman implied that her trade was unlawful. These accusations by Congress
further assured that the statements on Ms. Stewart’s behalf could not alter the total mix of
information regarding MSO. “Comfort statements made in reaction to acknowledged problems
are cold comfort which a reasonable investor would assess skeptically.” In re Westell
Technologies, 2001 WL 1313785, at *8.
But the government does not even charge that the core of the June 7 statements was
illegal. On the government’s theory, the market knew about the timing of Ms. Stewart’s sale;
Congress’s investigation and doubts about the legality of the sale; and Ms. Stewart’s position that
she had no contact with Sam Waksal in advance of the sale, received no nonpublic information
38
regarding ImClone, and that her trade was lawful. The market also knew all of the publicly
available information about MSO itself and that the investigations centered on the issue of
whether Ms. Stewart had been tipped about Erbitux. In this context, the government argues that
when the market heard on top of all that that Ms. Stewart traded because she had predetermined
to sell below $60, it somehow relied on that subsidiary information and was defrauded, because
that was not the real reason for her trade. See Ind. ¶¶ 17, 60. The argument is absurd.
Plainly, no reasonable investor could have been misled by the $60 understanding issue.
No reasonable investor would have disregarded the dangers of the congressional investigation, the
timing of the trade, the known close relationship of Ms. Stewart to Dr. Waksal, and the similarly
dated Waksal-family trades that were themselves under a related investigation, and purchased
MSO stock in reliance upon the exculpatory statements on Ms. Stewart’s behalf. And even if a
reasonable investor conceivably could have done so, it is simply inconceivable that that investor
would have thought: “I know Congress is investigating whether Ms. Stewart received an illegal
tip from Sam Waksal. Nevertheless, I am going to buy MSO stock today in reliance on Ms.
Stewart’s statements – not her statements that she didn’t receive an illegal tip and that her
transaction was lawful, but her statement that she had a $60 price target for ImClone.” That train
of thought is decidedly unreasonable and therefore legally irrelevant.
Nor can the government argue that the June 7 statement contained a material omission in
not revealing that Ms. Stewart allegedly was told prior to selling ImClone on December 27, 2001
that Sam Waksal was selling his ImClone shares at Merrill Lynch. See Ind. ¶¶ 17, 60. The Mylan
decision also demonstrates that the omission of the Waksal trading information was immaterial as
a matter of law. In Mylan, the defendant disclosed extremely positive earnings results, but did not
39
disclose the exclusive supply contracts that drove those earnings results and that later were the
basis of its $147 million disgorgement penalty. See 230 F.3d at 597. Yet the Third Circuit held
that Mylan’s failure to disclose was not a material omission because a reasonable investor could
not appreciate the legal significance of the exclusive supply contracts: “[W]e seriously doubt that
‘the reasonable investor’ possesses the depth of antitrust law expertise that would allow him or
her to conclude that the contracts were susceptible to successful attack under the antitrust laws.”
Knowledge that the FTC was investigating was “much more informative to ‘the reasonable
investor’” than information about the contracts. Id. at 600.
Similarly here, information that Ms. Stewart had heard about the Waksal selling would not
have been material to any reasonable investor, as a matter of law. There is no insider trading
charge in the Indictment based on the Waksal selling information. As commentators have noted,
the government declined to charge insider trading criminally because Ms. Stewart’s alleged
conduct does not fall within any recognized arena of unlawful conduct. For that reason, even if
the market were populated by sophisticated securities litigators, it would have been unable to
connect the dots between the alleged truth – that Ms. Stewart was tipped about the Waksal selling
– and any enhanced risk of prosecution or other material consequences to MSO. One has to be a
legal expert with an intimate knowledge of the misappropriation theory even to begin to
appreciate the potential legal significance of the Waksal selling information. Indeed, numerous
law professors expert in this field have had a hard time understanding how the alleged, uninvited
receipt by Ms. Stewart of the Waksal selling information could possibly violate the federal
40
securities laws.8 Such information surely would have had no material significance for any normal
investor.9
The clincher for immateriality is what happened to MSO’s stock price on June 7: it
dropped 8.5%, from $19.01 to $17.39. See App. 1. Remarkably, the government alleges that
Ms. Stewart issued a false, inflationary statement even though the stock substantially declined the
day the statement was issued. The market reaction on June 7 confirms the securities law theory
that, when informed of a federal investigation and a subject’s defensive statement, a reasonable
investor will discount the defensive statement and focus on the risks of the investigation. Indeed,
8
See, e.g., Jerry Markon and Richard B. Schmitt, Q&A: The In’s and Out’s of Insider Trading, THE
WALL STREET JOURNAL, Oct. 4, 2002 (quoting David M. Brodsky: “the mere fact that insiders are selling,
even heavily, isn’t necessarily ‘material’ or market-moving information . . . .”); Charles Gasparino, Merrill
Employee Casts Further Doubt on Stewart Version, THE WALL STREET JOURNAL, Aug. 6, 2002 (noting
that Professor John Coffee stated “it’s unclear whether Ms. Stewart violated criminal insider-trading rules
by merely acting on knowledge of the family’s sales, even if those sales weren't known to the public”).
9
The SEC’s decision to bring an insider trading action against Ms. Stewart and Mr. Bacanovic is
completely unprecedented and represents an unwarranted expansion of the misappropriation theory. The
courts have sustained misappropriation cases where – unlike here – the information allegedly
misappropriated was riskless trading information – information that had a “known effect” on a particular
stock and thus guaranteed “no risk profits.” See United States v. O'Hagan, 521 U.S. 642, 656 (1977);
United States v. Falcone, 257 F.3d 226, 234 (2d Cir. 2001). Here, the “tip” allegedly given to Ms. Stewart
– that Sam Waksal was seeking to sell the ImClone shares at Merrill Lynch – was inherently vague and
would not have conveyed any market-directional signal. Sales of stock by a CEO into the market normally
are executed only when the CEO possesses no nonpublic, material information. Information that a CEO
(and his family members) are selling is immaterial as a matter of law and is a far cry from the confidential
business information that lies at the heart of every prior misappropriation case – such as that a major
corporation is about to announce a merger or acquisition or a market moving business publication is about
to be released. See, e.g., United States v. Newman, 664 F.2d 12 (2d Cir. 1981); United States v.
Carpenter, 791 F.2d 1024 (2d Cir. 1986), aff'd, 484 U.S. 19 (1987). In addition, all of the other indicia of
fraud that typically constrain a misappropriation case are absent in the Stewart case. For example, the
SEC does not allege any illicit scheme or pattern of conduct, that Ms. Stewart sought or paid for the
alleged tip, that she attempted to conceal her trade, or that she was informed the tip was improper. To the
contrary, the alleged tip came from Ms. Stewart's broker, who owed fiduciary duties to her, and whom she
had every right to expect would act lawfully and in her best interest. And the information was about Sam
Waksal – a social friend of both Ms. Stewart and Mr. Bacanovic – thus may have been perceived as mere
gossip, not the type of stolen information required for a misappropriation case. Finally, unlike prior
misappropriation cases, there was more than sufficient public information to motivate a trade at that time:
Martha Stewart sold ImClone when it was declining rapidly on extraordinary volume. See Ind. ¶¶ 16-17.
41
in rejecting the 10b-5 claim in Mylan, the Third Circuit relied on similar facts: After Mylan
simultaneously disclosed increased revenues (without mentioning their illegal source) and the
pendency of an FTC investigation, its stock price declined 14% over the next 18 days. See 230
F.3d at 599.
Moreover, any suggestion that it was specifically the $60 component of those statements
that propped up the stock price would be spectacularly and unreasonably speculative, given the
mix of information in the market. In sum, for multiple reasons, the alleged misstatement of June 7
about Ms. Stewart’s predetermination to sell at $60 was immaterial as a matter of law, and the
June 7 portion of Count Nine should be dismissed.
ii.
The June 12 Alleged Misstatements
The alleged misrepresentations in Martha Stewart’s June 12 statement were significantly
less material than the alleged misstatement of June 7. By the time the June 12 statement was
issued at 5:32 p.m., the market had been bombarded by negative information about Ms. Stewart,
including that: (1) Ms. Stewart called Sam Waksal around the time of her December 27 trade and
left the message that “something is going on with ImClone and she wants to know what”;
(2) Waksal was arrested on charges of perjury, conspiracy, and securities fraud; and (3) not only
Congress, but the SEC, and perhaps the USAO as well, were investigating Ms. Stewart’s
ImClone transaction. By the time the stock market opened on June 13, investors also were privy
to a government leak revealing that Ms. Stewart was indeed the subject of a criminal investigation
and had been interviewed by the FBI. See supra pp. 11-16.
Furthermore, the media and, more importantly, the federal authorities, immediately and
forcefully challenged the June 12 statement. Members of the media ridiculed Ms. Stewart and
42
jested about her potential incarceration. Congressional representatives and spokesmen said they
would not take Martha Stewart’s word for it and spawned articles like “PROVE IT; STEWART
TOLD FEDS DEMAND BACKUP FOR HER STOCK STORY,” “CONGRESS PUTS
STEWART IN PRESSURE COOKER.” App. 353-57.
Not only that, but analysts covering MSO refused to rely on the June 12 statement and
downgraded their ratings on MSO stock. Analysts said what securities law would predict they
would say: the investigations created “enormous uncertainty,” and, notwithstanding Ms. Stewart’s
June 12 statement, they had no ability to forecast the resolution of the investigations. See supra
pp. 21-22, 24.
Ironically, while the government claims the June 12 statement misled the market, it
actually increased the market’s skepticism of Ms. Stewart’s position that she sold ImClone on
December 27 pursuant to a $60 understanding with Peter Bacanovic. The $60 understanding
came under fire from Congress, the government, and the public. As reported in the June 14 Wall
Street Journal, for instance, “[t]he sketchy information has frustrated congressional investigators.”
A congressional source said: “‘I don’t know if anyone has been able to pin Ms. Stewart down on
the date’ of the agreement to sell. ‘It’s obviously been thrown out as a vague matter of weeks,
different shades of this and that.’” App. 316-17.
Thus, the objective, public facts demonstrate that – in the face of all these red flags –
Martha Stewart’s June 12 statement could not have misled a reasonable investor about the nature
of MSO securities. Although no reported 10b-5 case even remotely resembles the facts of this
one, those that are roughly analogous unequivocally support that conclusion. In Westell
Technologies, for instance, defendants lied about the effects of sales problems, but because a lone
43
analyst had disclosed those problems, the lies were deemed, as a matter of law, “cold comfort”
and immaterial. See 2001 WL 1313785, at *8. In Carney v. Cambridge Tech. Partners, Inc., the
district court held: “[T]he idea that reasonable investors would ignore the advice and cautions of
independent securities analysts based solely on the optimistic opinions of . . . the company’s
president, is at odds with common sense.” 135 F. Supp.2d 235, 245 (D. Mass 2001). In this
case, it was not just analysts issuing cautions. Ms. Stewart’s statement was crushed under a
mountain of criticism and speculation, including from the very officials investigating her.
In Food Lion, the allegations of an antagonistic labor union in a Department of Labor
proceeding sufficed to negate the defendant’s denials even though the Department of Labor itself
said nothing. See 197 F.3d at 684-85. In this case, representatives of the government
investigations fueled a public mudslinging campaign against Ms. Stewart. In Mylan, the defendant
was the subject only of an FTC investigation and falsely denied the key fact in the investigation.
See 230 F.3d at 597. Martha Stewart was the subject of three federal investigations, and her
denial of the key allegation at the time – that she had been tipped by Sam Waksal – was true.
On June 12, Ms. Stewart’s problems were very much “public knowledge and, therefore,
part of the total mix of information available to the investor who wished to assess the effect on
[MSO].” See In re Westell, 2001 WL 1313785, at *8. Given the total mix of information –
including Ms. Stewart’s statement that she did not speak to Sam Waksal before selling ImClone
(which the government does not challenge) – the alleged misstatements of June 12 were
immaterial as a matter of law. The Court should dismiss Count Nine as to June 12 for want of
44
materiality. Any other result would be “at odds with common sense.” See Carney, 135 F. Supp.
2d at 245.10
iii.
The June 18 Alleged Misstatements
The public inquisition of Ms. Stewart that rendered her June 7 and 12 statements
immaterial only intensified by the time she issued her June 18 statement. The media was
portraying Ms. Stewart as “radioactive.” See App. 358. In addition to all of the negative
information noted above, the media widely reported that Peter Bacanovic’s account of the $60
understanding differed from Ms. Stewart’s. Given the discrepancy, the June 17 Wall Street
Journal, for instance, cited a source on the criminal investigation as raising the prospect that even
if Ms. Stewart made an agreement to sell below $60, she entered into that agreement already
having received a tip that the FDA might reject ImClone’s Erbitux application. See App. 475-77.
As with her June 12 statement, Ms. Stewart’s June 18 statement did nothing to calm the
firestorm surrounding her. On the morning of June 19, for instance, Rep. Bart Stupak appeared
on the Today show and expressed his belief that Ms. Stewart’s ImClone transaction was a
“calculated financial gain[] . . . to take advantage of a situation” and claimed (again falsely) that
Ms. Stewart’s call to Sam Waksal on December 27 occurred before she placed her sell order. See
supra pp. 26-27.
10
One of the June 12 alleged misstatements should be dismissed as a matter of law for the further reason
that it is indisputably true, even on the government’s theory. The government alleges that Ms. Stewart’s
statement that she did not have any “nonpublic information regarding ImClone when she sold her ImClone
shares” is false because she was told that Sam Waksal was trying to sell ImClone shares. See Ind. ¶¶ 17,
60, 63(c). But information about a private, intended transaction by the CEO is not information “regarding
ImClone.” The Court must take that phrase in the context in which it appeared – a statement denying
receipt of an illegal tip concerning the company’s key product, Erbitux. See, e.g., In re Northern Telecom,
116 F. Supp.2d 446 (S.D.N.Y. 2000). In that context, the phrase “information regarding ImClone” can
only mean information about the company itself; information about an executive’s private transaction in the
company’s securities does not qualify.
45
In light of the total mix of information publicly available on June 18 about the three federal
investigations of Ms. Stewart, and for the reasons applicable to the June 7 and 12 statements,
there is no “substantial likelihood” that Ms. Stewart’s June 18 statement “significantly” altered
the total mix. See Basic, 485 U.S. at 231-32 (emphasis added). As a matter of law, the
information about the investigations was “more than sufficient” – many times over – to put MSO
investors on notice of the risks to the company. See Mylan, 230 F.3d at 599.
Additionally, portions of the June 18 statement were legally immaterial even in the abstract
– all the more so in the context of the ImClone scandal. The government charges Ms. Stewart
with securities fraud for stating that she had cooperated “fully and to the best of [her] ability” with
the SEC and USAO and was cooperating with Congress. See Ind. ¶ 65(d); Tigue Aff., Ex.S at 2.
But a statement that a corporation or executive is “cooperating fully” with investigating
authorities inevitably is immaterial because the market completely discounts it, as it has no
definition or meaning. It is the type of statement that the market hears all the time – even from
people and companies that are later indicted, or even convicted, or that settle claims for massive
amounts of money. See, e.g., Mylan, 230 F.3d at 597; App. 20-21, 25-26, 28-33, 42-46. Thus,
Ms. Stewart’s statement of cooperation is akin to the “bland ‘corporate-speak’ that no rational
investor would consider material” and the “kind of rosy affirmation commonly heard from
corporate managers and numbingly familiar to the marketplace” that “courts have demonstrated a
willingness to find immaterial as a matter of law.” In re Northern Telecom Ltd. Sec. Litig., 1994
WL 455534, at *6.
By way of example, Arthur Andersen repeatedly told the public that from the time it
discovered document destruction on the Enron matter it “has been cooperating fully with the
46
official investigations” by the SEC and Justice Department. See, e.g., App. 16-18, 23-24. On
June 15, 2002 – just three days before Ms. Stewart’s June 18 statement – Arthur Andersen was
convicted of obstruction of justice and effectively destroyed. In a post-verdict press release,
Andersen asserted that “the government failed to uphold its moral responsibility to the public by
indicting and prosecuting a firm of 26,000 innocent people that fully cooperated with the
Department of Justice, the SEC, and Congress.” App. 364 (emphasis added).
The public was still reading news stories about Andersen’s cooperation, and conviction,
when Ms. Stewart issued her June 18 statement. See, e.g., App. 381-83, 396-400. Quite
obviously, reasonable investors, especially in June 2002, understood that a statement of full
cooperation by a subject or target of an investigation – even if completely true (as Andersen’s
statement may very well have been) – guarantees nothing. For one thing, even if a subject is
cooperating fully, she might ultimately be punished for the conduct that the government is
investigating in the first place. Martha Stewart’s statement that she was cooperating with
investigations “fully and to the best of [her] ability” could not have misled a reasonable investor
and therefore was immaterial as a matter of law. And when the Court further considers the public
report available prior to June 18 that the government was conducting a false statement
investigation into whether Ms. Stewart lied to the government in her interview (see App. 300303), the conclusion that her statement of cooperation was immaterial becomes irresistible.
Statements that a subject of an investigation is cooperating and exculpatory statements by
subjects of investigation generally are not capable of “duping the market.” As with the alleged
misstatements on June 7 and 12, in light of the negative information about Ms. Stewart that
saturated the market, no reasonable mind could conclude that Ms. Stewart’s alleged
47
misstatements on June 18 hoodwinked investors and led them “down some primrose path.” See
Halperin, 295 F.3d at 360. Even with Ms. Stewart’s statement, the “nature of the … risk” from
the investigations was, to say the least, “well known to the market”; therefore, Ms. Stewart’s June
18 statement was “not material.” See Food Lion, 197 F.3d at 684. As to June 18, and in its
entirety, Count Nine should be dismissed.
d.
The Fluctuations in MSO's Stock Price Are Consistent with the
Immateriality of the Alleged Misstatements
It is truly ironic that in drafting its Indictment of Martha Stewart for allegedly misleading
the public about MSO’s stock, the government misleads the public by selectively citing MSO’s
stock prices. The June 12 and 18 statements were each issued after the close of the market, so
the most relevant dates to measure their market impact, if any, would appear to be June 13 and
19, respectively. In its allegations concerning the June 12 statement, the government pleads the
opening price of MSO stock on June 13, but not the closing price. Ind. ¶ 64. In its allegations
concerning the June 18 statement, the government pleads MSO’s closing price on June 19, but
not the opening price. Ind. ¶ 67. And in its allegations concerning the June 7 statement, the
government pleads no stock price at all. See Ind. ¶ 61. The motivation for the government’s
gimmickry is understandable: the information the government studiously omits from the
Indictment undermines its securities fraud charge against Martha Stewart.
First, the government brought the unprecedented criminal charge that Martha Stewart’s
June 2002 proclamations of innocence were actually fraudulent, inflationary stock-market
manipulations, even though the price of MSO fell off a cliff in June 2002 — down 40%, from
$19.01 on June 6 to $11.47 on June 28. See Ind. ¶ 58. Where is this 40% decline reflected in the
forty-one page Indictment?
48
A good portion of that decline occurred on June 7, but the Court would not know that
from reading the government’s Indictment, which charges Ms. Stewart with defrauding the
market on June 7. As shown above, the 8.5% decline in MSO’s stock price on June 7 provides
strong support for the conclusion that the June 7 statement in the Wall Street Journal was entirely
immaterial and certainly that no reasonable investor was misled by the alleged misstatement
concerning a $60 price target. See supra pp. 38-42.
The government does (selectively) plead stock prices with respect to the June 12 and 18
statements, but its theory is inconsistent. For the June 12 statement, the government pleads that
MSO stock opened 7% higher on June 13. Ind. ¶ 64. But if the market open is indicative of the
impact of a statement issued the evening before, then the June 18 statement must have been
immaterial, since on June 19, MSO opened exactly where it had closed on June 18. See App. 2.
Not surprisingly, the government omits the June 19 opening price from the Indictment. It pleads
that the June 19 closing price was 14% higher than June 18. Ind. ¶ 67. But if the closing price
the day after a statement is issued is indicative, then the June 12 statement must not have been
material because on June 13, MSO closed down $0.20 – another fact conspicuously absent from
the Indictment.
The fact is that MSO’s stock-price fluctuations on June 13 and 19 cannot disturb the
conclusion that Ms. Stewart’s alleged misstatements on June 12 and 18 were immaterial as a
matter of law. Although MSO opened 7% higher on June 13, the stock still remained 15.6%
below its June 6 price prior to disclosure of the investigations of Ms. Stewart. And even the 7%
blip was fleeting. By 10:43 a.m. on June 13, MSO returned to the previous closing price of
$15.00. It traded around $15.00 for the afternoon and closed down for the day at $14.80. See
49
App. 5-9. This brief upward movement in the stock price is immaterial and, whatever its cause, it
cannot detract from the plain truth that the market was too filled with cautionary information to
permit a reasonable investor to rely on Ms. Stewart’s June 12 statement.
MSO opened unchanged on June 19, the morning after the June 18 statement, and
although it jumped 14.2% on June 19, the only reasonable inference is that the increase had
nothing to do with the alleged misstatements of June 18. As shown in the preceding section,
those alleged misstatements were legally immaterial given the total mix of information. See supra
pp. 46-48. As shown in the next section, the alleged misstatements were independently
immaterial because they repeated Ms. Stewart’s prior statements. See infra pp. 52-55. There had
to have been an alternative cause for the stock-price jump, and there was.
On the morning of June 19, MSO issued a press release announcing that it was raising its
earnings guidance for the second quarter of 2002 from $0.14 per share to $0.15 and that its
flagship magazine experienced a 12% increase in ad revenue during the second quarter. In the
afternoon, Martha Stewart and other MSO executives delivered a presentation at the Gannett
Media Conference in Manhattan at which they confirmed the increased earnings guidance and
discussed other positive aspects of MSO’s performance. See supra pp. 27-28. Analyst
commentary on June 19 and 20 scarcely mentioned Ms. Stewart’s June 18 statement, if at all, and
instead focused on MSO’s fundamentals, its encouraging announcements, and the uncertainty of
the Stewart investigations. See App. 589-93, 598-99, 693-701, 702-12, 713-16, 717-19.
Although MSO was trading up even before the press release was issued at 11:09 a.m.,
there were other positive drivers in the market before it opened for trading that day. As the New
York Times reported the day before, Merrill Lynch anticipated the press release and predicted
50
MSO would raise its earnings guidance. App. 656-59. And that morning’s Daily News ran
“MARTHA’S SAFE; Isn’t target of fed stox probers, but may testify,” reporting a leak from the
government’s criminal investigation to the effect that “Ms. Stewart is not considered a target in
the ongoing FBI probe . . . and will likely not face any criminal charges. She is being looked at
merely as a potential witness in the case against Waksal. . . .” App. 656-59. That report could
have provided some relief to MSO shareholders, who were aware that Waksal had been arrested
and that the government was investigating Ms. Stewart for insider trading and false statements.
See id. The publication of a possible leak from the government’s investigation and MSO’s
positive press release (predicted the day before) suffice to negate any possible inference that Ms.
Stewart’s alleged misrepresentations on June 18 were material to the market.
2.
The Alleged Misstatements of June 12 and 18 Were Immaterial for the
Independent Reason that they Were Redundant, Adding Nothing to the Total Mix
of Publicly Available Information
a.
The June 18 Statement Reiterated the June 12 Statement
The June 18 Statement is immaterial as a matter of law because it expressly reiterated the
June 12 statement and added no new information of potential significance to investors. To be
material under the securities laws, information must significantly alter the total mix of information
available to the public. See, e.g., Basic, 485 U.S. at 231-32. It is axiomatic, then, that if a public
statement merely repeats information already in the public domain, and adds no significant new
information, it is immaterial as a matter of law. Simply put, if a statement does not significantly
alter the total mix of public information, then it does not significantly alter the total mix of public
information.
51
This Court applied that tautological truth when it held that if a statement does not contain
“any significant new information,” then “[n]o reasonable investor could conclude that [it]
significantly altered the total mix of available information.” In re Northern Telecom, 116 F.
Supp.2d at 467 (emphasis added). The Second Circuit likewise has held that “a misrepresentation
is immaterial if the information is already known to the market because the misrepresentation
cannot then defraud the market.” Ganino, 228 F.3d at 167; see also Food Lion, 197 F.3d at 685
(charges aired in television broadcast “added nothing to inform the market further” but “simply
repeated earlier charges . . . already publicly available, and, therefore were not material”).
In charging securities fraud for the June 18 statement, the government disregards this
precept articulated in Northern Telecom and Ganino. Not only does the government charge Ms.
Stewart with securities fraud for repeating information she had told the public just six days earlier,
it charges her with securities fraud for the very assertion that “[i]n my June 12, 2002 statement I
explained what did happen.” See Ind. ¶ 65(a). By definition, a reaffirmation of a prior statement
cannot significantly alter the total mix of information, unless the market has valid reason to doubt
whether the speaker still adheres to the original statement. But there was no reason for doubt in
this case. From June 13 to 18, the media almost incessantly reported the June 12 statement as
Ms. Stewart’s version of the facts. And in many cases, it reported that spokespersons for Ms.
Stewart declined further comment beyond her June 12 statement. See, e.g., App. 289, 290-91,
292, 312-13. Far from disavowing the June 12 statement, it had already been reaffirmed for Ms.
Stewart. Accordingly, under Northern Telecom and simple logic, since Ms. Stewart’s assertion
that her June 12 statement “explained what did happen” added no “significant new information”
52
to the total mix, it is immaterial as a matter of law and Paragraph 65(a) of the Indictment should
be dismissed.
Paragraph 65(b) must suffer the same fate. It alleges that “Stewart falsely stated that her
December 27, 2001 sale of ImClone stock ‘was based on information that was available to the
public that day.’” That was no news to the market. In her June 12 statement, Ms. Stewart
explained that she sold her ImClone shares because she agreed with her broker to sell if the price
fell below $60, and on December 27, her broker advised her that ImClone had fallen below $60.
Thus, Ms. Stewart had clearly set forth that her ImClone sale was based on the stock price that
day. Now, as every reasonable investor and unreasonable investor knows, the stock price was
“information that was available to the public that day.” The statement was doubly redundant
because Ms. Stewart expressly stated on June 12 that she “did not have any nonpublic
information regarding ImClone when [she] sold [her] ImClone shares.” If she had no nonpublic
information regarding ImClone when she sold her shares, then, obviously, her sale was based on
public information, as she stated on June 18. As such, Ms. Stewart’s June 18 statement that her
ImClone sale was based on public information in no way altered — let alone significantly altered
– the total mix of information about MSO, and Paragraph 65(b) should be dismissed.
In Paragraph 65(c), the government alleges that Ms. Stewart “falsely stated that ‘[s]ince
the stock had fallen below $60, I sold my shares, as I had previously agreed to do with my
broker.’” That statement merely paraphrased Ms. Stewart’s June 12 statement that “I agreed
with my broker . . . that, if the ImClone stock price were to fall below $60, we would sell my
holdings. On December 27, I returned a call from my broker advising me that ImClone had fallen
below $60. I reiterated my instructions to sell the shares.” The June 18 version added nothing of
53
substance. And by June 18, the market had heard about the $60 understanding numerous times.
The $60 statement of June 18 likewise added absolutely nothing to the total mix of information,
and Paragraph 65(c) should be dismissed.
Finally, in purporting to supplement the allegations of the Indictment, the government
attacks plainly repetitious statements. The government adds this statement from June 18 as an
alleged securities fraud: “I had no insider information. My sale of ImClone stock was entirely
proper and lawful.” Tigue Aff., Ex. S. But that statement is substantially identical to this passage
from the June 12 statement: “I did not . . . have any nonpublic information. . . . In placing my
trade, I had no improper information. My transaction was entirely lawful.” The June 18
statement “added nothing to inform the market further” but “simply repeated” the earlier
statements and “therefore [was] not material.” See Food Lion, 197 F.3d at 685.
b.
The June 12 Statement Reiterated What the Public Knew to Be Martha
Stewart’s Position
The June 12 charges likewise should be dismissed on the independent basis that the
alleged misstatements repeated information already present in the total mix of publicly available
information. The June 12 statement speaks for itself on this point. It began, “[i]n response to
media inquiries, I want to reiterate the facts surrounding my sale of ImClone stock.” App. 181
(emphasis added). Indeed, the facts of Ms. Stewart’s ImClone transaction already were out in the
marketplace. Between June 7 and June 12, the market heard Ms. Stewart’s side of the story
either from her representatives or via congressional leaks of what her attorneys had told
congressional investigators in private dialogue. The June 13 New York Times brings home the
point by recounting Ms. Stewart’s version of the facts not from her June 12 statement, but from
what “[s]he ha[d] told Congressional investigators.” The Times added – quite correctly – that the
54
June 12 statement was “consistent with information she gave to” Congress, and that congressional
representatives had already leaked. App. 241-42.
Paragraph 63(a) of the Indictment charges the falsity of the following sentence in the June
12 statement: “I agreed with my broker several weeks after the tender offer, at a time when the
ImClone shares were trading at about $70 that, if the ImClone stock price were to fall below $60,
we would sell my holdings.” The sentence reiterated statements attributed to Ms. Stewart’s
attorneys that were first published in the June 7 Wall Street Journal and June 8 Washington Post
and widely disseminated thereafter. The Washington Post reported from congressional
investigators Ms. Stewart’s position that she “had decided, in a conversation with her broker
some weeks earlier, to sell if ImClone’s volatile stock fell below $60 a share.” The June 12
statement is substantially identical to the Washington Post quote. They both contain the key
information that Ms. Stewart agreed with her broker to sell ImClone if it fell below $60 a share.
As to the timing of the understanding, the Wall Street Journal said the decision to sell
below $60 was made “more than a month before” the December 27 sale, and the Washington Post
said “some weeks earlier,” while the June 12 statement said “several weeks after the tender offer.”
The tender offer closed on November 2, 2001, so there were approximately eight weeks between
the tender offer and December 27. App. 10. Therefore, “several weeks after” November 2 is the
same as “more than a month before” December 27, and not materially different from “some weeks
earlier” than December 27.
The only arguably new piece of information was that ImClone was trading around $70
when Ms. Stewart agreed to sell below $60. But that scrap surely could not have significantly
altered the total mix of information available on MSO. A reasonable investor could have looked
55
up the stock price during November and December 2001 to see when it was trading around $70.
In any event, if there was any ambiguity in the June 12 statement’s dating of the $60
understanding, that ambiguity could not have misled an investor to buy MSO stock. To the
contrary, as noted, Congress and the media questioned the veracity of the June 12 statement
because the $60 understanding was “thrown out as a vague matter of weeks, different shades of
this and that.” See App. 316-18.
Accordingly, Ms. Stewart’s June 12 statement about the making of her $60 understanding
did not contain “any significant new information,” and “[n]o reasonable investor could conclude
that [it] significantly altered the total mix of available information.” See In re Northern Telecom,
116 F. Supp. 2d at 467-68. Paragraph 63(a) should be dismissed.
The alleged misrepresentation in Paragraph 63(b) was equally redundant of information
well known to the market. The challenged passage is: “On December 27, I returned a call from
my broker advising me that ImClone had fallen below $60. I reiterated my instructions to sell the
shares.” That statement conveyed no new information over and above what the June 8
Washington Post had reported, and what the market had heard many times since: Ms. Stewart’s
“stock sale occurred on Dec. 27 because she had decided . . . to sell if ImClone’s volatile stock
fell below $60 a share. When the price dipped below that level [on Dec. 27], the broker called
and got her permission to sell ….” App. 122-24. Thus, as a matter of law, there can be no
“substantial likelihood” that the statement significantly altered the total mix of information, and
Paragraph 63(b) should be dismissed.
Paragraph 63(c) charges Ms. Stewart’s June 12 statement that “she did not have any
nonpublic information regarding ImClone when [she] sold [her] ImClone shares.” That statement
56
was taken nearly verbatim from a statement published in the June 7 editions of the New York
Times and the New York Post and then republished elsewhere: “Martha Stewart did not receive
any nonpublic information regarding ImClone prior to her sale of a small number of ImClone
shares.” Thus, it was merely an echo when the market heard that one on June 12, and, needless to
say, the statement could not have significantly altered the total mix of information about MSO.
Paragraph 63(c) should be dismissed.
The government wishes to add to its charges this statement – “In my placing my trade I
had no improper information. My transaction was entirely lawful” – but that too mimicked a
nearly identical prior statement. On June 7, publications such as the New York Times quoted a
Stewart spokesperson as maintaining that “Martha Stewart did not receive any nonpublic
information regarding ImClone prior to her sale. . . . Her transaction was entirely lawful.” That
statement too added nothing to the mix and was legally immaterial.
That covers all of the June 12 charges. Each one attempts to criminalize a statement that
could not have defrauded the market because it repeated information already known to the
market. It is troubling not only that the government brought this novel securities-fraud charge in
a criminal case but that it attempted to pile on by charging multiple felonies for the same
statements, over and over. The element of materiality prevents the government from succeeding,
and the June 12 and 18 portions of Count Nine (¶¶ 60, 62-67) should be dismissed.
C.
Count Nine Should be Dismissed Because the Alleged Misstatements Were Not “In
Connection With” the Securities of MSO
The prior section establishes that congressional statements and media press coverage
about Ms. Stewart’s personal trading clearly affected MSO's stock price, such that Ms. Stewart’s
personal protestations of innocence were immaterial as a matter of law when viewed in that
57
context. This section addresses an additional defect in Count Nine: the statements at issue were
plainly identified as, and understood by the market to be, personal statements on behalf of Martha
Stewart, not statements on behalf of MSO. Although the news coverage of her personal situation
affected MSO’s stock price, Second Circuit case law nevertheless makes it clear that her personal
statements were not made “in connection with” the purchase or sale of MSO securities.
The Indictment alleges that Martha Stewart made three false statements in June 2002
“regarding her sale of ImClone stock” in an effort to manipulate the price of MSO stock. See
Ind. ¶ 60. But the government concedes that these statements were not made by, for, or on behalf
of MSO. And there is no claim that the statements directly pertained to MSO securities, or even
to MSO’s revenues, costs, products, or earnings forecasts. They did not; the statements pertained
to Ms. Stewart’s personal sale of shares of ImClone, a company that has nothing to do with
MSO. Such statements have never before been considered to be a basis for a securities fraud
charge, and they should not be now.
When Congress passed section 10(b) of the Securities and Exchange Act in 1934, it was
concerned with “true and accurate corporate reporting as an essential cog in the proper
functioning of the public exchanges.” H.R.Rep.No. 1383, 73rd Cong., 2d Sess. 11 (1934)
(emphasis added). Congress never sought to create a regime in which any false statement, made
by any person, that had any relation to a public company could be prosecuted as securities fraud.
Thus, even if the alleged false statements were material (and they were not),11 there is no liability
under Section 10(b) unless they were made “in connection with” the purchase or sale of securities.
Count Nine should be dismissed because public comments by an individual neither made by, for,
11
See Point I(B), supra.
58
or on behalf of a corporation, nor directly pertaining to the securities allegedly manipulated, fail
the “in connection with” requirement of Section 10(b).
The “in connection with” standard is not boundless. More than thirty years ago, the
Second Circuit held that false statements are not actionable under 10b-5 unless “promulgated for
or on behalf of corporations.” SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 859-62 (2d Cir.
1968) (en banc). The Court repeatedly emphasized that Rule 10b-5's purpose was to prevent
fraudulent corporate statements. See, e.g., id. at 859 (“responsible officials of the leading
exchanges have unqualifiedly recognized in theory at least the vital importance of true and
accurate corporate reporting as an essential cog in the proper functioning of the public
exchanges”) (emphasis added) (quoting H.R.Rep.No. 1383, 73rd Cong., 2d Sess. 11 (1934)); id.
at 861. Though the dissenting judges argued that it was unwise to construe the “in connection
with” requirement to reach “every statement issued by a publicly listed company,” in part because
the legislative history made clear that section 10(b) was not intended to “polic[e] all corporate
publicity,” id. at 882-83, the majority opinion in Texas Gulf established the now-settled law that
when a public company chooses to authorize its representatives to speak about corporate matters,
such speech must not fraudulently mislead investors.
In the years after Texas Gulf, the number of Rule 10b-5 cases mushroomed, and courts
often repeated Justice Douglas’s statement that the “in connection with” requirement was to be
read “flexibly, not technically and restrictively.” Superintendent of Ins. Of the State of New York
v. Bankers Life & Cas. Co., 404 U.S. 6, 12 (1971). But even in Bankers Life, the Court was
careful to stress that Rule 10b-5 was not endlessly elastic, noting that it did not reach even all
cases of “internal corporate mismanagement” that might be said to have some relevance to that
59
corporation’s securities. Id.; see also SEC v. Zandford, 535 U.S. 813, 818, 820 (2002) (Rule
10b-5 does not reach every fraudulent act or misstatement that “happens to involve securities” in
some way).
A creative lawyer can almost always articulate some relationship between allegedly
fraudulent conduct and the securities of a public company; if that were the test, there would be no
limit to the reach of the federal securities laws. But there is a limit: Rule 10b-5 is not violated
unless the fraudulent conduct directly relates to the securities that are the object of the fraud.
Thus, as Judge Friendly explained for the Second Circuit nearly twenty years ago, even
“misrepresentations or omissions involved in a securities transaction but not pertaining to the
securities themselves” cannot form the basis for a Rule 10b-5 claim. Chemical Bank v. Arthur
Andersen Co., 726 F.2d 930, 943 (2d Cir. 1984); United States v. Coriaty, 2001 WL 1910843, at
*7 (S.D.N.Y. July 16, 2001) (“Cases involving different facts and interpreting Chemical Bank
have held that unless the misrepresentations relate to the nature or value of the securities
themselves, the ‘in connection with’ requirement . . . is not satisfied.”); Manufacturers Hanover
Trust Co. v. Smith Barney, Harris Upham & Co., 770 F. Supp. 176, 181 (S.D.N.Y. 1991) (same);
Citibank v. K-H Corp., 1991 WL 35951, *4 (S.D.N.Y. 1991) (“‘To satisfy the ‘in connection
with’ requirement, plaintiff may not allege fraudulent acts which merely happened to involve
[securities] in some way. The ‘in connection with’ requirement mandates that the alleged fraud
concern the fundamental nature of the [securities].’”) (quoting Kearney v. Prudential-Bache Sec.,
Inc., 701 F. Supp. 416, 424 (S.D.N.Y.1988)) (citing Chemical Bank).
In seventy years of application, the “in connection with” requirement has never been
stretched as far as the government urges here. After all, the government concedes that the
60
allegedly false statements were not issued by MSO. See Ind. ¶60. And while Ms. Stewart was
the CEO of MSO at the time the statements were issued, see id. at ¶1, the government did not
(because it could not) allege that Ms. Stewart made the statements for or on behalf of MSO in
her capacity as its corporate officer. To the contrary, these were personal statements about a
personal matter.
Count Nine fails the “in connection with” test because the allegedly misleading statements
not only were not made “for or on behalf of” MSO, see Texas Gulf, 401 F.2d at 861, they also did
not “pertain[] to [MSO’s] securities themselves.” Chemical Bank, 726 F.2d at 943. This is no
accident: MSO did not issue these statements because the subject matter – a personal transaction
in the securities of another company – did not concern MSO. This was not a comment by Ms.
Stewart, in her role as CEO, that MSO’s flagship magazine subscriptions were up, that sales of
MSO’s new furniture line were booming, or that MSO had record cash reserves on hand and
expected a banner earnings year. Those are the sort of corporate statements that pertain directly
to a Company’s securities. See In re Carter-Wallace, Inc., 150 F.3d 153, 156 (2d Cir. 1998)
(drug company’s misleading advertisements about the safety of one of its products held to be “in
connection with” securities transaction).
Martha Stewart is not a corporation, much less a security. She is not a product. She is a
person. The government points to the fact that MSO disclosed to investors that Ms. Stewart’s
“reputation” was material to MSO’s success. See Ind. ¶57. This is true of hundreds of important
executives at hundreds of public companies. See Tigue Aff., Ex. F. But the “in connection with”
requirement is not so elastic that it can be stretched to make every non-corporate misstatement
concerning the personal reputation of corporate executives a federal crime. Congress never
61
intended to make the securities laws the means to police disclosures concerning personal
peccadillos, illicit affairs, religious or political beliefs, or other personal matters. The
government’s attempt to stretch the “in connection with” requirement to reach personal
statements about personal matters is unprecedented, unwise, and unfounded. Count Nine should
be dismissed.
POINT II
THE UNPRECEDENTED APPLICATION OF RULE 10b-5 TO PERSONAL
STATEMENTS ABOUT PERSONAL CONDUCT IS UNCONSTITUTIONALLY
VAGUE AND VIOLATES DUE PROCESS
A.
Due Process Requires Both Reasonable Notice and Explicit Standards to Limit
Prosecutorial Discretion
“A criminal statute, particularly one regulating speech, must ‘define the criminal offense
with sufficient definiteness that ordinary people can understand what conduct is prohibited and in
a manner that does not encourage arbitrary and discriminatory enforcement.’” United States v.
Rahman, 189 F.3d 88, 116 (2d Cir. 1999) (quoting Kolender v. Lawson, 461 U.S. 352, 357
(1983)). When analyzing a vagueness challenge, a court must first “determine whether the statute
gives the person of ordinary intelligence a reasonable opportunity to know what is prohibited.”
Chatin v. Coombe, 186 F.3d 82, 87 (2d Cir. 1999); see also United States v. Handakas, 286 F.3d
92, 101 (2d Cir. 2002) (“[B]efore one can be punished, it must be shown that [the] case is plainly
within the statute”) (emphasis added). The court also must consider whether the law sets
“boundaries to prosecutorial discretion.” Handakas, 286 F.3d at 111; see also id. (“The principle
that a statute must provide both ‘notice’ and ‘explicit standards’ to survive an ‘as-applied’
constitutional challenge based on vagueness is well established.”) (emphasis added); Kolender,
461 U.S. at 358 (“Where the legislature fails to provide such minimal guidelines, a criminal statute
62
may permit a standardless sweep [that] allows policemen, prosecutors, and juries to pursue their
personal predilections.”) (internal citation omitted).
Even in the civil context, Due Process prohibits the government from sanctioning an
individual where there is “substantial uncertainty” as to the scope of the rule allegedly violated.
Upton v. SEC, 75 F.3d 92, 98 (2d Cir. 1996) (reversing mere SEC “censure” because SEC rule,
as applied, was unconstitutionally vague). The standard is even more stringent in criminal cases.
See Winters v. State of New York, 333 U.S. 507, 515 (1948) (“The standards of certainty in
statutes punishing for offenses is higher than in those depending primarily upon civil sanction for
enforcement.”).
Finally, a void-for-vagueness challenge “does not necessarily mean that the statute could
not be applied in some cases but rather that, as applied to the conduct at issue in the criminal
case, a reasonable person would not have notice that the conduct was unlawful and there are no
explicit standards to determine that the specific conduct was unlawful.” United States v. Sattar,
272 F. Supp.2d 348, 357 (S.D.N.Y. 2003) (emphasis added); see also Handakas, 286 F.3d at
111-12 (same); Chatin, 186 F.3d at 87 (same).12 Although Ms. Stewart need only show a lack of
12
The vagueness doctrine applies whether or not the prosecution implicates First Amendment interests.
See Handakas, 286 F.3d at 111 (“[I]t is also clear that notice and explicit standards are required not only
for regulations implicating . . . First Amendment freedoms, . . . but also criminal statutes that do not
involve those freedoms.”) (quotation marks omitted). But the doctrine applies with special force where, as
here, see Point IV, infra, the statute as applied also threatens to chill First Amendment-protected speech.
See Baggett v. Bullitt, 377 U.S. 360, 372 (1964) (“The vice of unconstitutional vagueness is further
aggravated where . . . the statute in question operates to inhibit the exercise of individual freedoms
affirmatively protected by the Constitution. We are dealing with indefinite statutes whose terms, even
narrowly construed, abut upon sensitive areas of basic First Amendment freedoms. The uncertain
meanings of the oaths require the [appellant] to steer far wider of the unlawful zone.”) (internal citations
and quotation marks omitted).
63
either fair notice or sufficiently definite standards to prevent arbitrary and discriminatory
enforcement, Count Nine fails both requirements.
B.
The Prosecution’s Novel Interpretation of Rule 10b-5 is Boundless and Standardless
There is no violation of Rule 10b-5 (as applied here) unless there is a material false
statement made “in connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5;
see 15 U.S.C. § 78j(b) (same). The prosecution’s unprecedented application of this rule to
statements by an individual about personal conduct stretches the “in connection with” requirement
past any recognizable or enforceable boundary. See Point I(C), supra. Under the prosecution’s
novel theory, all of the following hypotheticals could be federal crimes:
•
A prominent CEO of a successful, conservative, family-oriented Fortune 500
company is accused of being a homosexual. With stock prices plunging, and the
possibility of being forced out of the company, the CEO states falsely that he is not
gay. The stock rebounds. Is this the federal crime of securities fraud?
•
Press reports falsely state that another CEO has an advanced form of cancer and
will die within four weeks. The CEO’s company’s stock plunges. The CEO
publicly denies she has cancer. In fact she has cancer but it is treatable and there is
no imminent threat to her life. Is this the federal crime of securities fraud?
•
A newly confirmed Treasury Secretary was well known during his years in the
private sector as a deficit hawk. In his new role, he tries to boost the stock market
by making public comments in which he falsely states that he believes that the huge
federal deficit is not bad for the economy. Every word the Treasury Secretary
says, of course, can move the markets. Has the Secretary committed the federal
crime of securities fraud?
•
The tabloids report that the CEO of a public company that distributes bibles is an
atheist. The company’s stock plummets. The CEO falsely denies the report, and
falsely states that he attends church every week. The stock rebounds. Is this the
federal crime of securities fraud?
•
A prominent CEO is accused of being a member of the Communist Party. Stocks
of the company plunge. The CEO makes a statement denying the allegation, even
though he is a member of the party. Stocks of his company rebound. Is this the
federal crime of securities fraud?
64
•
A prominent CEO deemed critical to the success of his company is accused of
having an affair with a young woman. Stocks plunge amid fears that he will be
forced out of the company. He falsely denies the allegation. Stocks of his
company rebound. Is this the federal crime of securities fraud?
In each hypothetical, the statement is false, arguably material,13 made with the requisite
bad intent, and although not about a corporation’s securities or made for or on behalf of a
corporation, is under the prosecution’s theory made “in connection with the purchase or sale of
any security.” The examples prove the disturbingly broad sweep of the prosecution’s
interpretation of Rule 10b-5.
No CEO, however prominent, is on notice that a false statement about purely personal
conduct is securities fraud, a federal crime punishable by years in prison. The prosecution’s
interpretation of Rule 10b-5 makes no distinction between falsely denying a medical condition, an
adulterous affair, an embarrassing political affiliation, some other personal matter, or, as here,
making an alleged false statement about a legal, private stock purchase entirely unrelated to MSO.
Rule 10b-5 cannot be interpreted to deprive every officer of a public corporation of the
fundamental right to protect his or her privacy by denying (even falsely) reports about deeply
personal matters concerning health, sexual practices, religious beliefs, political affiliations and the
like.
The government may argue that Martha Stewart is “different” – that she is so closely
associated with MSO that her statements about private conduct are not truly personal. To be
sure, Martha Stewart, like many corporate executives, is important to her company. MSO so
advised the market in the prospectus cited in paragraph 57 of the Indictment. But that disclosure
simply reminded investors that Martha Stewart is a person – with all the vulnerability and
13
At least under the prosecution’s theory, see Point I(B), supra.
65
exposure to adversity and misfortune that that implies. Many prominent persons in the business
world are critically important to the companies with which they are associated; and those
companies announce that fact to the investing public.14 But Rule 10b-5 was never intended to
impose on such persons special duties of disclosure with respect to their private lives.
The prosecution’s application of Rule 10b-5 to personal statements concerning personal
conduct removes the “boundaries to prosecutorial discretion” required by the Due Process
Clause. Handakas, 286 F.3d at 101; see id. at 108 (citing absurd examples of criminal violations
under prosecution’s interpretation of statute as evidence that statute was unconstitutionally vague
as applied). It allows “a standardless sweep [that] allows . . . prosecutors . . . to pursue their
personal predilections,” precisely the case here. Kolender, 461 U.S. at 358. Many prominent
business persons have made false statements about their personal lives, yet not been prosecuted.15
But the Due Process Clause does not leave it to the good graces of the local prosecutor to
determine which of these personal misstatements by CEOs are crimes, and which are not.
14
There are hundreds, and probably thousands, of such examples in SEC filings. Twelve are included
here. See Tigue Aff., Ex. F (e.g., Amazon.com: “We depend on the continued services and performance of
our senior management and other key personnel, particularly Jeffrey P. Bezos, our chief executive officer
and chairman of the board. . . . The loss of any of our executive officers or other key employees could harm
our business.”; Barnes & Noble, Inc. (same for chairman of the board, CEO, “senior management and
other key personnel”); Charter Communications, Inc. (same); Dell, Inc. (same); Donna Karan International
(same for Donna Karan and for “key members of the Company’s design teams and other key management
executives”); Microsoft Corp. (same for Bill Gates); Polo Ralph Lauren Corp. (same for Ralph Lauren “or
other key personnel”); Starbucks Corp. (same for CEO, President, and senior vice president, coffee)).
15
Bryan Mitchell, the CEO of publicly traded MCG Capital (“MCG”), was not prosecuted for securities
fraud for lying on his resume. See App. at 736-43 Nor were Bausch & Lomb CEO Ron Zarrella or
Veritas CFO Kenneth Lonchar for similar false statements, even though when it was revealed that Lonchar
had lied about graduating with an MBA from Stanford University (when he never even attended that
school), shares of Veritas stock fell 19%. See id. at 720-35.
66
C.
The Unprecedented Nature of This Prosecution is Further Evidence of the Lack of
Reasonable Notice
The above demonstrates that a “person of ordinary intelligence” would not have “a
reasonable opportunity to know” that a personal statement about conduct unrelated to the
business of the company with which she is associated is criminal securities fraud. Chatin, 186
F.3d at 87. Section 10(b) of the Securities Exchange Act of 1934 enjoys its seventieth
anniversary next year; Rule 10b-5 is over a half-century old. Thousands of SEC and criminal
cases have been prosecuted since then. Yet in all these thousands of prosecutions, in all the
decades since the Depression, we are aware of no one who has been prosecuted for securities
fraud based upon an alleged false personal statement about personal conduct. This
unprecedented, novel application of the statute and rule, in a criminal case no less, is yet further
compelling evidence that Ms. Stewart could not have had “a reasonable opportunity to know”
that this securities statute applied. See also Handakas, 286 F.3d at 107 (unwilling to “effect a
breathtaking expansion of mail fraud,” Second Circuit struck down statute, as applied, as
unconstitutionally vague).
It is telling that the SEC, the federal agency charged with regulating the securities
markets, declined to bring even a civil securities fraud charge against Ms. Stewart for her
personal statements after an extensive investigation into this very matter. After the issue was
addressed in Ms. Stewart’s Wells submission, the SEC refused to bring such a charge, no doubt
because application of the securities fraud statute to speech about personal conduct is not only
unprecedented and unfair, but baseless. If the very agency charged with policing the securities
markets does not believe the statements warrant even a civil charge, how could Ms. Stewart, or
67
anyone, be on “reasonable” notice that an errant federal prosecutor’s office would choose to
criminalize such statements? See Chatin, 186 F.3d at 87.
D.
Even the Second Circuit and the 73rd Congress Were Not on Notice of The Prosecution’s
Novel Interpretation
The securities fraud allegations of Count Nine fail the “in connection with” requirement of
Rule 10b-5. See Point I(C), supra. Yet, even if one could stretch the “in connection with”
language to reach the statements charged in Count Nine, any such interpretation of Rule 10b-5
would be unprecedented.
More than thirty years ago, in one of the most frequently cited securities fraud cases in
history, the Second Circuit held that false statements are not actionable under 10b-5 unless
“promulgated for or on behalf of corporations.” Texas Gulf Sulphur Co., 401 F.2d at 859-62; see
also id. at 882-83 (Moore, J., dissenting) (“The majority read the phrase [‘in connection with the
purchase or sale of any security’] as . . . requiring that the allegedly misleading statement be
issued by a publicly traded corporation”) (emphasis added). And twenty years ago, the Second
Circuit held definitively that even “misrepresentations or omissions involved in a securities
transaction but not pertaining to the securities themselves” cannot form the basis for a Rule 10b-5
claim, because they fail the “in connection with” requirement. Chemical Bank, 726 F.2d at 943.
If even our most distinguished jurists were “unaware” that either (i) personal statements
promulgated by and on behalf of an individuals (not corporations), or (ii) misrepresentations “not
pertaining to the securities themselves,” were actionable securities fraud, how could Martha
Stewart, a non-lawyer, reasonably be on such notice?
Not only the Second Circuit, but the very Congress that passed the Securities Act of 1934
was not on notice of the government’s novel view. Unlike the prosecution here, that Congress
68
was concerned with “true and accurate corporate reporting as an essential cog in the proper
functioning of the public exchanges.” H.R.Rep.No. 1383, 73rd Cong., 2d Sess. 11 (1934)
(emphasis added). Is there a member of the 73rd Congress who could have guessed that
“corporate reporting” would, seventy years later, come to include personal statements by CEOs
about personal conduct?
The Second Circuit’s decision in Handakas is instructive. There, “[e]ven someone fully
familiar with [the statute] and our cases, would lack any comprehensible notice” that the conduct
at issue violated the statute. Handakas, 286 F.3d at 107. Count Nine is on even more shaky
ground than the failed prosecution in Handakas. Here, anyone “fully familiar” with the leading
Second Circuit cases, Texas Gulf and Chemical Bank, would not only lack “comprehensible
notice” that personal statements about personal conduct violated Section 10b(5), she would know
that a statement at a minimum must either be “promulgated for or on behalf of [a] corporation[],”
see Texas Gulf, or at least “pertain[] to the securities themselves” to violate Rule 10b-5, see
Chemical Bank.
The Second Circuit has itself noted that “there remains quite a bit of confusion in
evaluating marginal [Rule 10b-5] cases.” In re Ames Dep’t Stores Inc. Stock Litig., 991 F.2d
953, 962 (2d Cir. 1993); see also Chemical Bank, 726 F.2d at 942 (“the 'in connection with'
phrase is not the least difficult aspect of the 10b-5 complex to tie down.”) (internal quotation
marks omitted). Although few commentators or courts can agree upon what “in connection with”
means, everyone does agree upon one thing: the state of the law in this area is undefined and
disputed. “[W]hat ‘in connection with’ requires remains a source of uncertainty. Since 1984, the
‘in connection with’ requirement has been described both as ‘broad’ and as ‘stringent.’” Prof.
69
Barbara Black, Commentary: The Second Circuit’s Approach to the “In Connection With”
Requirement of Rule 10b-5, 53 BROOK. L. REV. 539, 540 (1987). “Although broad
generalizations can be made concerning the expansion and subsequent contraction of the ‘in
connection with’ requirement over time, the most compelling feature of the case law is the
resultant state of confusion. Courts simply have been unable to articulate principles for the
interpretation and application of the requirement.” C. Edward Fletcher, III, The “In Connection
With” Requirement of Rule 10b-5, 16 PEPP. L. REV. 913, 928-29 (1989) (emphasis added). In
short, “the confusion that reigns in the case law” and the “interpretative conundrum presented by
the ‘in connection with’ requirement . . . fail to give notice to potential defendants (who may be
criminally liable for violations of 10b-5) of the prospect of their liability under the federal
securities laws.” Id. at 918.
Count Nine should be dismissed as unconstitutionally vague.
E.
Top Securities Law Experts Recognize that the Prosecution’s Interpretation of Rule 10b-5
is Novel
Experts in securities law agree (apparently with the SEC) that the theory underlying Count
Nine is not only unprecedented, but “truly extraordinary.” See App. 754-55, David E. Marder,
former SEC enforcement lawyer, quoted in the Washington Post, June 19, 2003 (Count Nine is
“truly extraordinary”; unaware of any other instance in which the government “has alleged you
manipulated stock prices simply by protesting your innocence”). Another leading practitioner and
former SEC lawyer noted: “[i]t’s not a statement about her company. It’s a statement concerning
her professed innocence, and I find it troubling that they would take a novel charge like this in the
criminal arena.” Id. (Bruce Mendelsohn, quoted in NBC Nightly News, June 30, 2002); see also
id. Stephen Molo, former federal prosecutor, quoted in Fortune Magazine, November 25, 2002
70
(“If you make a false statement to a federal investigator under oath, you’re in trouble. But if the
government is trying to build a case based on statements Stewart made through her PR firm, that
is highly unusual.”).
If even disinterested securities law experts around the country were not on notice of the
novel interpretation the prosecution urges today, a person “of ordinary intelligence” would
certainly not have “a reasonable opportunity to know what is prohibited” by Rule 10b-5 in this
context. Chatin, 186 F.3d at 87; see United States v. Matthews, 787 F.2d 38, 49 (2d Cir. 1986)
(citing opinions of securities experts that prosecution “goes beyond any precedent” as evidence of
lack of fair notice; court dismissed indictment). Contrast the defendant in Upton, who was told
that a New York Stock Exchange examiner thought that a certain loan substitution practice “was
questionable and should be stopped.” Upton, 75 F.3d at 95. Notwithstanding this warning, and
Upton’s continuation of the practice, his civil censure was still reversed on vagueness grounds,
because the “informal consultation” with the NYSE examiner “was not actual notice of a change
in the Commission’s enforcement policy.” Id. at 98.
Here, expert counsel could not have warned Ms. Stewart that her personal statements
would be parsed and charged as securities fraud. Yet the prosecution seeks not only to censure,
but to imprison Ms. Stewart. Cf. Winters v. State of New York, 333 U.S. 507, 515 (1948) (“The
standards of certainty in statutes punishing for offenses is higher than in those depending primarily
upon civil sanction for enforcement.”) (emphasis added). This attempt should be rejected.16
16
Contrast also the as-applied challenges of defendants whose conduct was obviously proscribed by the
securities laws. See, e.g., United States v. Willis, 737 F. Supp. 269, 276 (S.D.N.Y. 1990) (denying
vagueness challenge of psychiatrist who traded on what was plainly inside information); United States v.
Persky, 520 F.2d 283, 287-88 (2d Cir. 1975) (“if anything is clear from the Section and Rule, it is that
conduct fraudulent even under the most restrictive definition of common law fraud, as Persky's surely was,
(continued...)
71
F.
The History of this Case Demonstrates why the Vagueness Doctrine is Necessary to
Protect Against Misuse of Government Power
“An indefinite statute creates opportunity for the misuse of government power.”
Handakas, 286 F.3d at 107-108. As in Handakas, the prosecution’s amorphous definition of “in
connection with” renders Section 10(b) “a catch-all . . . which has no use but misuse,” and
“highlight[s] the dangers of an offense that is ‘harnessed into service’ by the state when other
prohibitions will not serve.” Id. at 108 (citation omitted).
The prosecutors in this case investigated Ms. Stewart for seventeen months in an attempt
to charge her with criminal insider trading that never occurred. Having failed after its exhaustive
investigation to uncover evidence to support even an allegation of criminal insider trading, the
prosecution was left with obstruction of an agency proceeding and false statement counts that
charge Ms. Stewart with covering up non-criminal activity. Because these charges, if proven,
carry less severe penalties under the sentencing guidelines, the prosecution overreached,
“harness[ing] into service” a novel and questionable application of a federal securities statute that,
not incidentally, threatens a substantially greater prison sentence. Handakas, 286 F.3d at 108.
Such “misuse of government power” should not be countenanced by this Court. Id. at 107-108.
Count Nine should be dismissed.17
16
(...continued)
is proscribed under § 10(b). . . . Nor is it appropriate for Persky to challenge the vagueness of § 10(b) and
the Rule on behalf of those whose conduct would be more ambiguous but who are not before us.”)
(emphasis added). As Persky noted (if obliquely) and as the subsequent case law makes clear, vagueness
challenges are “as applied.” Unlike Persky, Ms. Stewart, like the defendant in Upton – is a defendant
before the court “whose conduct,” to say the least, was “more ambiguous,” and who was not on reasonable
notice that her statements violated the law.
17
Count Nine also fails because a “person of ordinary intelligence” would not have “a reasonable
opportunity to know” that the statements were “material,” and therefore violated Rule 10b-5. Chatin, 186
F.3d at 87. See infra I(B). No court has ever found public statements of innocence in the face of
(continued...)
72
POINT III
THE RULE OF LENITY ALSO REQUIRES THAT COUNT NINE BE DISMISSED
In the end, the Court need not reach the Due Process Clause issue because the
prosecution’s unprecedented attempt to expand the reach of Rule 10b-5 to criminalize personal
statements about personal conduct violates the rule of lenity.
Because the government has no right to use the criminal law to experiment on a citizen,
the rule of lenity requires a court to dismiss criminal charges in “situations in which a reasonable
doubt persists about a statute’s intended scope even after resort to ‘the language and structure,
legislative history, and motivating policies’ of the statute.” Moskal v. United States, 498 U.S.
103, 108 (1990) (quoting Bifulco v. United States, 447 U.S. 381, 387 (1980)). This “canon of
strict construction of criminal statutes . . . ensures fair warning by so resolving ambiguity in a
criminal statute as to apply it only to conduct clearly covered.” United States v. Lanier, 520 U.S.
259, 266-67 (1997) (emphasis added).
Whatever else one may say about the sweep of Rule 10b-5, we are unaware that it has
ever been applied – even in a civil context – to personal statements about personal conduct. Even
17
(...continued)
governmental allegations of wrongdoing to be material. To the contrary, every court has held such
statements to be immaterial, as a matter of law. See, e.g., Ieradi v. Mylan Labs., Inc., 230 F.3d 594, 597
(3d Cir. 2000) (false statement that company “acted properly and in full compliance with the Federal Trade
Commission Act” not material where public knew of FTC investigation); World Series of Casino
Gambling, Inc. v. Donald King, 1986 WL 12525 (S.D.N.Y. Oct. 30, 1986) (false statement by King’s
attorney that he did not expect “any problems for King to result from” six-year U.S. Attorney’s Office
investigation not material); Anderson v. Abbott Labs., 140 F. Supp.2d 894, 906 (N.D. Ill. 2001)
(“Abbott’s maintenance of its innocence is not fraud.”) (emphasis added); In re Westell Technologies, Inc.
Sec. Litig., 2001 WL 1313785 (N.D. Ill. Oct. 26, 2001) (falsely downplaying effect of poor sales on
revenue not material because sales problems were public knowledge).
Anyone “fully familiar” with any of these cases would plainly lack “comprehensible notice” that such
statements of innocence violated Rule 10b-5. See Handakas, 286 F.3d at 107. At a minimum, there was
“substantial uncertainty” as to whether such statements could be material. See Upton v. SEC, 75 F.3d 92,
98 (2d Cir. 1996).
73
after seventy years of interpretation and commentary, its limits are ambiguous at best. See Point
II, supra. “Such a persisting ambiguity ‘should be resolved in favor of lenity.’” Lurie v. Wittner,
228 F.3d 113, 125 (2000) (quoting Liparota v. United States, 471 U.S. 419, 427 (1985)); see also
Crandon v. United States, 494 U.S. 152, 158 (1990) (“any ambiguity in the ambit of [a penal]
statute’s coverage” must be resolved against prosecution); United States v. Universal C.I.T.
Credit Corp., 344 U.S. 218, 222 (1952) (“We should not derive criminal outlawry from some
ambiguous implication.”).
The prosecution here has failed to “tread cautiously in extending” Rule 10b-5 to a brand
new context. United States v. Chestman, 947 F.2d 551, 567 (2d Cir. 1991) (en banc), cert.
denied, 503 U.S. 1004 (1992). That failure requires the Court rigorously to apply the rule of
lenity to protect Ms. Stewart’s rights. See id. at 570 (“More than a perfunctory nod at the rule of
lenity, then, is required” to prevent unduly broad application of Rule 10b-5 in a criminal case).
POINT IV
COUNT NINE VIOLATES MS. STEWART’S FIRST AMENDMENT RIGHT
TO SPEAK AND TO DEFEND HERSELF ON A MATTER OF PUBLIC CONCERN
It is undisputed that Count Nine seeks to criminalize Ms. Stewart’s speech, and her speech
alone. This criminalization of pure speech is subject to strict scrutiny and is prohibited.
A.
Strict Scrutiny Applies to this Attempted Criminalization of Speech
1.
Speech to Protect One’s Reputation is Protected
“The right of a man to the protection of his own reputation from unjustified invasion and
wrongful hurt reflects no more than our basic concept of the essential dignity and worth of every
human being – a concept at the root of any decent system of ordered liberty.” Milkovich v.
Lorain Journal Co., 497 U.S. 1, 22 (1990) (quoting Rosenblatt v. Baer, 383 U.S. 75, 92-3 (1966)
74
(Stewart, J., concurring)). There is no question that Ms. Stewart had a First Amendment right to
speak out to defend her reputation. See id.; Gertz v. Robert Welch, Inc., 418 U.S. 323, 344
(1974) (“The first remedy of any victim of defamation is self-help – using available opportunities
to contradict the lie or correct the error and thereby to minimize its adverse impact on
reputation.”); see generally Thornhill v. Alabama, 310 U.S. 88, 95 (1940).18
Although a point perhaps lost on the prosecution, Ms. Stewart is a person, not a
commodity. She has a daughter, she has friends, she has neighbors. She has a personal
reputation. She is entitled, as is anyone, to speak out to defend herself. Indeed, speaking out to
defend herself was likely Ms. Stewart’s only remedy. The government officials who leaked the
false allegations that Ms. Stewart had been provided insider information by Sam Waksal were
largely anonymous. Whether known or not, given Ms. Stewart’s public figure status, the First
Amendment protections afforded those who defamed her would likely have precluded any legal
action. See, e.g., New York Times v. Sullivan, 376 U.S. 254 (1964). It is precisely because
public figures “enjoy significantly greater access to the channels of effective communication and
hence have a more realistic opportunity to counteract false statements than private individuals
normally enjoy” that they have less protection under the defamation laws. Gertz, 418 U.S. at 344.
With diminished ability to sue, the right of public figures to speak out to defend their reputations
18
In many jurisdictions throughout the country, including New York, persons who speak out to defend
themselves in response to libelous attacks even enjoy a qualified privilege in a defamation action. See, e.g.,
Preston v. Hobbs, 146 N.Y.S. 419 (1st Dep’t 1914) (“if such reply could be published or circulated only at
the risk of subjecting those who took part in such publication or circulation to an action of libel,
unprotected by any defense of privilege, all avenues of self-defense would be closed to him who had been
the subject of the original libelous attack and whose right to appropriate reply the law recognizes and
should protect”).
75
is all the more critical. Any effort by the government to regulate, much less criminalize, such
speech is subject to the strictest scrutiny.
2.
Speech of Public Concern is Protected
Strict scrutiny also applies because Ms. Stewart’s speech was classic speech of public
concern, attacking the false leaks of a congressional investigation, contradicting its insinuations of
criminal wrongdoing, and defending her innocence in the face of potential criminal proceedings.
Speech of public concern occupies the “highest rung of the hierarchy of First Amendment values,”
NAACP v. Claiborne Hardware Co., 458 U.S. 886, 913 (1982), and lies “at the heart of the First
Amendment’s protection.” First Nat’l Bank of Boston v. Bellotti, 435 U.S. 765, 776 (1978).
“There is no question that speech critical of the exercise of the State’s power lies at the very
center of the First Amendment.” Gentile v. State Bar of Nevada, 501 U.S. 1030, 1034 (1991)
(plurality opinion) (citing Butterworth v. Smith, 494 U.S. 624, 632 (1990) (same)); see also Mills
v. Alabama, 384 U.S. 214, 218 (1966) (“Whatever differences may exist about interpretations of
the First Amendment, there is practically universal agreement that a major purpose of that
Amendment was to protect the free discussion of governmental affairs.”).
Speech concerning legal or criminal matters is also, without question, speech of public
concern. See, e.g., Pollnow v. Poughkeepsie Newspapers, Inc., 486 N.Y.S.2d 11, 16 (2d Dep’t
1985) (“it is . . . plain that a private person’s alleged criminal conduct and the operation of the
criminal justice system with respect to the disposition of the charges against such an individual are
matters of legitimate public concern.”) (collecting cases); The Florida Star v. B.J.F., 491 U.S.
524, 536-37 (1989) (speech concerning “the commission, and investigation” of crime is of
“paramount public import”); Landmark Communications Inc. v. Virginia, 435 U.S. 829, 839
76
(1978); Nebraska Press Assoc. v. Stuart, 427 U.S. 539, 606 (1976) (Brennan, J., concurring)
(speech concerning “the criminal justice system is at the core of First Amendment values, for the
operation and integrity of that system is of crucial import to citizens concerned with the
administration of government”).
3.
Assertions of Innocence are Protected Speech
The criminalization of Ms. Stewart’s speech is subject to strict scrutiny for a third reason:
it burdens legal protections at the core of our system of criminal justice – the presumption of
innocence, the right to defend oneself, and the right to a fair, untainted, impartial jury. Speech
that touches upon other constitutional interests warrants the fullest protection. See, e.g., Bigelow
v. Virginia, 421 U.S. 809, 822 (1975) (because “appellant’s First Amendment interests coincided
with the constitutional interests of the general public,” restriction on abortion advertising was
subject to higher scrutiny); Republican Party of Minnesota v. White, 536 U.S. 765, 788 (2002)
(restriction on speech that “tap[s] the energy and the legitimizing power of the democratic
process” subject to higher scrutiny).
Similarly, the presumption of innocence would mean little if the defendant cannot say she
is innocent. The right to defend oneself means nothing if the defendant cannot explain why she is
innocent. The right to an impartial jury means nothing if the government has carte blanche to
taint the jury pool with massive prejudicial publicity, while the defendant remains mute for fear of
further criminal prosecution.19
19
See Point IV(C), infra, for further discussion of the chilling effect of Count Nine upon the exercise of
these core constitutional rights.
77
B.
Count Nine Fails Strict Scrutiny
There can therefore be no dispute that strict scrutiny applies. Applying strict scrutiny, the
prosecution bears the heavy burden of proving that Count Nine is narrowly tailored to serve a
compelling government objective. See White, 536 U.S. at 774-75. The standard is exacting.
With respect to the “compelling interest” requirement, “the substantive evil must be extremely
serious and the degree of imminence extremely high before utterances can be punished,” and a
“solidity of evidence” is necessary “to make the requisite showing of imminence.” Landmark
Communications, 435 U.S. at 845 (quoting Bridges, 314 U.S. at 263 (1941) and Pennekamp v.
Florida, 328 U.S. 331, 347 (1946)). “The danger must not be remote or even probable; it must
immediately imperil.” Id. (quoting Craig v. Harney, 331 U.S. 367, 376 (1947)). And in order to
show that Rule 10b-5 as applied here is narrowly tailored, the prosecution must demonstrate that
it does not “unnecessarily circumscrib[e] protected expression.” White, 536 U.S. at 775 (quoting
Brown v. Hartlage, 456 U.S. 45, 54 (1982)).
The government has no interest, much less a “compelling” one, in criminalizing unsworn
statements about personal conduct, true or false. If it did, the SEC undoubtedly would have
brought civil charges based on these statements. It is not now, and has never been, the business
of government to regulate the truth or falsity of such statements.20
As stated by the Second Circuit and the 73rd Congress itself, the governmental interest at
the heart of Rule 10b-5 is, rather, “the vital importance of true and accurate corporate reporting
as an essential cog in the proper functioning of the public exchanges.” Texas Gulf, 401 F.2d at
20
Count Nine, for example, does not implicate any independent governmental interest in upholding the
oath in sworn testimony, or even in the integrity of information given to a government agent during a
governmental investigation.
78
859 (quoting H.R.Rep.No. 1383, 73rd Cong., 2d Sess. 11 (1934)). As applied in this case, Count
Nine is not “narrowly tailored” to serve that interest.
This prosecution does not concern “corporate reporting” at all. Unlike the overwhelming
majority of Rule 10b-5 cases, it does not deal with 10-K Forms, with 10-Q Forms, with
registration statements, with proxy materials, with corporate press releases, with prospectuses, or
with corporate statements or documents of any kind. It does not deal with speech by a
corporation, on behalf of a corporation, or even about a corporation. Instead, this prosecution
seeks, for the first time in the history of the securities laws, to criminalize speech by a woman
defending her reputation, speaking out against false congressional allegations, and asserting her
innocence. The government not only “unnecessarily circumscrib[es] protected expression.”
White, 536 U.S. at 775 (quoting Brown, 456 U.S. at 54). Here it is circumscribing only protected
expression.
C.
Count Nine Threatens to Chill an Enormous Range of First Amendment-Protected Speech
Count Nine’s criminalization of this speech not only fails strict scrutiny, but, even worse,
application of Rule 10b-5 in this context will also unconstitutionally chill an enormous range of
protected speech. See, e.g., Board of County Comm’rs of Wabaunsee County, Kansas v.
Umbehr, 518 U.S. 668, 674 (1996) (“constitutional violations may arise from the deterrent, or
‘chilling,’ effect of governmental [efforts] that fall short of a direct prohibition against the exercise
of First Amendment rights”) (internal quotation marks omitted).
79
1.
The Chill Over Speech that may “Concern” the Stock Market
The prosecution has chosen here to focus on a famous American businesswoman whose
every word and personal act – it contends – is “in connection with” the securities of a public
company with which she is closely associated. This expansive reading of the “in connection with”
requirement could criminalize any deliberately or recklessly false statement by any person that
might materially affect the stock of a public company. That would be a dangerous precedent.
The stock market is sensitive to an enormous range of statements made by a vast array of
persons, including federal prosecutors, government spokespersons, current and former
government officials, columnists, talk show hosts, and public relations professionals. If the
government’s theory is applied to its fullest, all such persons would have to carefully assess the
rule before speaking out, lest some prosecutor decide that the speech was false, material, and
therefore securities fraud.
Whether or not the government will actually prosecute such persons for securities fraud
based on allegedly false statements about their personal conduct (decisions which would be left to
the individual discretion of dozens of United States Attorneys around the country) is beside the
point. “It is not merely the sporadic abuse of power by the censor [or prosecutor] but the
pervasive threat inherent in its very existence that constitutes the danger to freedom of
discussion.” Thornhill, 310 U.S. at 97; see, e.g., NAACP v. Button, 371 U.S. 415, 433 (1963)
(First Amendment “freedoms are delicate and vulnerable, as well as supremely precious in our
society. The threat of sanctions may deter their exercise almost as potently as the actual
application of sanctions.”); see id. at 435 (“It makes no difference whether such prosecutions or
proceedings would actually be commenced”). By subjecting people who speak about public
80
issues of relevance to the stock market to potential criminal exposure, the government will
impermissibly chill public discussion and debate. But as the Supreme Court has held time and
again, even “erroneous statement is inevitable in free debate . . . [and] must be protected if the
freedoms of expressions are to have the breathing space that they need to survive.” New York
Times Co. v. Sullivan, 376 U.S. 254, 271-72 (1964) (internal citation omitted); see also Button,
371 U.S. at 433 (“Because First Amendment freedoms need breathing space to survive,
government may regulate in the area only with narrow specificity.”); Nike, Inc. v. Kasky, 539
U.S. __, 123 S.Ct. 2554, 2565 (2003) (Breyer, J., dissenting from denial of certiorari) (“speech
on matters of public concern needs ‘breathing space’ — potentially incorporating certain false or
misleading speech — in order to survive”) (collecting Supreme Court cases).
Ironically, the prosecution’s boundless and unpredictable expansion of the securities laws
will chill the very robust discussion and debate vital to the efficient operation of the securities
markets. See, e.g., Bates v. State Bar of Arizona, 433 U.S. 350, 364 (1977) (“[T]he consumer’s
concern for the free flow of commercial speech often may be far keener than his concern for
urgent political dialogue. . . . [Such] speech serves to inform the public of the availability, nature,
and prices of products and services, and thus performs an indispensable role in the allocation of
resources in a free enterprise system.”). Such discussion, whether in the form of fact or opinion,
is plainly protected speech. See Lowe v. SEC, 472 U.S. 181, 210 (1985) (“To the extent that the
[speech] contains factual information about past transactions and market trends, and the
newsletters contains commentary on general market conditions, there can be no doubt about the
protected character of the communications.”); see id. at 210 n.58 (“it is difficult to see why the
81
expression of an opinion about a marketable security should not . . . be protected [by the First
Amendment]”) (citation omitted).
But “[t]he existence of” the legal regime urged by the prosecution “readily lends itself to
harsh and discriminatory enforcement by local prosecuting officials” and may well “result[] in a
continuous and pervasive restraint on all freedom of discussion that might reasonably be regarded
as within its purview,” i.e., upon an enormous range of protected speech that concerns the
market. Thornhill, 310 U.S. at 97-8.
2.
The Chill Over Defendants or Potential Defendants who Dare Assert Their
Innocence
Count Nine will also chill, and has already chilled, individuals who work in or for
corporations from asserting their innocence in the face of a criminal investigation. Under the
prosecution’s theory, Ms. Stewart’s public explanation of her innocence is a crime because it
materially affected MSO’s stock price (and because the government believes that any statement
supporting her innocence is false). If accepted by this Court, the prosecution’s theory inevitably
will chill any person under investigation not only from explaining, but also from even merely
asserting his or her innocence. For while the prosecution may contend that it would not prosecute
someone for a statement that merely denies guilt or asserts innocence, how could one be sure
where the prosecutor would draw the line between a permissible denial of guilt, and an indictable
explanation of innocence?21
21
There is no analytical distinction between a false denial of guilt (or bare-bones assertion of innocence)
that is (arguably) material to the stock of a public company, and a false, detailed explanation of innocence
that is (arguably) material to the stock of a public company. This case proves the point. According to the
prosecution, Ms. Stewart’s plea of not guilty is false, because they believe she is guilty. How is it any less
material to the stock price of MSO for Ms. Stewart publicly to deny that she is guilty, than it is to state the
reasons for her assertion of innocence?
82
The right to be presumed innocent is a core, perhaps the core, right in any criminal case.
“The principle that there is a presumption of innocence in favor of the accused is the undoubted
law, axiomatic and elementary, and its enforcement lies at the foundation of the administration of
our criminal law.” Coffin v. United States, 156 U.S. 432, 453 (1895); In the Matter of Winship,
397 U.S. 358, 363 (1970) (same). But the presumption of innocence means little if the defendant
cannot actually assert and explain her innocence. Just as “the liberty of the press might be
rendered a mockery and a delusion . . . if, while every man was at liberty to publish what he
pleased, the public authorities might nevertheless punish him for harmless publications,” so would
the presumption of innocence be “rendered a mockery” if, while a defendant may assert her
innocence before trial as “she pleased,” the government might nevertheless indict, try, and
imprison her for it. See Thornhill, 310 U.S. at 98 n.12 (internal citation omitted).
If prosecutors are permitted to apply this interpretation of Rule 10b-5, it will inevitably
prevent any public corporation (and its officers) from commenting on any pending investigation
concerning the company, for fear of later being indicted for incompletely or falsely denying the
allegations of improper conduct. What CEO can now afford to risk pleading or asserting
innocence, even about alleged personal crimes unrelated to the company? That CEO can always
be accused of “falsely defending” himself or herself, thereby materially affecting his or her
company’s stock price and committing “securities fraud,” a crime fraught with potentially
disastrous consequences under the Sentencing Guidelines.
Such fear is hardly hypothetical. As noted in a recent Washington Post article:
The [securities] fraud charge has worried the public relations industry and the
legal-defense community and could force high-profile executives to be far more
cautious in responding to government investigations . . . . Brian Oxman, a Los
Angeles criminal defense attorney, said he recently met with a celebrity whom he
83
wouldn’t identify. “I said to my client, ‘See what happened to Martha Stewart?
You must be quiet. Your attorney must provide the information,’” he said.22 “Do
not . . . explain away even the simplest thing because your words will be twisted.”
See App. 754-55.
Defendants are entitled not only to a presumption of innocence, but to the “right to a fair
opportunity to defend against the State’s accusations.” Chambers v. Mississippi, 410 U.S. 284,
294 (1973); see generally Taylor v. Illinois, 484 U.S. 400 (1988); Crane v. Kentucky, 476 U.S.
683 (1986). Speaking out to defend oneself is not merely speech of the highest value. “The
freedom of individuals verbally to oppose or challenge” government action without criminal
consequence “is one of the principal characteristics by which we distinguish a free nation from a
police state.” City of Houston, Texas v. Hill, 482 U.S. 451, 462-63 (1987).23 It is classic, First
Amendment-protected speech, and it will be quashed by this misguided prosecution.
What corporate officer will speak out now and risk the prosecutor adding charges with
heavier potential penalties? What lawyer for a corporate officer will speak out now? The
Damoclean sword of a criminal securities fraud prosecution hangs over every word. Any
statement of innocence, even about purely personal conduct, may now be viewed by an
overzealous prosecutor as a false statement (false because the prosecution believes the defendant
to be guilty) material to the stock price of the company.
22
Actually, as evinced by paragraph 61 of the Indictment, the prosecution does not seem to care whether it
is the defendant or her attorney who asserts innocence. Both are now securities fraud.
23
Just as “[p]rison officials cannot properly bring a disciplinary action against a prisoner for filing a
grievance that is determined by those officials to be without merit,” and cannot “properly bring a
disciplinary action against a prisoner for filing a lawsuit that is judicially determined to be without merit,”
prosecutors cannot properly charge a defendant for assertions of innocence that they determine to be
without merit. Sprouse v. Babcock, 870 F.2d 450, 452 (8th Cir. 1989).
84
D.
Indicting a Defendant for Asserting her Innocence is the Most Noxious Form of
Prohibited Viewpoint Discrimination
Nothing is more settled than that “the First Amendment forbids the government to
regulate speech in ways that favor some viewpoints or ideas at the expense of others.” Members
of the City Council of Los Angeles v. Taxpayers for Vincent, 466 U.S. 789, 804 (1984). “The
principle of viewpoint neutrality . . . underlies the First Amendment.” Bose Corp. v. Consumers
Union of United States, Inc., 466 U.S. 485, 505 (1984); see also Rosenberger v. Rector &
Visitors of the Univ. of Va., 515 U.S. 819, 829 (1995) (“In the realm of private speech or
expression, government regulation may not favor one speaker over another . . . Viewpoint
discrimination is . . . an egregious form of content discrimination.”); Police Dep’t of the City of
Chicago v. Mosley, 408 U.S. 92, 96 (the “government must afford all points of view an equal
opportunity to be heard”). By favoring expressions of guilt over expressions of innocence, the
government violates this cardinal principle.
It is (one hopes) the view of all prosecutors that the defendants they prosecute are actually
guilty. The expression of and factual support for that point of view — “he is guilty” — will
plainly never be prosecuted. The government therefore has carte blanche (as it did here) to make
false factual statements (knowing, reckless, or otherwise) concerning a defendant’s alleged guilt
that may (at least under the prosecution’s theory) be material to the purchase or sale of securities
of a publicly traded company.
Apparently, defendants in the Southern District will not be afforded equal “breathing
space” to assert their innocence. Because prosecutors believe defendants to be guilty, any claim
or explanation of innocence by a defendant is, in the prosecutor’s view, by definition a false
85
statement. And such statements will now be prosecuted. The Constitution’s prohibition against
viewpoint discrimination precludes such an offensive result.
Count Nine effectively “license[s] one side of a debate to fight freestyle, while requiring
the other to follow Marquis of Queensbury rules.” R.A.V. v. City of St. Paul, Minnesota, 505
U.S. 377, 392 (1992). It is disturbing enough (and prohibited) for the government to choose
between viewpoints of different private speakers. But this prosecution has done far worse. For it
has favored the government’s own speech over speech of the defendant. In the prosecution’s
world view, Congress, the SEC, and the prosecution have the right to pillory a CEO defendant,
falsely or truthfully, without consequence. But if Martha Stewart, or any prominent CEO, has the
temerity to defend himself or herself in the court of public opinion, a securities fraud charge with a
crushing penalty may await. The chilling effect is obvious. Count Nine should be dismissed.
POINT V
COUNT EIGHT SHOULD BE DISMISSED BECAUSE IT FAILS TO ALLEGE
SUFFICIENTLY THE ESSENTIAL ELEMENTS OF AN 18 U.S.C. § 1505
VIOLATION AND BECAUSE THE INDICTMENT DOES NOT ALLEGE A
NEXUS BETWEEN THE ALLEGED CONDUCT AND THE OBSTRUCTION
The USAO twice interviewed Martha Stewart and at some point concluded that certain of
her statements during those interviews were false. It considered whether to use these allegedly
false statements to charge her with obstruction of justice. But at the conclusion of its seventeenmonth investigation, the government realized that it had not obtained evidence sufficient to charge
Ms. Stewart with obstructing justice in violation of 18 U.S.C. § 1503 – the obstruction of justice
statute traditionally utilized by the USAO. The government could not proceed under § 1503
because there was no evidence that Ms. Stewart knew that there was an ongoing grand jury
investigation when she voluntarily spoke to the USAO and, as a result, she could not have known
86
that her statements “would be provided to the grand jury.” United States v. Aguilar, 515 U.S.
593, 601 (1995).
In an effort to circumvent that lack of evidence, the government decided to charge instead
that Ms. Stewart obstructed an SEC proceeding in violation of 18 U.S.C. §1505 because SEC
attorneys happened to be present at the interviews. See Ind. ¶ 55. This shift in theories cannot
save the government’s obstruction charge. Just as the government could not prove that Ms.
Stewart intended, or acted in a manner that was likely, to obstruct a grand jury investigation in
violation of § 1503, the Indictment fails as a matter of law to allege facts to support the charge
that Ms. Stewart violated § 1505, because it fails to establish that Ms. Stewart's statements were
knowingly made in an SEC proceeding.
A.
Factual Background
In late January 2002, Ms. Stewart’s attorneys were informed that the USAO wished to
interview her. Pursuant to that request, Ms. Stewart attended an informal and unsworn interview
on February 4, 2002 at the USAO, and then, again pursuant to an informal request, participated in
a brief telephone interview on April 10, 2002. At each interview, only the Assistant United States
Attorney (“AUSA”) questioned Ms. Stewart. At each interview, only the FBI agent took notes.
After each interview, only the FBI agent created a report purportedly based on the contents of the
interview. And after each interview, Ms. Stewart’s attorneys corresponded solely with the AUSA
who had requested and conducted the interview. See, e.g., Ind. ¶¶ 27, 36; see also Affidavit of
John F. Savarese, Esq. (“Savarese Aff.”) at ¶¶ 3, 4, 5, 6, 7; Tigue Aff. ¶¶ 7, 8.
Attorneys from the SEC attended Ms. Stewart’s two voluntary interviews, but, unlike the
AUSA and the FBI agent, the SEC lawyers did not ask questions. During the interviews, the
87
SEC attorneys took no notes. Although initially introduced to Ms. Stewart, the attorneys from
the SEC never advised Ms. Stewart that the SEC was conducting its own, independent
investigation, despite having obtained a formal order of investigation on January 28, 2002 — just
one week before Ms. Stewart’s February 4th interview. The SEC attorneys never gave Ms.
Stewart the standard warnings issued to witnesses who testify in an SEC proceeding.24 The SEC
attorneys also never gave Ms. Stewart a copy of the SEC's Form 1622, the standard form that
advises witnesses what to expect during an SEC proceeding. The SEC attorneys did not request
copies of documents offered by Ms. Stewart’s attorneys during the interview. And when the
documents were sent to the government, Ms. Stewart’s attorney sent them directly to the AUSA
– with no copy to the SEC. See Savarese Aff. ¶¶ 3,4,5,7 and Ex. A.
Despite the SEC’s failure to apprise Ms. Stewart that they were conducting an SEC
investigation, or even to participate in Ms. Stewart's questioning, the government has charged Ms.
Stewart with obstructing an SEC proceeding in violation of § 1505 and with conspiring to commit
that violation. The Court should dismiss the charges because the government has failed to allege
the requisite elements of a § 1505 offense.25
B.
Essential Elements of a § 1505 Violation
The crime of obstruction of an agency proceeding, codified in 18 U.S.C. § 1505, has three
essential elements:
24
The SEC routinely provides standard warnings to its witnesses. These warnings generally include:
(i) introduction of the SEC attorneys; (ii) discussion of the investigation’s scope, and (iii) notice of the
formal order of investigation to the extent one exists.
25
The government pleads a violation of § 1505 count as an object of the conspiracy. See Ind. ¶ 38.
Because the § 1505 charge in Count Eight is defective and should be dismissed, the Court also should
strike paragraph 38 from Count One.
88
First, there must be a pending proceeding before a department or agency of the
United States. Second, the defendant must be aware of such a proceeding. Third,
the defendant must have intentionally endeavored corruptly to influence, obstruct
or impede the pending proceeding.
United States v. Price, 951 F.2d 1028, 1031 (9th Cir. 1991) (emphasis added); see also United
States v. Sprecher, 783 F. Supp. 133, 163 (S.D.N.Y. 1992) (Cedarbaum, J.). In addition to the
three elements contained in the statute, the Supreme Court has made clear that the government
may not impose criminal liability for obstructing an investigation unless the defendant’s conduct
has a sufficient “nexus” to the investigation that it is likely actually to obstruct it. See United
States v. Aguilar, 515 U.S. 593 (1995).
Because Count Eight does not adequately allege each essential element of § 1505, it
should be dismissed. See United States v. Pirro, 212 F.3d 86, 92 (2d Cir. 2000) (an “indictment
that fails to allege the essential elements of the crime charged offends both the Fifth and Sixth
Amendments”); see also Pettibone v. United States, 148 U.S. 197, 202 (1893).
1.
Ms. Stewart’s Alleged Conduct Lacked the Requisite Nexus to, and Therefore
Cannot Have Obstructed, the SEC Proceeding
There is no violation of § 1505 unless there is an objective basis to believe that the alleged
obstructive conduct in fact was likely to impair the investigation. See Aguilar, 515 U.S. at 599601.26 Thus, even if the Indictment adequately alleged that Ms. Stewart knew about and also
26
Although Aguilar involved § 1503, its reasoning applies to § 1505. It is generally accepted that because
the language of the Omnibus Clauses of 1505 and 1503 are substantially identical, case law interpreting
one section is relevant in assessing the other. See United States v. Laurins, 857 F.2d 529, 536 (9th Cir.
1988), cert. denied 492 U.S. 906 (1989) (“cases interpreting section 1503 are relevant to constructions of
section 1505”); United States v. Mitchell, 877 F.2d 294, 299 n.4 (4th Cir. 1989) (agreeing with their “sister
circuits that the identity of purpose among these provisions makes case law interpreting any one of these
provisions strongly persuasive authority in interpreting the others”); Taran v. United States, 266 F.2d 561,
562 (8th Cir. 1959) (“[i]n general, § 1505 serves a purpose in the administrative field similar to that of §§
1503 and 1504 in the judicial field”). This makes perfect sense. There is no reason in law or logic to think
(continued...)
89
intended to obstruct an SEC proceeding – and, as explained below, it does not – Count Eight still
would have to be dismissed because the alleged obstructive conduct did not have the “natural and
probable effect” of interfering with that proceeding. Id. at 593, 599.
In Aguilar, the defendant, Aguilar, a federal judge, was asked by a friend to speak with
another federal judge on behalf of a third party with a pending habeas corpus case before that
judge. During the course of an unrelated investigation, the FBI learned of the meetings between
Aguilar and his friend and informed the Chief Judge of the district. The Chief Judge advised
Aguilar that his friend was possibly involved with criminal activity because the friend’s name had
appeared on a wiretap application. Months later, Aguilar alerted his friend that his telephones
were being wiretapped. Id. at 595-97. Shortly thereafter, as part of a grand jury investigation
into “an alleged conspiracy to influence the outcome of . . . [the] habeas case,” two FBI agents
questioned Aguilar. Id. at 597. “During the interview, [Aguilar] lied about his participation in the
[habeas] case and his knowledge of the wiretap.” Id.
Notwithstanding that Aguilar had lied to FBI agents, the Supreme Court held that there
could be no obstruction of justice because “if the defendant lacks knowledge that his actions are
likely to affect the judicial proceeding, he lacks the requisite intent to obstruct.” Id. at 599; see
also Pettibone, 148 U.S. at 207 (“without such knowledge or notice the evil intent is lacking”).
The Supreme Court thus adopted the “nexus” requirement – utilized in various Courts of Appeals
decisions – as the “correct construction of § 1503.” Aguilar, 515 U.S. at 600.27 This rule
26
(...continued)
that the result in Aguilar would have been different if Aguilar had lied to an SEC investigator and been
charged under § 1505, rather than having been charged under § 1503 for lying to an FBI agent.
27
The Courts of Appeals decisions utilized the nexus requirements to “place metes and bounds on the
very broad language of the catchall provision” of § 1503. Id. at 599 (referring to the Omnibus Clause of §
(continued...)
90
requires that the obstructive act (here, the mere making of a false statement), “must have a
relationship in time, causation, or logic with” the proceedings allegedly obstructed. See id. at
599. “In other words, the endeavor must have the ‘natural and probable effect’ of interfering with
the due administration of justice.” Id. (internal citations omitted).
The key point in Aguilar was that it was unclear that the defendant knew that his false
statements “would be provided to the grand jury”; the evidence showed only that Aguilar made
false statements to an investigating agent. Id. at 601. “[W]hat use will be made of false testimony
given to an investigating agent who has not been subpoenaed or otherwise directed to appear
before the grand jury is far more speculative” than the use of false documents or testimony
delivered directly to the grand jury. Id. As the Supreme Court noted, simply giving false
testimony to an investigating agent without knowing that those false statements would be
provided to the grand jury “cannot be said to have the ‘natural and probable effect’ of interfering
with the due administration of justice.” Id. at 599. There could be no criminal liability for
obstruction unless the defendant’s allegedly false statements were in fact “likely to obstruct” the
investigation. See id. at 601.28
If Aguilar, who lied to FBI agents who had specifically advised him that a grand jury
investigation had been commenced, was not liable for obstructing that investigation, id. at 600,
27
(...continued)
1503, which is substantially identical to the Omnibus Clause of § 1505).
28
The Second Circuit employed the Aguilar rationale in a decision overturning convictions for conspiracy
to obstruct justice in violation of 18 U.S.C. § 1503. See United States v. Schwarz, 283 F.3d 76 (2d Cir.
2002). In Schwarz, the Second Circuit noted that the government failed to prove one of the critical
elements of conspiracy to commit obstruction of justice: that the defendants “specifically agreed to obstruct
the federal grand jury proceeding.” Id. at 105-7. The decision to overturn the convictions was based
primarily on the principle that “‘if the defendant lacks knowledge that his actions are likely to affect the
judicial proceeding, he lacks the requisite intent to obstruct’” it. Id. at 109 (quoting Aguilar, 515 U.S. at
599).
91
then the Indictment plainly fails to state an obstruction charge against Ms. Stewart. Ms. Stewart’s
alleged “obstructive” conduct consists of unsworn statements she made during two interviews
with the USAO. Any statements she made were responses to questions posed by the AUSA who
conducted the interview. The SEC attorneys did not explain to her that their presence would
convert the interview into an “SEC proceeding,” or that her statements would be used in an SEC
proceeding. Indeed, the SEC attorneys never told her that a parallel SEC proceeding even
existed. These are the factors that Aguilar makes clear are necessary to support an obstruction
charge. In their absence, there is no basis to conclude that Ms. Stewart’s alleged conduct had a
“‘natural and probable effect’ of interfering with” the SEC proceeding, or that she intended to do
so. See Aguilar, 515 U.S. at 599.29
2.
Given the Undisputed Facts, Ms. Stewart’s Voluntary Interviews by the United
States Attorney’s Office Were Not Part of an SEC Proceeding
Count Eight is fatally flawed for another fundamental reason: Ms. Stewart never
participated in, and therefore could not have obstructed, an SEC proceeding. The bedrock
element of § 1505 is that there be a “pending proceeding . . . before a department or agency of the
United States.” Price, 951 F.2d at 1031.30 The United States Attorney’s Office is not a
department or agency of the United States. It follows that a meeting called by the United States
29
Two circuit court cases cited with approval in Aguilar further demonstrate that Ms. Stewart’s alleged
conduct fails to satisfy Aguilar’s nexus requirement. As the Eleventh Circuit explained in United States v.
Thomas, 916 F.2d 647 (11th Cir. 1990), “not all false or evasive testimony constitutes obstruction of
justice.” Id. at 652. In addition to proving the defendant’s knowledge and intent, the court “emphasize[d]
the requirement of proving an effect of impeding justice in the false testimony context because obstruction
of justice is not inherent in all false testimony.” Id. (emphasis added). And in United States v. Wood, the
Tenth Circuit affirmed the dismissal of a §1503 charge because the defendant’s alleged acts did not have
the “natural and probable effect of impeding the due administration of justice.” 6 F.3d 692, 697 (10th Cir.
1993) (emphasis added).
30
What constitutes a “proceeding” is a question of law. See United States v. Fruchtman, 421 F.2d 1019,
1021 (6th Cir. 1970), cert. denied, 400 U.S. 849 (1970).
92
Attorney’s Office, held at the United States Attorney’s Office, controlled by the United States
Attorney’s Office, and conducted by the United States Attorney’s Office, cannot properly be
considered an SEC “proceeding” for purposes of a § 1505 violation. The mere passive presence
of SEC attorneys does not transform such a meeting into an SEC “proceeding.”
Section 1505 does not apply to all government “proceedings” of any type; rather, it
applies to a “proceeding” conducted by specified agencies, such as the SEC. See, e.g.,
Fruchtman, 421 F.2d at 1021; United States v. Batten, 226 F. Supp. 492, 494 (D. D.C. 1964)
(“the term ‘proceeding’ as used in 18 U.S.C. § 1505, should be construed broadly enough to
include any investigation directed by a formal order of the [Securities and Exchange] Commission,
at which a designated officer takes testimony under oath”) (emphasis added).
The SEC has an established method of conducting its investigatory proceedings. It issues
an Order of Investigation defining its scope, a copy of which is invariably provided to a witness
who requests it and agrees not to use it for an improper purpose. Typically, the SEC obtains
evidence pursuant to a subpoena for documents and sworn testimony. Furthermore, its rules of
practice require that witnesses be notified about a litany of applicable rights.
None of these procedures were followed during the USAO interviews of Martha Stewart.
There was no notice that an Order of Investigation existed; there was no subpoena for documents
or testimony; there was no sworn testimony of any kind, and no notice of the witness’s rights. To
the contrary, the interviews here were initiated by an informal request from an AUSA
investigating the trading of ImClone securities, conducted solely by that AUSA, and recorded
solely by a Special Agent of the FBI, who was assisting the AUSA in the investigation. These
interviews were not conducted as an SEC “proceeding” because they were not an SEC
93
“proceeding” as that term is defined by § 1505.31 Accordingly, as a matter of law, the Indictment
fails to allege the basic element of § 1505.
3.
The Indictment does not Sufficiently Allege the Second and Third Essential
Elements of a 18 U.S.C. § 1505 Violation
Even assuming for the sake of argument that the interviews held at, and conducted by, the
USAO were part of an SEC proceeding, Ms. Stewart cannot be held criminally liable under
§ 1505 unless she: (i) was aware that the interviews constituted an SEC proceeding and (ii)
“intentionally endeavored corruptly to influence, obstruct or impede [that] . . . proceeding.”
Price, 951 F.2d at 1031. Nothing in the Indictment supports the conclusion that, at the time she
made the alleged false statements, Ms. Stewart knew that the SEC was conducting its own
proceeding to investigate trading in ImClone securities, that her USAO interviews somehow
constituted an SEC proceeding, or that her statements would be used in an SEC proceeding.
The Indictment attempts to avoid these basic requirements by using imprecise, generic
terms. For example, in one paragraph that discusses the alleged objects of the conspiracy, the
Indictment states:
31
Moreover, given the requirement that Ms. Stewart intended to obstruct the SEC proceeding, as opposed
to the FBI or USAO investigations, the SEC representatives should have placed Ms. Stewart on notice that
they intended to treat this interview as part of some type of SEC proceeding. They did not, but instead sat
silently throughout the interview after being introduced. See Savarese Aff. ¶ 3, 7. Now the government
seeks to capitalize on its own failure to notify Ms. Stewart or her counsel that there was an independent
SEC investigation by contending that the mere passive presence of SEC attorneys at a USAO interview is
enough to convert a USAO interview into an SEC proceeding. The government should not be permitted to
dictate when a novel set of facts does or does not violate a criminal statute, especially because criminal
statutes must be narrowly construed. See Aguilar, 515 U.S. at 600 (courts “traditionally exercise restraint
in assessing the reach of a federal criminal statute, both out of deference to the prerogatives of Congress . .
. and out of concern that a fair warning should be given to the world in language that the common world
will understand, of what the law intends to do if a certain line is passed”) (internal citations and quotation
marks omitted).
94
As described more fully below, after learning of the investigations, MARTHA
STEWART and PETER BACANOVIC, and others known and unknown, entered
into an unlawful conspiracy to obstruct the investigations . . .32
Ind. ¶ 23. This critical sentence is intentionally ambiguous: the word “investigations” is plural.
Because Ms. Stewart is charged only with violating § 1505, the object of the conspiracy cannot be
to obstruct several undefined “investigations,” but solely to obstruct an SEC proceeding. And
because paragraph 23 is realleged in Count Eight, it confuses the allegations within the
substantive charge of obstruction of an agency proceeding. See Ind. ¶ 54.
The government’s repeated use of the term “obstruction of justice” highlights its inability
adequately to allege that Ms. Stewart intended to obstruct a specific agency proceeding.33 The
most improper use of the phrase “obstruction of justice” occurs in Paragraph 37, which purports
to allege the conspiracy count:
From in or about January 2002 until in or about April 2002, in the Southern
District of New York and elsewhere, PETER BACANOVIC and MARTHA
STEWART, and others known and unknown, unlawfully, willfully, and knowingly
did combine, conspire, confederate and agree together and with each other to
commit offenses against the United States, to wit: to obstruct justice, in violation
of Section 1505 of Title 18, United States Code . . . .
Ind. ¶ 37 (emphasis added). Given the plain language of § 1505, the pending proceeding that Ms.
Stewart is alleged to have obstructed must be the SEC agency proceeding, as neither the FBI or
USAO investigations qualify as a “proceeding before a department or agency of the United
32
Paragraph 22 of the Indictment alleges that, beginning in or about January 2003, the SEC, FBI and the
USAO were all conducting investigations into trading in ImClone securities. See Ind. ¶ 22. However, the
term “investigations” is not defined within Paragraph 22. Nor would it matter, as the “knowledge” required
to be alleged is specifically that of the SEC proceeding — not the FBI or USAO investigations.
33
See Ind. at Count One introduction (“Conspiracy to Obstruct Justice . . .”), ¶ 22 heading (“The Scheme
To Obstruct Justice”), ¶ 29 (“in furtherance of the scheme to obstruct justice”), ¶ 38 heading (“Obstruction
of Justice”), Count 7 heading (“Obstruction of Justice by Peter Bacanovic”), Count 8 heading
(“Obstruction of Justice by Martha Stewart”).
95
States” for purposes of a § 1505 violation.34 See, e.g., United States v. Wright, 704 F. Supp. 613
(D. Md. 1989) (dismissing § 1505 charges when the allegedly false statement was made to the
USAO); United States v. Higgins, 511 F. Supp. 453 (W.D. Ky. 1981) (FBI investigation was not
a proceeding within the meaning of § 1505).
It would only be proper to use the phrase “obstruction of justice” in a case charging a
violation of § 1503, not § 1505. See, e.g., United States v. Senffner, 280 F.3d 755, 759 (7th Cir.
2002); United States v. Cohn, 452 F.2d 881, 884 (2d Cir. 1971); cert. denied, 405 U.S. 975
(1972) (noting that § 1505 “tracks the language of § 1503 in the context of administrative
proceedings”); Price, 951 F.2d at 1031 (referring to a violation of § 1505 as “obstruction of
proceedings”).35 The government’s repeated use of the inapplicable shorthand “obstruction of
justice” makes clear that the Indictment fails properly to allege either that Ms. Stewart had
knowledge of the SEC proceeding or that she intended to obstruct that specific SEC proceeding.36
34
And the two paragraphs within the Indictment that track the language of the statute state that the
proceeding allegedly obstructed was that of the SEC.
35
While courts sometimes use the terms interchangeably, in this case, where a § 1503 violation cannot be
proven, the use of the term “obstruction of justice” creates unnecessary confusion and prejudice. For this
reason, in the alternative, Ms. Stewart respectfully requests that the Court strike all references to
“obstruction of justice” within the Indictment as surplusage. See Point VII, infra.
36
The government well knows how to plead violations of § 1505 and § 1503 with the requisite clarity.
Consider the recent indictment in United States v. Quattrone, 03 Cr. 582 (RO). There, the underlying
complaint describes count one as “obstruction of justice,” and properly cites to § 1503. See Tigue Aff.,
Ex. A at 1. Count two of the complaint charges a violation of § 1505 and properly characterizes such a
charge as “obstruction of agency proceeding.” Id. at 2. The Quattrone indictment is equally precise: count
one is labeled “Obstruction of Justice” and properly charges only a § 1503 violation. See Tigue Aff., Ex.
B at 1, 23. Count two of the indictment charges only a violation of § 1505, which it properly characterizes
as “obstruction of agency proceedings” – a heading that never appears in the instant Indictment. Id. at 23.
Indeed, the statutorily correct term – “obstruction of an agency proceeding” – is completely absent from
this Indictment. It bears noting that because these two indictments came not only from the same USAO,
but from the same unit within that USAO, there is no office policy to employ the generic term “obstruction
of justice” to plead a violation of § 1505.
96
In sum, the Indictment is fatally deficient because it fails to allege that Ms. Stewart was
aware of the pending SEC proceeding at the time she made the false statements. Without such
knowledge, Ms. Stewart could not have formed the requisite intent to obstruct the SEC
proceeding. And, even assuming that she had the requisite knowledge and intent, the Indictment
does not (and could not) allege a sufficient “nexus” between the alleged false statements and the
alleged obstruction, as required by Aguilar, because there is no basis to believe that anything Ms.
Stewart told the government was likely to interfere with the SEC’s investigation. Accordingly,
Count Eight and the object of the conspiracy charging obstruction of an agency proceeding within
Count One should be dismissed.
POINT VI
FALSE STATEMENT SPECIFICATIONS FOUR AND FIVE OF COUNT THREE
AND SPECIFICATION ONE OF COUNT FOUR SHOULD BE STRICKEN
The prosecution’s “false statement” case against Ms. Stewart is based exclusively on one
in-person interview on February 4, 2002 and a short telephone interview on April 10, 2002. In
these interviews, the government’s investigative purpose was clear: to determine whether Ms.
Stewart had been tipped by Sam Waksal that the FDA was about to reject ImClone’s application
for approval of Erbitux.
Though it is now clear that no one tipped Ms. Stewart about the impending FDA decision,
the Indictment alleges that Ms. Stewart made eleven false statements to government investigators
about her sale of ImClone stock during her February 4 and April 10 interviews. See Ind. ¶¶
44-47. The statements charged in Specifications Four and Five of Count Three should be stricken
from the Indictment because they are not material as a matter of law. And the statement charged
97
in Specification One of Count Four should be stricken because it is literally true even according to
the government’s theory of the case.
A.
Specifications Four and Five of Count Three Should be Stricken Because the Alleged
False Statements are not Material
Count Three alleges that Ms. Stewart made eight false statements during her February 4,
2002 interview with government agents. See Ind. ¶ 45. At least two of the specifications relate
to statements that had nothing to do with the purpose of the government’s investigation: to
determine whether Ms. Stewart was tipped by Sam Waksal about the negative FDA decision.
Specification Four alleges:
Stewart falsely stated that before ending her call with Bacanovic on December 27,
2001, Stewart and Bacanovic had discussions regarding what MSO stock was
doing and regarding Kmart.
Ind. ¶ 45. Specification Five alleges:
Stewart falsely stated that she decided to sell her ImClone stock on December 27,
2001 because she did not want to be bothered over her vacation.
Id. These alleged false statements could not possibly have influenced those conducting the
investigation. Because they are immaterial as a matter of law, specifications Four and Five should
be stricken from the Indictment.
There is no liability under Section 1001 of Title 18 unless one “knowingly and willfully”
makes a “materially false, fictitious or fraudulent statement or representation” to a government
agent. 18 U.S.C. § 1001(a)(1), (2). Both falsity and materiality are required. See United States
v. Gaudin, 515 U.S. 506, 509 (1995) (false statements must be “material to the government
inquiry”). A false statement is material if it has “a natural tendency to influence or [is] capable of
influencing, the decision of the decision making body to which it was addressed.” Gaudin, 515
98
U.S. at 509. The question is “whether the statement had the potential for an obstructive or
inhibitive effect.” United States v. Greenberg, 735 F.2d 29, 31 (2d Cir. 1984). While the
government need not establish that its decision-making was actually affected, it must be able to
prove that a reasonable official “would consider the statements to be significant to the exercise of
his or her official duties.” United States v. Antique Platter of Gold, 184 F.3d 131, 136 (2d Cir.
1999) (emphasis added); see also United States v. Beer, 518 F.2d 168, 172 (5th Cir. 1975)
(conviction reversed where there was no evidence of how a particular statement could have
affected any decision of the FDIC); Kungys v. United States, 485 U.S. 759, 761 (1988). While a
defendant is entitled to have the issue of materiality resolved by the jury, where, as here, the case
for materiality is “so weak that no reasonable juror could credit it,” the Court must resolve the
issue as a matter of law. Gaudin, 515 U.S. at 517; see also United States & ex rel Berge v. Board
of Trustees, 104 F.3d 1453, 1460 (4th Cir. 1997), cert. denied, 522 U.S. 916 (1997) (“even the
Gaudin Court acknowledged that there always remains as a threshold question of law whether the
case for materiality” is too weak to submit to jury); United States v. Newell, 14 F. Appx. 456 (6th
Cir. 2001) (upholding dismissal of false statement count where alleged false statement was not
material).
During the February 4th interview, Ms. Stewart was questioned about why she sold
ImClone shares on December 27, 2001.37 According to the FBI 302 report, Ms. Stewart
explained that she and Mr. Bacanovic agreed to sell if ImClone fell to $60 a share:
37
The government has produced its notes and FBI 302 reports of the February 4 and April 10 interviews
to the defense. True and correct copies of relevant portions of those items are attached as exhibits to the
Affidavit of John J. Tigue, submitted herewith. See Tigue Aff., Exs. C & D. Nothing herein is intended to
admit the accuracy of these documents.
99
Stewart and Bacanovic both decided that when the stock started trading at $60.00
a share, Stewart would sell her shares. Both Stewart and Bacanovic determined
the target price of $60.00 dollars a share. Stewart did not place a limit order with
Bacanovic at that time. She told Bacanovic to call her when the stock was trading
at $60.00 dollars and she would decide. Bacanovic is always able to reach
Stewart. In the normal course of business Bacanovic normally calls Stewart at her
office telephone number. Stewart recalled at the time she had this discussion with
Bacanovic the stock was trading at around $74.00 dollars. Stewart stated that she
wished she had sold at $74.00 dollars.
* * *
On December 27, 2001, Stewart was en route to Mexico for a vacation. At
approximately 1:30 p.m., New York time, the plane stopped in Texas for fuel and
Stewart called her assistant Annie. Annie told Stewart that Bacanovic had called
and that he said that they ‘should talk before the end of the day.’ After speaking
with Annie, Annie put Stewart through to Bacanovic. Stewart thought that
Bacanovic was in his office. Bacanovic told Stewart that ImClone was trading a
little below $60.00 dollars and asked Stewart if she wanted to sell. Stewart told
Bacanovic to sell it. Stewart decided to sell the stock that day because she didn’t
want to be bothered over her vacation and she would not be returning until
January 6, 2002.
Tigue Aff., Ex. C at 3.
Even if, as alleged, Ms. Stewart’s additional statement that she and Bacanovic discussed
MSO stock and Kmart on December 27, 2001 were false, this would hardly have had a tendency
to influence or impede government interviewers attempting to determine whether Stewart was
tipped by Sam Waksal. The statement had nothing to do with ImClone or the reasons for Ms.
Stewart’s sale. It was ancillary and irrelevant to the investigation. Ms. Stewart might just as
easily have said that she and Bacanovic discussed the weather or the Super Bowl. This
specification should be dismissed. See United States v. Naserkhaki, 722 F. Supp. 242, 248 (E.D.
Va. 1989) (“Where, as here, a misstatement relates to an ancillary, non-determinative fact, it is not
material and cannot support a conviction under Section 1001.”); United States v. Cordero, 205
F.3d 1325 (2d Cir. 2000) (to be material, a statement must “relate to an important fact as
100
distinguished from some unimportant or trivial detail”); United States v. Freedman, 445 F.2d
1220, 1227 (2d Cir. 1971) (in order for a false statement to be material under perjury statute, “it
must be shown that a truthful answer would have been of sufficient probative importance to the
inquiry so that, [at] a minimum, further fruitful investigation would have occurred”).
For similar reasons, Ms. Stewart’s alleged statement that she sold her ImClone shares on
December 27, 2001 in part because she did not want to be bothered over vacation was not
material. According to the Indictment and the FBI 302 on which it relies, Ms. Stewart told
government interviewers that she sold ImClone stock based on the $60 understanding with her
broker. The government disputes this account, contending that Ms. Stewart sold her shares
because she was told by Douglas Faneuil that the Waksals were selling their ImClone holdings.
See Ind. ¶ 17.38 Either way, under the government’s theory, Ms. Stewart’s comment about her
vacation was an ancillary, add-on explanation for the sale; the primary explanation was the $60
understanding. Ms. Stewart allegedly told the government that she and Bacanovic “both decided
that when the stock started trading at $60.00 a share, Stewart would sell her shares.” See Tigue
Aff., Ex. C at 1. She then stated that, on December 27, “Bacanovic told [her] that ImClone was
trading a little below $60.00 dollars and asked [her] if she wanted to sell. [She] told Bacanovic to
sell it.” Id. After having explained the primary, financial reason for her sale, Ms. Stewart’s
comment about a subsidiary, psychological motivation was immaterial as a matter of law because
38
Even if the government were correct, it is difficult to conceive how the government could ever prove
beyond a reasonable doubt that Ms. Stewart did not also have in mind that she wanted to sell so she would
not have to think about her ImClone position while on vacation. There is no dispute that the conversation
at issue on December 27, 2001 took place as Ms. Stewart stood on an airport tarmac in Texas on her way
to Mexico for a post-Christmas vacation. In that context, it is hardly surprising that it would have
occurred to her, perhaps even as an afterthought, that she preferred not to worry about one of her minor
stock holdings during her vacation.
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it could not possibly have influenced the conduct of the government’s investigation or changed
the course of the inquiry in any way. To suggest that Ms. Stewart could have thrown the
government off the trail by adding that she did not want to be bothered on vacation is simply
absurd. And to charge that statement as a felony is overreaching in the extreme. Specification
Five should be stricken as well.
B.
Specification One of Count Four Should Be Stricken
Count Four of the Indictment alleges that, on April 10, 2002, during an interview with the
SEC, the FBI and the USAO, “Stewart falsely stated that she did not recall if she and Bacanovic
discussed Samuel Waksal on December 27, 2001, nor did she recall being informed on December
27, 2001 that any of the Waksals were selling their ImClone stock.” Ind. ¶ 47. But according to
the government, this statement is literally true because the Indictment asserts that Ms. Stewart
spoke with Douglas Faneuil on December 27, not with Bacanovic. See Ind. ¶ 17. Because
Section 1001 does not cover statements that are literally true, this specification should be stricken.
There can be no violation of Section 1001 if the statement alleged to be false is literally
true. United States v. Mandanici, 729 F.2d 914, 921 (2d Cir. 1984) (“a defendant may not be
convicted under § 1001 on the basis of a statement that is, although misleading, literally true”);
see also Bronston v. United States, 409 U.S. 352, 352-53 (1973) (witness may not be convicted
under federal perjury statute for answer that is literally true but unresponsive of question asked
and arguably misleading by negative implication); United States v. Carey, 152 F. Supp.2d 415,
423-24 (S.D.N.Y. 2001) (“an individual cannot be convicted of perjury for an answer given under
oath that is literally true, even if it is unresponsive and intended to mislead; the ‘literal truth’
defense also applies to false statement prosecutions under 18 U.S.C. § 1001”).
102
The Indictment alleges that “[o]n December 27, 2001, at approximately 1:39 p.m. (EST),
Martha Stewart telephoned the office of Peter Bacanovic and spoke to Douglas Faneuil, who
informed her that Samuel Waksal was ‘trying to sell all of the ImClone stock that Waksal held at
Merrill Lynch.’” Ind. ¶ 17. Specification One of Count Four alleges that Ms. Stewart stated that
she “did not recall if she and Bacanovic discussed Samuel Waksal,” and further, could not recall
being informed that any of the Waksals were selling their ImClone shares. Id. at 47. Although
the second part of this allegation does not refer explicitly to Bacanovic, it is clear from the context
and from the government’s own notes that the statement was referring to him. See Tigue Aff.,
Ex. D at 1 (“Stewart has no recollection of Bacanovic referencing that any of the Waksals were
selling. Stewart does not recall if she and Bacanovic discussed Sam Waksal.”); see also Tigue
Aff., Ex. D at 2 (“No recollection of P.B. referencing selling of any Waksals[.] Doesn’t recall
same or Waksals being discussed.”).
According to the government’s theory of the case, Ms. Stewart’s statement that she was
unable to recall discussing these topics on the phone with Bacanovic on December 27 is true,
since she was speaking to Douglas Faneuil not Peter Bacanovic. See Ind. ¶ 17.39 If the
government wanted this information with respect to Faneuil it would have asked. Ms. Stewart’s
statement that she did not recall being informed by Bacanovic that the Waksals were selling their
ImClone stock is true since she did not have that conversation with Bacanovic under the
39
It is important to note that by April of 2002, Peter Bacanovic had given sworn SEC testimony. That
testimony includes a statement by Mr. Bacanovic that it was Douglas Faneuil who spoke to Ms. Stewart on
December 27, not Mr. Bacanovic. Presumably, this information was conveyed to the USAO. Despite this
knowledge, the AUSA persisted in asking Ms. Stewart questions as if the conversation took place with
Bacanovic. Although on the call, at no time did the SEC correct the record so that the more accurate
question could be posed. Thus, it is hardly unfair to apply the Bronston theory to this situation, in which
the government’s question was either deliberately or inadvertently wrong. See, e.g., Bronston v. United
States, 409 U.S. 352 (1973).
103
government’s theory of the case. Had the government focused Ms. Stewart’s attention and
recollection on a conversation with Faneuil, Ms. Stewart’s recollection might have been refreshed.
But a “false statement” charge cannot be made from a true statement. Specification One of Count
Four should be dismissed.
POINT VII
THE SURPLUSAGE OF THE INDICTMENT SHOULD BE STRICKEN
A.
The Indictment’s “Background” Section is Surplusage and Should be Stricken
An indictment “must be a plain, concise and definite written statement of the essential
facts constituting the offense charged.” Fed. R. Crim. P. 7(c)(1). This Indictment fails that test.
It contains a “Background” section – included in Count One but incorporated by reference in
every other count – that spreads over 19 pages and includes numerous allegations that are not
only largely irrelevant, but also seriously prejudicial and inflammatory. This is “Background” in
name only; in fact, it is a detailed argument of the prosecution’s position – a piece of advocacy
designed to sway the jury’s opinion before it hears a single piece of evidence. This “Background”
section is surplusage and should be stricken.
Pursuant to Fed. R. Crim. P. 7(d), a court may, upon the defendant’s motion, “strike
surplusage from the indictment.” Fed. R. Crim. P. 7(d). The purpose of the rule is to protect the
defendant against “prejudicial allegations of irrelevant facts.” United States v. Miller, 26 F.
Supp.2d 415, 420 (N.D.N.Y. 1998). The decision to strike is within the discretion of the trial
court. Id.
Commentators have criticized the practice of prosecutors, utilized here, to “insert
unnecessary allegations for ‘color’ or ‘background’ hoping that these will stimulate the interest of
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the jurors.” See WRIGHT, FEDERAL PRACTICE AND PROCEDURE, CRIMINAL 3d § 127. In similar
situations, courts have stricken the entire introduction or preamble to the indictment. For
example, in United States v. Nachamie, 98 Cr. 1238 (July 26, 2000), in which the defendants were
charged with conspiracy to commit health care fraud, mail fraud, make false statements and
submit false claims, defense counsel complained that the prosecution had made unfair use of the
indictment:
The practice of putting an introduction to an indictment that pleads facts that are at
issue, I find to be a very troublesome practice. For this jury to decide whether or
not defendants are guilty of the various counts, they don’t need the introduction.
They had testimony. They are the triers of fact. . . .
For the government to have an added advantage of this document going in as if
that is the statement of the law, I find to be a problem.40
Judge Scheindlin agreed that a narrative introduction to the indictment was unnecessary
and prejudicial, noting the court’s concern with this prosecutorial practice. “It troubles me. . . I
have been troubled by these detailed introductions that may, in fact, contradict the charge or that
simply serve[] as second summation.” Tigue Aff., Ex. G at 3209, 3212. Accordingly, Judge
Scheindlin decided to give the jury the indictment without the entire introductory section, noting
that it gave the prosecution an unfair advantage to have its theory of the case set forth in what
was effectively a “second opening, second summation, second charge.” Id. at 3212.
Similarly, in United States v. Vastola, 670 F. Supp. 1244, 1254 (D.N.J. 1987), the court
granted the defendant’s pretrial motion and struck the entire five-page preamble to the indictment,
which included, among other things, a descriptive paragraph on each of the defendants and
40
The relevant portions of this transcript have been attached to the Affidavit of John J. Tigue, Jr. See
Tigue Aff., Ex. G at 3209, 3211.
105
additional narrative not contained in the counts of the indictment.41 The court noted that the
preamble “is not simply a roadmap indicating which defendants are indicted for which crimes. It
contains information which may be meaningful to a jury’s consideration of the guilt of the
defendants.” Vastola, 670 F. Supp. at 1254. The court explained that it was concerned that “the
jury’s deliberations will be unduly influenced by the preamble (the jurors have a copy of the
indictment while deliberating).” Id.
Moreover, in Vastola, as here, the preamble contained “irrelevant and vague language
which may imply guilt by association or insinuate unalleged facts,” that could lead the jury to infer
involvement with uncharged crimes. Id. at 1255. As numerous courts have held, “[a]nything in
the indictment that allows the jury to infer involvement with uncharged crimes. . . is improper.”
Id. at 1255; see also Miller, 26 F. Supp. at 420 (striking language that improperly implies
defendants’ involvement in uncharged acts of violence); United States v. Teicher, 726 F. Supp.
1424, 1441 (S.D.N.Y. 1989) (striking defendant’s name from paragraph where inclusion created
inference that he was accused of nine separate counts of mail fraud, which he was not).
The Background section here is improper because it repeatedly suggests that Martha
Stewart engaged in culpable behavior for which she has not been charged. For example,
Paragraph 18 contains the allegation that “Martha Stewart knew that information regarding the
sale of the Waksal shares had been communicated to her in violation of the duties of trust and
confidence owed to Merrill Lynch and its clients.” Ind. ¶ 18. This allegation is unnecessary
because Ms. Stewart is not charged with insider trading. It is, however, extremely prejudicial,
41
Although the preamble struck by the court in Vastola preceded the first count of the indictment, and the
background here is included in Count One, both the background and the preamble serve the same function
and this Court should strike the Background section for the same reasons.
106
because it invites the jury to infer that she is guilty of insider trading even before hearing the case,
and even though the prosecutors have determined that such a charge was unwarranted.
Accordingly, this paragraph should be stricken.
Paragraph 26 alleges that, after hearing that the government had requested an interview
with her, Martha Stewart accessed her telephone message log and reviewed the message
Bacanovic had left for her on December 27 and further claims:
In furtherance of the conspiracy, and knowing that Bacanovic’s message for
Stewart was based on information regarding the sale and attempted sale of the
Waksal Shares that Bacanovic subsequently caused to be conveyed to her, Stewart
deleted the substance of Bacanovic’s phone message, changing the message from
‘Peter Bacanovic re imclone.’ After altering the message, Stewart directed her
assistant to return the message to its original wording.
Ind. ¶ 26. This allegation has no place in the Indictment because the alleged alteration has not
been charged as an overt act in connection with the alleged conspiracy. At most, it is a piece of
evidence that the government wants to stress. Paragraph 26 therefore encourages the jury to infer
that Martha Stewart engaged in some unlawful act in connection with a phone message when, in
fact, the alteration was temporary and the original record was promptly restored and provided to
prosecutors in response to their request. Because this allegation is prejudicial and inflammatory,
paragraph 26 should be stricken.
Allowing the judge to read to the jury a surplusage-filled introduction to an indictment
intensifies its prejudicial effect. As the court in Vastola stressed:
In addition to this court’s apprehension of the prejudicial effect of the preamble on
jury deliberations, the court is concerned with the prejudicial effect on the jury of
listening to the judge recite this preamble at the opening of the case.
Vastola, 670 F. Supp. at 1255; see also Tigue Aff., Ex. G at 3212 (if the jury heard the preamble,
the prosecution would be unfairly advantaged by a “second opening, second summation, second
107
charge”). This is exactly the improper advantage the prosecution seeks to obtain here. It should
not be countenanced.
Because the first 36 paragraphs of the “Background” section of the Indictment contain
allegations that are both highly prejudicial, inflammatory, and irrelevant to the elements of the
crimes charged, paragraphs 1 through 36 should be stricken as surplusage.
B.
The “Broadening Language” in the Indictment Should be Stricken as Surplusage
Eight paragraphs of the Indictment contain improper “broadening language.” See Ind.
¶ 23 (“after learning of the investigations, Martha Stewart and Peter Bacanovic, and others . . .
unknown, entered into an unlawful conspiracy to obstruct the investigations”) (emphasis added);
¶ 27 (“Stewart made the following false statements facts, in substance and in part, and concealed
and covered up the following material facts, among others . . .”) (emphasis added); ¶ 36 (“Stewart
made the following false statements, in substance and in part, and concealed and covered up the
following material facts, among others.”) (emphasis added); ¶ 37 (“Peter Bacanovic and Martha
Stewart and others . . . unknown, and did combine, conspire, confederate and agree together. . .”)
(emphasis added); ¶ 38 (“It was part and an object of the conspiracy that Martha Stewart and
Peter Baconovic, and others . . . unknown. . .”) (emphasis added); ¶ 39 (“It was further a part and
an object of the conspiracy that Martha Stewart and Peter Bacanovic, and others . . . unknown”)
(emphasis added); ¶ 63 (“Stewart made the following false statements, among others”) (emphasis
added); and ¶ 65 (“she made the following false statements, among others”) (emphasis added).
There is no reason to believe (and no proof of which we are aware) that “others
unknown” to the grand jury were part of the conspiracy alleged. This language is a gratuitous
attempt to mislead the jury into speculating that the conspiracy is far wider than alleged.
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Paragraphs 23, 37, 38 and 39, for example, allege that defendants Stewart and Bacanovic
conspired with “others . . . unknown,” improperly suggesting that they were part of a larger
scheme, with more conspirators than the Indictment explicitly charges. Because this inference is
extremely prejudicial, courts routinely strike such language. See United States v. Alsugair, 256 F.
Supp.2d 306, 317 (D.N.J. 2003) (striking the phrase “and others” since references to “others”
“implies that there are additional individuals who were involved in the scheme, which could
prejudice the defendant by leading the jury to believe that there exists a broader scope of illegal
activity than is actually charged in the indictment”); United States v. Mango, 1997 WL 222367, at
*16 (N.D.N.Y. May 1,1997) (striking phrase “among others”).
The Indictment contains additional improper “broadening” language. Paragraphs 27, 36,
63 and 65 suggest that Ms. Stewart may have made other false statements, not specifically alleged
in the Indictment. This unwarranted suggestion is extremely prejudicial and would permit the
prosecution to go beyond the precise violations charged by the grand jury. Because the words
“among others” in those paragraphs “add nothing to the charges, give the defendant no further
information with respect to them, and create the danger that the prosecutor at trial may
impermissibly enlarge the charges contained in the indictment returned by the grand jury, this
language must be stricken.” United States v. DePalma, 461 F. Supp. 778, 798 (S.D.N.Y. 1978)
(striking the phrase “and other activities”); see also Mango, 1997 WL 222367 at *16 (N.D.N.Y.
May 1, 1997) (striking the phrases “among other,” “among others” and “among other things”
because this language “would allow the jury to draw the inference that defendants are accused of
crimes not charged in the indictment”); United States v. DeFabritus, 605 F. Supp. 1538, 1547
(S.D.N.Y. 1985) (striking words “among other things” because they do not “add anything to the
109
charges in the indictment and would lead the jury to draw improper inferences regarding other
crimes not charged in the indictment”); United States v. Hubbard, 474 F. Supp. 64, 82 (D.D.C.
1979) (striking words “among other things” because they “encourage the jury to draw inferences
that the defendants are believed to be involved in activities not charged in the indictment”); United
States v. Pope, 189 F. Supp. 12, 25 (S.D.N.Y. 1960) (striking the words “among other things”
because they add nothing to the charges and give the defendants no further information).42 As the
court stressed in United States v. Brighton Building, the prosecution “may not use the indictment
as a vehicle to persuade the jury that the crime alleged has great and hidden implications.” 435
F. Supp. 222, 231 (D.C. Ill. 1977).
Accordingly, the Court should strike as surplusage the above “broadening language”
contained in Paragraphs 23, 27, 36, 37, 38, 39, 63 and 65 of the Indictment.
C.
All References to an Alleged Scheme or Conspiracy to “Obstruct Justice” Should Be
Stricken From the Indictment as Surplusage
Count One of the Indictment alleges, among other things, that the defendants engaged in a
conspiracy to “obstruct justice in violation of Section 1505 of Title 18.” Ind. ¶ 37. The
Indictment is larded with references to an alleged conspiracy or scheme to “obstruct justice.” For
example, the heading under Count One uses the phrase “conspiracy to obstruct justice.” See Ind.
at 1. The heading above paragraph 22 is titled “the scheme to obstruct justice” and the heading
42
While some courts have stricken this kind of broadening language only when it is included in a
“charging” paragraph – that is, a paragraph delineating the matter upon which the grand jury based its
charge rather than a “means” paragraph which goes to the matter of proof needed to sustain the charges,
see DePalma, 461 F. Supp. at 798 – such words are prejudicial “[r]egardless of their location in the
indictment, [because] they may encourage the jury to draw the inferences that the defendants are believed to
be involved in activities not charged in the indictment.” Hubbard, 474 F. Supp. at 82; see also DeFabritus,
605 F. Supp. at 1547 (striking language without drawing any distinction based upon location of words);
Brighton Building, 435 F. Supp. at 230-31 (striking words “among other things” from certain paragraphs).
110
under Count Eight uses the language “obstruction of justice.” This inflammatory shorthand,
however, is found nowhere in Section 1505 of Title 18, which subjects to criminal penalties
anyone who:
[C]orruptly, . . . , influences, obstructs or impedes or endeavors to influence,
obstruct or impede the due and proper administration of the law under which any
pending proceeding is being had before any department or agency of the United
States . . .
18 U.S.C. § 1505 (emphasis added). The word “justice” does not appear anywhere within 18
U.S.C. § 1505. While there is a statute that speaks of “obstruction of justice,” 18 U.S.C. § 1503,
Section 1503 is not charged in this case.
The statute that is charged – Section 1505 – refers only to the “due and proper
administration of the law under which any pending proceeding is being had.” By alleging that
defendants conspired to “obstruct justice,” the Indictment does not properly allege a violation of
Section 1505. Because the Indictment improperly refers to a conspiracy to “obstruct justice”
pursuant to Section 1505 – a legal impossibility – those references are irrelevant to the crime
charged, inflammatory and prejudicial. See United States v. Killeen, 1998 WL 760237 (S.D.N.Y.
Oct. 29, 1998). Accordingly, the heading to Count One, the heading above paragraph 22, and the
heading to Count Eight should be stricken. In addition, the references in paragraph 37 to an
alleged conspiracy “to obstruct justice in violation of Section 1505” should also be stricken.
A similar failure properly to allege that defendants had agreed to commit a violation of
Section 1505 resulted in the dismissal of the conspiracy count of an indictment. See United States
v. Kanchanalak, 37 F. Supp.2d 1 (D. D.C. 1999). In that case, the indictment charged the
defendants with conspiring to obstruct a congressional investigation and alleged that defendants
agreed “corruptly to obstruct the due administration of the law under which an inquiry is being
111
conducted.” Id. at 2 (internal quotation marks omitted). The actual language of the statute does
not refer, however, to the “due administration of the law” but rather the “due and proper exercise
of the power of inquiry under which any inquiry or investigation is being had.” Id. at 3 (internal
quotation marks omitted); see also 18 U.S.C. § 1505. The court concluded that the government
did not properly allege that the defendants conspired to commit a violation of Section 1505 and
struck all references to the Section 1505 object of the conspiracy and all references to the
congressional investigation at issue. Id.
The issue in Kanchanalak was not merely whether the defendants had received adequate
notice of the charged offense. The court stressed that the Constitution requires that the elements
of the offense be identified accurately in the indictment:
An indictment also serves to protect a defendant’s Fifth Amendment right to have
a grand jury consider and find all elements of an offense . . . . While the citation to
Section 1505 may be constitutionally sufficient to give fair notice of what is
charged here, it provides no assurance that the grand jury in fact found all essential
elements of the conspiracy offense with respect to the Section 1505 object of the
conspiracy.
Id. at 6. Thus, the court granted the defendants’ motion to strike the Section 1505 object of the
conspiracy and all references to the congressional investigation.
The allegations in this case that Ms. Stewart and Mr. Bacanovic conspired to obstruct
justice in violation of Section 1505 are similarly deficient. The words “obstruct justice in violation
of Section 1505” in Paragraph 37 should be stricken as confusing and legally deficient. For the
same reasons, the headings to Count One and Count Eight, and the heading above paragraph 22
on page 9 should be stricken since the language improperly alleges a scheme to “obstruct justice,”
which does not constitute a violation of Section 1505.
112
D.
The References to the FBI and the U.S. Attorney’s Office Should be Stricken from
Paragraphs 22 and 23 as Surplusage
Paragraphs 22 and 23 of the Indictment appear under the heading “The Scheme to
Obstruct Justice.” As noted above, this heading is improper because it fails to describe a violation
of Section 1505, which is the only obstruction statute charged in the Indictment. In addition,
paragraph 22 refers to the commencement of investigations by the FBI and the USAO and refers
numerous times to the “investigations.” See Ind. ¶ 22. Paragraph 23 further alleges that the
defendants entered into a conspiracy to “obstruct the investigations.” Id. at ¶ 23. All the
references to the investigations conducted by the FBI and the USAO in paragraphs 22 and 23
should be stricken because Section 1505 refers only to agency investigations and does not apply
to investigations conducted by the FBI or the USAO.
Paragraph 22 alleges that:
In or about January 2002, the Northeast Regional Office of the United States
Securities and Exchange Commission (“SEC”), an agency of the United States, the
Federal Bureau of Investigation (the “FBI”), and the United States Attorney’s
Office for the Southern District of New York commenced investigations into
trading in ImClone securities in advance of the public announcement of the FDA’s
negative decision, including into the trades conducted by Samuel Waksal and
Martha Stewart. The investigations focused on whether such trades were made in
violation of federal securities laws and regulations that prohibit trading on the basis
of material, nonpublic information. It was material to the investigations to
determine, among other things, what was communicated to Stewart about
ImClone on December 27, 2001 and the reasons for Stewart’s December 27, 2001
sale of ImClone stock.
Ind. ¶ 22. Paragraph 23 alleges, among other things, that “after learning of the investigations,
Martha Stewart and Peter Bacanovic . . . entered into an unlawful conspiracy to obstruct the
investigations.” Id. at 23.
113
The specific references to the FBI and the USAO, and the numerous references to
“investigations,” plural, should be stricken. To the extent that the conspiracy charge is premised
on an alleged conspiracy to “obstruct” anything other than an agency proceeding, it cannot stand,
as only § 1505 was charged as an object of the conspiracy. See United States v. Persico, 520 F.
Supp. 96, 101 (E.D.N.Y. 1981) (“proceeding” in Section 1505 is limited to actions of an agency
with rulemaking powers). Investigations conducted by the FBI and the United States Attorney’s
Office are not covered by Section 1505. See United States v. Wright, 704 F. Supp. 613 (D. Md.
1989) (dismissing charge under Section 1505 where alleged false statement was made to U.S.
Attorney’s Office); United States v. Higgins, 511 F. Supp. 453 (W.D. Ky. 1981) (FBI
investigation was not a proceeding within meaning of Section 1505).43
The SEC investigation is the only agency investigation referred to in the Indictment that
could be charged under Section 1505. The broad references in paragraphs 22 and 23 to the
alleged conspiracy to “obstruct the investigations” improperly sweep the FBI and USAO’s
investigations into the alleged conspiracy to violate Section 1505 and will mislead and confuse the
jury. The reference to these other investigations is legally deficient, wholly improper, and
extremely prejudicial. Accordingly, all references to these additional investigations in paragraphs
22 and 23 should be stricken. See Kanchanalak, 37 F. Supp.2d at 3 (striking references to
congressional investigation where indictment failed to properly allege conspiracy to violate
Section 1505); see also Killeen, 1998 WL 760237 at *4 (striking paragraph containing an
inaccurate interpretation of an SEC release).
43
It is for this reason that the charge in Count Eight, which tracks the statutory language of Section 1505,
refers only to the SEC investigation.
114
POINT VIII
THE COURT SHOULD ORDER THE GOVERNMENT
TO PROVIDE A BILL OF PARTICULARS
Ms. Stewart seeks the Court’s intervention in obtaining additional discovery in this case.
As set forth in detail below, Ms. Stewart has conferred with the government as required by Local
Criminal Rule 16.1; however, there are certain items on which no agreement with the government
has been reached. Accordingly, Ms. Stewart respectfully requests that the Court order the
government to provide a bill of particulars pursuant to Rule 7(f) of the Federal Rules of Criminal
Procedure.44
A.
Compliance With Local Criminal Rule 16.1
1.
Discovery Requests
By letter dated June 10, 2003, Ms. Stewart made an informal discovery request, seeking
information pursuant to, among other things, Rule 16 of the Federal Rules of Criminal Procedure,
Brady v. Maryland, 373 U.S. 83 (1963) and its progeny, and 18 U.S.C. § 3500 (the “June 10
discovery request”). See Tigue Aff., Ex. H. On June 17, 2003, the government provided
defendants with certain discovery and made additional materials available for inspection and
copying; however, the letter failed to respond to the specific items contained within the June 10
discovery request.45 Id. at Ex. I. Accordingly, by letter dated June 26, 2003, Ms. Stewart
44
Ms. Stewart joins in the discovery motions submitted by Mr. Bacanovic, specifically those seeking early
disclosure of (1) Brady material; (2) a witness list thirty days prior to trial; (3) material required to be
produced pursuant to 18 U.S.C. § 3500; (4) impeachment or Giglio material. Although Ms. Stewart joins
in this motion, and therefore does not address the legal reasons why early disclosure of such material is
warranted herein, she submits to the Court that she has independently complied with the requirements of
Local Criminal 16.1 with respect to these requests. Such compliance is summarized for the Court’s
consideration below.
45
The June 17 letter provided information about most, but not all, discovery material. The government
(continued...)
115
requested that the government respond to each of the items set forth in the June 10 discovery
request. Id. at Ex. K. Later that same day, the government provided Ms. Stewart with a letter
that addressed some, but not all, of the items set forth in the June 10 discovery requests. Id. at
Ex. L.
Because the government’s June 26 letter neglected to address certain of the items set forth
in the June 10, 2003 discovery requests, and in an effort to comply with the terms of Local
Criminal Rule 16.1, Ms. Stewart wrote to the government on July 17, 2003 and specifically
outlined the outstanding items. The letter requested that the government respond by August 29,
2003, so that any remaining issues could be raised with the Court by the date of the motions. Id.
at Ex. M.
2.
Requests for a Bill of Particulars
On June 18, 2003, Ms. Stewart requested that the government provide certain information
concerning the allegations in the Indictment as its bill of particulars pursuant to Rule 7(f) of the
Federal Rules of Criminal Procedure. Id. at Ex. P. On June 26, 2003, the government responded
that no bill of particulars was warranted given the detailed allegations in the Indictment. Id. at Ex.
Q. Although it failed to provide a bill of particulars, the government’s June 26 response did
45
(...continued)
supplemented its disclosures in subsequent letters. See Tigue Aff., Ex. J. The government has produced an
avalanche of documents. For example, there are approximately 200,000 hard documents to review. See
Tigue Aff. ¶ 24. There were over 20 hard drives and computer files made available, with additional hard
drives not yet provided. Id. These computer drives contain an enormous amount of information, perhaps
tantamount to more than 1.2 million pages of documents. Id. The government has also produced four
audiotapes (containing more than 180 minutes of data), twenty eight floppy disks containing substantial
data for approximately 175 telephone numbers, seven CDRoms containing additional data for an additional
twenty four numbers, and miscellaneous electronic discovery, including numerous e-mail messages. Id.
While the government has produced a massive amount of information, it has resisted Ms. Stewart’s
requests for particular items necessary for her to prepare her defense. Ms. Stewart’s counsel will sift
through the massive pile of material produced so far, but requires the additional material sought in this
motion to defend her.
116
provide limited information in response to Ms. Stewart’s June 18 requests. Id. By letter dated
June 30, 2003, Ms. Stewart supplemented her request for a bill of particulars by seeking
additional information regarding the allegations in Paragraphs 60-66 of the Indictment. Id. at Ex.
R. On September 8, 2003 – over two months after the request was made – the government
responded to the June 30 request made by Ms. Stewart. Id. at Ex. S. Although the government
provided some additional information in response to the June 30 request, it declined to provide a
bill of particulars. Id.
B.
The Court Should Direct The Government To Provide Ms. Stewart With A Bill Of
Particulars
Pursuant to Fed. R. Crim. P. 7(f), a defendant is entitled to a bill of particulars “to identify
with sufficient particularity the nature of the charge[s] pending against [her], thereby enabling
defendant to prepare for trial, to prevent surprise, and to interpose a plea of double jeopardy
should [she] be prosecuted a second time for the same offense.” United States v. Bortnovsky,
820 F.2d 572, 574 (2d Cir. 1987) (citing Wong Tai v. United States, 273 U.S. 77, 82 (1927)).
The trial court has broad discretion to order the government to provide a bill of particulars.
United States v. Davidoff, 845 F.2d 1151, 1154 (2d Cir. 1988). Among the factors courts
consider in making this determination are “the complexity of the offense, the clarity of the
indictment, and the discovery otherwise available to the defendants.” United States v. Weinberg,
656 F. Supp. 1020, 1029 (E.D.N.Y. 1987); see United States v. Shoher, 555 F. Supp. 346, 349
(S.D.N.Y. 1983).
117
1.
The Court Should Order the Government to Produce Particulars Identifying the
“Other Things” and “Other Matters” Ms. Stewart and Mr. Bacanovic Are Alleged
to Have Done
The Indictment is littered with the terms “other things” and “other matters” in relation to
the conduct of both Ms. Stewart and/or Mr. Bacanovic. The discovery so far produced does not
permit defendants to divine the “other things” and “other matters” pled in the Indictment. The
use of this phrase suggests that the government will attempt to prove wrongful acts by Ms.
Stewart beyond those alleged in the Indictment. Without knowing what they are, Ms. Stewart is
unable to prepare for them. If the government knows what these alleged “other things” and
“other matters” are, it must give Ms. Stewart a bill of particulars.49
Davidoff proves the point. In that case, multiple defendants were charged with a RICO
conspiracy and various extortion offenses for allegedly extorting air freight companies. Davidoff
was ultimately tried alone on a redacted indictment containing five counts, including the RICO
conspiracy count. “The RICO conspiracy count . . . alleged that it was part of the conspiracy to
commit extortion offenses and that these offenses ‘included, but were not limited to’ the
violations set forth in the four remaining counts of the Indictment.” Id. at 1153. Prior to trial,
Davidoff requested a bill of particulars that identified the “unspecified violations indicated [in the
RICO conspiracy count] by the phrase ‘but were not limited to.’” Id. The court denied the
request. Id. At trial, the government introduced evidence that Davidoff had extorted three freight
companies that had not been identified in the Indictment. Davidoff was convicted. On appeal, he
argued the failure to obtain the bill of particulars denied him a fair trial. Id. at 1154.
49
As noted in Point VII, supra, Ms. Stewart has moved to strike these phrases as surplusage. Should the
Court deny the motion to strike, this motion is made in the alternative.
118
Reversing the conviction, the Second Circuit made clear that where, as here, an indictment
frames a broad conspiracy charge, fairness may require the trial court to order the government “to
particularize the nature of the charge to a degree that might not be necessary in the prosecution of
crimes of more limited scope.” Id. at 1154. The court rejected the notion that a defendant who
was put on notice that he would have to defend against extortion schemes aimed at one company
should be forced to confront new allegations at trial that he extorted three different companies. In
holding that the district court abused its discretion by failing to require the government to provide
particulars regarding the phrase “but were not limited to,” the court emphasized the unfairness of
requiring Davidoff to defend against allegations which were not articulated prior to trial. Id.; see
also Turkish, 458 F. Supp. 874, 883 (S.D.N.Y. 1978) (ordering the government to provide a
complete response to request for particulars specifying the “other conditions of the Crude Oil
Market” alleged in the indictment.)
The Indictment here contains a complex set of factual allegations and legal conclusions.
Its liberal use of phrases such as “among other things” suggests that the Indictment recites only
some of the conduct the government will seek to prove at trial.50 The Court should compel the
government to produce a bill of particulars because this Indictment is both complex and unclear.
50
For example, the Indictment alleges that “[i]t was material to the investigations to determine, among
other things, what was communicated to STEWART about ImClone on December 27, 2001 and the
reasons for STEWART's December 27, 2001 sale of ImClone stock,” Ind. ¶ 22 (emphasis added), and that
“[s]pecifically, and among other things, STEWART and BACANOVIC agreed that rather than tell the
truth about the communications with STEWART on December 27, 2001 and the reasons for STEWART's
sale of ImClone stock on December 27, 2001, they would instead fabricate and attempt to deceive
investigators with a fictitious explanation for her sale: that STEWART sold her ImClone stock on
December 27, 2001 because she and BACANOVIC had a pre-existing agreement to sell the stock if and
when the price dropped to $60 per share.” Ind. ¶ 23 (emphasis added). Moreover, in paragraph 35
subdivisions (a) through (c) the government has failed to disclose the other matters about which Mr.
Bacanovic allegedly testified falsely. See Ind. ¶ 35. In paragraph 36 subdivisions (a) through (c) the
government has failed to disclose the other matters about which Ms. Stewart testified falsely. See Ind. ¶
36.
119
See Weinberg, 656 F. Supp. at 1029; Shoher, 555 F. Supp. at 349. If the Indictment is not
clarified by a bill of particulars, Ms. Stewart may be placed in the unfair position of having to
defend against allegations not defined prior to trial. See Davidoff, 845 F.2d at 1154; see also
Turkish, 458 F. Supp. at 883; United States v. Trie, 21 F. Supp.2d 7, 22 (D.D.C. 1998)
(indictment alleged that defendant received benefits from the DNC “including, but not limited to .
. .”; government ordered to provide particulars specifying the property allegedly obtained by Trie
in order to enable him to prepare his defense).51
2.
The Court Should Order the Government to Produce Particulars Identifying the
Dates Missing from the Allegations Against Ms. Stewart and Mr. Bacanovic
The Court also should order the government to provide a bill of particulars that informs
Ms. Stewart of the date on which the conspiracy alleged in Count One commenced, and the
respective dates on which the SEC, FBI, and USAO commenced their investigations. This
information is necessary for Ms. Stewart to prepare adequately for trial.
The government has asserted that knowledge of these precise dates is not information
essential for trial preparation. While some courts have refused to order the government to
provide such particulars, they have done so only when the “indictment adequately advise[d]
defendants of the specific acts of which they [were] accused.” See United States v. Torres, 901
51
The government cannot contend, as it has here, that it has discharged its responsibility to provide
detailed notice of the charges by referring the defendant to the often indecipherable, handwritten interview
notes produced so far in discovery. As Davidoff made clear:
[t]hough Jencks Act [and discovery] material may sometimes provide adequate notice of
uncharged offenses that a defendant will be obliged to meet, especially if the material is
made available sufficiently in advance of trial . . . such material may not be automatically
relied on by the Government as an adequate substitute for a straightforward identification
in a bill of particulars of . . . offenses that the prosecution intends to prove.
Id. at 1155 (citations omitted).
120
F.2d 205, 234 (2d Cir. 1990), cert. denied, Cruz v. United States, 498 U.S. 906 (1990). That is
not the case here.
A critical issue in this trial concerns Ms. Stewart’s awareness of the existence and status
of the various government investigations; the dates on which those investigation commenced are
directly relevant to her defense of the so-called “obstruction of justice” charges. See Point V,
supra. This is precisely the kind of case in which the government has an obligation to provide
specific dates. See United States v. Reale, 1997 WL 580778 at *14 (S.D.N.Y. 1997)
(government ordered to produce a bill of particulars that included dates in a mail and wire fraud
case, because the lack of specificity in the indictment did not give the defendants adequate
opportunity to prepare a defense); United States v. Strawberry, 892 F. Supp. 519, 526-27
(S.D.N.Y. 1995) (government ordered to provide a bill of particulars that included the specific
dates that the defendants allegedly joined and left the conspiracy because information in the
Indictment was insufficient). Failure to do so will violate Ms. Stewart’s right to prepare for trial.
CONCLUSION
For the foregoing reasons, Ms. Stewart respectfully requests that the Court: (1) dismiss
Count Nine in its entirety; (2) dismiss Count Eight and strike obstruction of an agency proceeding
from Count One of the Indictment; (3) strike certain specifications from Counts Three and Four
of the Indictment; (4) strike certain portions of the Indictment as surplusage; (5) order the
121