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Federal Judge Miriam Goldman Cedarbaum’s decision to dismiss a charge thatMartha Stewart defrauded investors in her own company by lying about hersale of ImClone stock turned on the different standards for “evidentiarysufficiency” in criminal and civil securities fraud cases. White-collar crime experts say that the impact of the missing charge cancut both ways when the jury convenes to consider the remaining chargesagainst Stewart and her co-defendant, former Merrill Lynch brokerPeter Bacanovic. Cedarbaum, of the Southern District of New York, decided Friday that prosecutors had presented only”weak” evidence that Stewart intended to deceive investors in MarthaStewart Living Omnimedia (MSL) when she issued a string of publicdenials about ImClone in June 2002. The judge said in a 23-page opinionthat the evidence on intent fell far short of the requirement incriminal cases to prove every fact beyond a reasonable doubt, and aguilty verdict on the issue of intent to defraud could only have beenreached through “speculation and surmise” by the jury. But the judge also said she felt the prosecution had met its evidentiaryburden to get the remaining counts to the jury. She said Stewart’sattorney Robert Morvillo will be limited, or barred entirely, from usingthe missing charge to his advantage in closing arguments that are set tobegin today. “They will likely hear the judge, and probably only the judge,explaining simply the charge is one they don’t have to consider anymoreand that they should not speculate as to why it’s no longer there whenthey consider the other charges,” said Alan Vinegrad, partner atCovington & Burling and former Eastern District U.S. Attorney. “That maybe accompanied by the judge instructing the lawyers not to say anythingabout it.” Morvillo will not be able to tell the jury the dismissal of thecharge is one example of government overreaching in the indictment ofStewart, a theme that he has sounded repeatedly since Stewartwas first led into federal court in Southern Manhattan last year. “I don’t think I have ever seen a case where the lawyers have beenpermitted to argue the merits or implications of a dismissed charge asopposed to the mere fact that it has been dismissed,” Vinegrad said. Still, there remains the possibility that the absent securities chargewill affect deliberations. If the jury “follows the judge’s instructions, they won’t,” Vinegradsaid, adding that the key word is “if.” Edwin Baum, litigation partner at Proskauer Rose, said the dismissal ofthe charge has to have some effect on the deliberations. “Notwithstanding that jurors try to be diligent and listen verycarefully to the judge, they are still human beings and no one can putit entirely out of their minds that there was a charge dismissed by thejudge,” he said. The timing of Cedarbaum’s decision sealed a win for the defensebecause the government, except in the most rare circumstances, cannotappeal a pre-jury judgment of acquittal. Had the judge let the jury render a verdict on the charge, and then seta guilty verdict aside as being against the weight of the evidence, thegovernment could have gone to the 2nd U.S. Circuit Court of Appeals and asked the court to reinstate the verdict. Baum said that aside from the obvious victory for Stewart, thedismissal might actually make it easier for the jury to convict her onthe other four charges: two counts of false statements and single countsof obstruction and conspiracy to obstruct. “When you try cases, one of the guiding principles is your case is onlyas strong as its weakest link — there’s always a risk when you putforward a very weak claim, you lose credibility with the jury,” Baum said. “So from the perspective of a prosecutor, I’d rather go to thejury without having the baggage of an extremely weak charge.” The problem for Stewart, Baum said, is that her risk ofconviction might increase “because the defense has tried to portray thegovernment as having a vendetta against Stewart, and they can nolonger point to the securities charge as an example of that in closingargument.” COVER STORY ALLEGED Stewart and Bacanovic are accused of conspiring to hide the realreason Stewart sold her stock: that she had been told by Bacanovic’s assistant and key government witness Douglas Faneuil on Dec.27, 2001, that ImClone founder Samuel Waksal and his family were sellingmillions of dollars of company stock. Stewart’s and Bacanovic’s alleged cover story was anunderstanding to sell ImClone when its share price fell to $60 and shesimply executed that agreement when she sold her remaining 3,928 sharesof stock on Dec. 27. That story, the government said, was told toinvestigators and then was repeated by Stewart in statements andreleases made by her lawyers, her company and, finally, in person at astock analyst conference on June 18, 2002. For making those three statements in June, Stewart was charged withfraud in connection with the purchase or sale of Martha Stewart LivingOmnimedia securities in violation of 15 U.S.C. �� 78b and 78ff. ISSUE OF INTENT Judge Cedarbaum told lead prosecutors Karen Patton Seymour and MichaelSchachter last week that they had a steep hill to climb on the issue ofintent if they wanted to get the fraud charge to the jury. Seymour insisted that Stewart’s intent to defraud investorscould be inferred from the statements because Stewart was well awarethat the negative publicity surrounding the ImClone scandal was damagingthe stock price of her company, MSLO. The government had also argued that the intent requirement for civil andcriminal securities fraud was the same, and Cedarbaum acknowledgedin her opinion that “securities law precedent developed in civillitigation has been freely applied in the criminal context.” However, the judge said, “The issue at hand is not which definition ofintent to apply, but whether, taking into account the heightenedstandard of proof in criminal cases, there is sufficient evidence ofStewart’s intent to deceive investors to present the matter to thejury.” Despite the government’s argument, she said, the case law makes it clearthat “evidentiary sufficiency” is not the same in civil and criminalsecurities fraud cases. Cedarbaum was persuaded by Morvillo that the Stewart statementat the June 18 analyst conference was only a small portion of Stewart’s overview of the company and its prospects, and that Stewart’s own executives, as well as analysts and investors at theconference, were primarily concerned with the company’s advertisers andpartners, and not the stock price. The government had produced no evidence, Cedarbaum said, showingthat “Stewart evinced a concern for the price of MSLO stock during therelevant period.” JURY CHARGE Cedarbaum issued her opinion while she huddled with prosecutorsand defense lawyers on Friday to discuss the charge she will give to thejury. Morvillo and Stewart co-counsel John J. Tigue Jr., of Morvillo,Abramowitz, Grand, Iason & Silberberg spent the rest of the day tryingto whittle down the specific allegations underlying the four remainingcounts against Stewart. The same is true for Bacanovic’s lead attorneys, Richard Strassbergand David Apfel of Goodwin Procter, who are trying to fend off chargesof perjury, making a false document, conspiracy and obstruction. The decision to charge Stewart with fraud was denounced in manyquarters as an ill-considered expansion of criminal liability under thesecurities laws, and Cedarbaum’s decision on the charge, which shecalled the most “problematic” in the indictment, came as no surprise tothose who specialize in securities law and white collar criminaldefense. “In some ways, it was almost unnecessary because they had plenty ofother obstruction-related charges to bring,” Vinegrad said. “I’msure they felt in good faith that she said these things to prop up theprice of her own company’s stock, but why they felt it was necessary toput in that charge when they had all these other charges is unclear.” Baum counts himself among attorneys who fear that the charge, ifsustained, would have had an “unfair chilling effect” on top executiveswho own large numbers of shares in their companies. “There were certainly waves of apprehension out there after the chargewas brought,” he said. “The reality of this world is when word gets outthat a senior executive is the subject of an investigation, it damagestheir reputation. A senior executive who has not been charged with acrime but speaks out at an analyst meeting to deny the allegations mightbe subjecting themselves to independent criminal liability.” Seymour and Schachter alleged that Stewart went beyond amere declaration of innocence by making what Baum said was an”affirmative representation” to the investor conference that she had apre-existing deal with Bacanovic to sell the ImClone at a specificprice. But Baum said Stewart’s elaboration is “only slightly” up thescale from a categorical denial.

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