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Federal prosecutors argue there is substantial precedent supporting a criminal securities fraud charge against Martha Stewart for misleading investors in her company about her role in an unrelated insider trading scandal. In a memorandum filed late Wednesday with Southern District of New York Judge Miriam Goldman Cedarbaum, the government said it was the jury, and not the judge, who should decide whether statements made by Stewart about her sale of ImClone Systems Inc. stock were “material” under the securities laws. The prosecution team, led by Criminal Division Chief Karen Patton Seymour, said the move to dismiss the fraud charge by Stewart’s lawyers wrongly “asks the Court to take the element of materiality out of the hands of the jury to conclude that Stewart’s lies to the investing public in June 2002 were material to investors” in Martha Stewart Living Omnimedia (MSLO). A fact is considered material if there is a substantial likelihood that a reasonable person would have considered it important in deciding whether to purchase or sell shares, prosecutors argue, and any reasonable investor would consider “important” Stewart’s public claim that she had a stop-loss order in place to sell her ImClone shares if they dropped below a certain price. The claim of a prearranged stop-loss order was allegedly made by Stewart to counter the belief that her Dec. 27, 2001, sale of ImClone shares was based on insider information. Prosecutors say she sold her shares because she learned that her friend, former ImClone chief Samuel Waksal, tried to sell a large block of his own shares in ImClone knowing that the company’s cancer-fighting drug was about to suffer a regulatory setback. Waksal has pleaded guilty to insider trading based on his sale of ImClone shares and is serving a federal prison sentence of 7 years and 3 months. The prosecutors also contend that contrary to Stewart’s argument, the jury — and not Cedarbaum — should decide whether the facts fit another element of criminal liability under � 10(b) and Rule 10b-5: that the allegedly false statements were “in connection with” the purchase or sale of securities. Absent a favorable ruling for the defense on the motions to dismiss, Stewart is set to go on trial on Jan. 12 for the securities fraud charge, conspiracy, obstruction of justice and two counts of making false statements. On Wednesday, the government also opposed Stewart’s motion to dismiss the obstruction charge and her attempt to winnow down other parts of the indictment. It also filed in opposition to the motion of co-defendant and former Stewart broker Peter Bacanovic for a separate trial. The conspiracy, obstruction and false statement charges against Stewart stem from her alleged scheme to block a regulatory probe of her ImClone sale that began shortly after the government’s investigation into Waksal’s attempted sale. While Stewart attorneys Robert Morvillo and John J. Tigue of Morvillo, Abramowitz, Grand, Iason & Silberberg have criticized those charges, they have saved their strongest statements for the fraud charge, which they say is an “unprecedented” attempt to expand criminal liability under the securities laws. MOTION ‘FRIVOLOUS’ But in their court papers filed Wednesday, Seymour and fellow prosecutors Michael S. Schachter and William A. Burck said the Stewart motion to dismiss the securities count was “frivolous.” The prosecutors argue that Stewart’s arguments concerning her June 2002 statements have already been raised — and rejected — by Southern District Judge John E. Sprizzo in the civil case brought against Stewart and directors of her company. Sprizzo ruled that the issue of materiality was one for the jury to decide, they said, and the judge characterized Stewart’s explanation as to why her statements were not material as “hard to swallow.” In any event, the prosecutors said the materiality of Stewart’s statements was amply demonstrated by the dramatic drop in the MSLO share price after it was revealed her public explanations for her ImClone sale might be false. The prosecution cites several cases in the Southern District in which judges have upheld criminal securities fraud charges because the indictments adequately “track” the language of � 10(b) and Rule 10b-5. And Stewart, as a former stockbroker and the head of MSLO, should have known that statements affecting the share price of her company could subject her to criminal liability, prosecutors argue. “[N]ot surprisingly,” they state, “Stewart has failed to cite a single case from any jurisdiction in which a district court dismissed an indictment based on a finding that the alleged misrepresentation or omission was immaterial ‘as a matter of law.’” The prosecution also takes issue with the contention of Morvillo and Tigue that � 10(b) and Rule 10b-5 were unconstitutionally vague as applied to their client, who they claimed is being prosecuted for “purely personal conduct.” Stewart, the prosecutors say, had plenty of notice that she would be subject to criminal prosecution for disseminating false and misleading statements about her ImClone sale, which would directly affect the Stewart brand name and her ability to run a company. And the prosecutors argue that the defense made a “gross mischaracterization” of the securities fraud charges when it claimed Stewart is being punished for asserting her innocence in public statements in June 2002. Stewart, they said, “gave a forceful, detailed, and false explanation for her sale of ImClone,” one that she repeated “four times.” Oral arguments on the motion to dismiss are expected to be heard by Cedarbaum on Nov. 18.

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