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Attorneys for Martha Stewart Monday attacked her indictment for securities fraud as baseless and a dangerous expansion of criminal liability under the nation’s securities laws. In motions to dismiss filed with Judge Miriam Goldman Cedarbaum, Robert G. Morvillo and John J. Tigue said the securities fraud count, based on allegedly misleading statements Stewart made to the public and investors in her own company, Martha Stewart Living Omnimedia, was “unprecedented in the seventy-year history of the federal securities laws.” Stewart made the statements as she was under investigation for selling her shares of ImClone, allegedly with the knowledge that ImClone Systems Inc. chairman and Stewart friend Samuel Waksal was selling large blocks of his own shares in the company. While Waksal eventually pleaded guilty to insider trading and was sentenced to prison, Stewart was never charged with insider trading. The securities fraud count was one of five against Stewart, who was charged in a nine-count indictment along with her stock broker, Peter Bacanovic. She is charged with conspiring with Bacanovic to obstruct justice in plotting to deceive federal investigators. She is also charged with obstruction of justice, two counts of making false statements and securities fraud. In their 122-page memorandum, the two attorneys, with the law firm Morvillo, Abramowitz, Grand, Iason & Silberberg, asserted that accusing Stewart of securities fraud for making the statements “violates the First Amendment, the Due Process Clause and the securities statute itself.” The attorneys also asked Cedarbaum to dismiss an obstruction of justice charge in the indictment for false statements she allegedly made to investigators with the Securities and Exchange Commission. “Count Eight, called ‘obstruction of justice,’ by the prosecution (even though it is not based on the obstruction of justice statute), must be dismissed because none of Ms. Stewart’s statements could have hindered the SEC investigation and the Indictment does not adequately allege that she was even aware of the SEC investigation when the statements were made,” the attorneys argue in memorandum. And as for two charges that Stewart made false statements to investigators during the ImClone probe, Morvillo and Tigue contend some of the statements that formed the substance of those charges should be dismissed as well, “either because they were immaterial to the investigation, or because even the prosecution’s theory admits that they were true.” POSSIBLE ATTORNEY WITNESS Attached to the papers was an affidavit filed by John F. Savarese, an attorney with Wachtell, Lipton, Rosen & Katz who represented Stewart during the first phases of the investigation and remains part of her legal team. Savarese is considered a possible witness in the case because he accompanied Stewart to a meeting with investigators on Feb. 4, 2002. That face-to-face meeting was followed by a critical phone interview with investigators on April 10, 2002. The memorandum also decries leaks from Congress during its investigation of the ImClone insider trading scandal, and criticizes the Southern District U.S. Attorney’s Office for targeting Stewart, saying “the prosecution has chosen to focus on a famous American businesswoman.” On the securities fraud charge, Stewart is accused of spreading false and misleading information in a statement that she “caused her attorney in New York” to provide to the Wall Street Journal in June 2002. She is also accused of following that statement by issuing a press release in which she elaborated on her allegedly false defense of having a $60 a share stop-loss order in place with her broker when the ImClone shares were sold. In a third public statement, intended for securities analysts and investors. Stewart claimed to have cooperated with the SEC and the U.S. Attorney’s Office “to the best of my ability,” which prosecutors say is untrue. Monday, Morvillo and Tigue argued in court papers that punishing their client for asserting her innocence was the most “noxious” form of assault on the First Amendment. The attorneys also said it was unfair to charge Stewart with a crime for behavior she could not reasonably have expected to be criminal. “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,” they state. They also quote several experts in securities fraud on the prosecution’s theory, saying, “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 conduct is prohibited. The government is scheduled to respond to motions to dismiss on Nov. 5.

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