The Trial of Martha Stewart

Damaging testimony from the government's star witness is turning up the heat in the Martha Stewart trial. Douglas Faneuil, Stewart's broker's assistant, testified that he tipped Stewart --on orders from his boss, Peter Bacanovic-- about Waksal's sale of ImClone shares. Tactics used by defense lawyers attempt to cast doubt on Faneuil's credibility by cross-examining him about his drug use and his five month wait before going to authorities with information.

The Post's Brooke Masters will be online Thursday, February, 12 at noon to take your questions regarding the trial of Martha Stewart and Peter Bacanovic.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Brooke Masters: Hi everybody. Sorry I'm a couple minutes late. I was doing an interview.

It's been a fascinating couple of weeks here in New York watching Martha Stewart on trial.

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Washington, D.C. : How damaging do you think Faneuil's testimony was to Martha Stewart and her broker? After all, she's not on trial for insider trading.

Brooke Masters: Douglas Faneuil, the broker's assistant who says he told Stewart that the Waksals were selling, was a very strong witness. His testimony was especially bad for his former boss Peter Bacanovic because he alleged that Bacanovic personally told him to call Stewart and then later pressured him not to tell authorities about the conversation.

But Faneuil's general credibility lent strength to the government's central contention--that Stewart lied to them because she had something to hide

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Liverpool, United Kingdom: Why would a woman who is a multi-millionaire and obviously doesn't need the money, risk everything on 3,000 shares?

Brooke Masters: That's clearly going to be a defense argument. Her attorney Robert Morvillo has already said in opening statements that she was far more interested in another transaction that was going on around this time--the sale of $25 million worth of stock in her own company.

But the government has introduced several types of evidence suggesting that Stewart was kind of obsessed with ImClone---Bacanovic left her nine messages between June and December 2001 and six mentioned ImClone. The broker also told the Securities and Exchange Commission that Stewart felt a personal tie to the stock because of her friendship with founder Samuel Waksal (who is now serving seven years in prison for insider trading-related crimes)

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Anonymous: Ms. Masters, Martha's assistant testified that she caught Martha changing a phone log but then Martha said "change it back." Do I take this to mean that Martha changed her mind, and that the phone log read as it originally was entered? If so, what does this all really prove? If it proves anything, does it prove that three weeks later when Martha said she did not recall whether there was an entry on the phone log regarding a call from the broker that she was lying?

washingtonpost.com: Special Report: The Martha Stewart Trial

Brooke Masters: Stewart couldn't put the message back, but her assistant spent several days looking in the computer system for a back up copy and she eventually found one. When the government asked to see the message, they were given the restored version not Stewart's edits.

The message episode is not a crime because she did put it back. However she told the government she did not recall whether there was a message only FOUR DAYS not three weeks later. The government says that's a lie.

The government also alleges that the message alteration showed Stewart must have felt she had something to hide

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Washington, D.C.: I wonder why in this era, a stop loss agreement wouldn't involve documentation? So that if your sale is later questioned, you can prove it.

Brooke Masters: According to the defense, it wasn't a formal order (which must be entered into the computer under Merrill Lynch rules) but rather an informal, we'll watch the stock and get back to you if it hits $60 kind of arrangement. Merrill frowns on this kind of thing for exactly the reason you cite.

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Mt. Lebanon, Pa.: Does the prosecution for this case ultimately wind its way back up to Eliot Spitzer, the New York State A.G.? If not, who's really running the show at the top level?

Is the SEC planning to jump on her too? Or do they have bigger fish to fry - where Wall St. crime and corruption is concerned?

Thanks much. Small-potatoes Investor

Brooke Masters: Eliot Spitzer has nothing to do with this case. It's the Justice Department---the current Deputy AG Jim Comey brought the case when he was US Attorney.

The SEC has filed civil insider trading charges against Stewart--their case has been stayed by the courts while the criminal case is pending, which is standard.

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Farragut West, D.C.: Does the government's case seem to be weak? The testimony of someone copping a plea and a change in a appointment calendar. This hardly seems like solid evidence. Perhaps someone in the U.S. Attorney's office just wants to make a name for him/herself?

Brooke Masters: The defense has made that argument in public statements, although Judge Cedarbaum has barred them from impugning the government's motives to the jury.

But you're leaving out some important evidence that has come in and some we are still expecting to see.

Bacanovic and Stewart told directly contradictory stories to the SEC about who Stewart spoke to on the Dec. 27 call and also about the date when they came up with the $60 agreement. They also denied having talked to each other about the investigation and Stewart then said that she knew Bacanovic "had the same recollection" of events as she did.

Prosecutors also allege that the worksheet Bacanovic gave them to "prove" there was a $60 arrangement shows signs of evidence tampering. They say the ink on the "@60" notation is different than the other ink on the page.

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Winthrop, Mass.: Given that Stewart isn't even being tried for insider trading, doesn't this whole trial reek of overly aggressive, self-interested prosecutors?

They were basically asleep at the switch throughout all of the REAL corporate scandals, where CEOs were looting the companies of millions of dollars and cooking the books. So they're overreacting now and trying to get a scalp, no?

Brooke Masters: Stewart is charged with civil insider trading by the SEC so she hasn't gotten a completely free pass on the insider trading allegation.

The defense thinks the prosecutors are too agressive. The prosecutors say they are defending the integrity of the justice system from people who tried to undermine it.

Obstruction cases are taken very seriously around the country even when the underlying crimes being investigated are pretty minor.

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Washington, D.C.: So is it realistically possible that Martha could go to prison? The amount of flack she takes generally irritates me - I can't help agree that if she was a man, all people would adore her and just see her as a smart business person with well-earned wild success.

Brooke Masters: If Stewart were convicted on all counts she would almost certainly get prison time. If she's guilty of some counts, but not the securities fraud count that carries the most time, she would probably still go to prison, but it is conceivable she could get some combination of weekends in jail and home confinement

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Detroit, Michigan: It seems to me that it is not being reported what effect, if any, this trial is having in the business community. It appears that the government is focusing substantial attention for litigation against someone who did not profit excessively by an alleged illegal abuse. Does this not signal to the managements of Enron types of large companies that they can get away with substantial illegal activity without the government coming after them?

Brooke Masters: I think the brokerage community is watching this very carefully because there's a lot of secret tipping and hush hush information passing that goes on. If Bacanovic really goes to jail for telling one client about another, that's going to force people to be a lot more careful.

As for other white-collar cases, I think the WorldCom, Tyco and Enron cases are likely to have more impact on the big corporate types than this one. (remember Fastow just pleaded guilty so there could be more movement on Enron, and WorldCom CFO Scott Sullivan goes on trial in April)

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Washington, D.C.: Can you explain why Martha's lawyers would ask for a mistrial on the premise that they weren't permitted to talk about insider scandal? Wouldn't it be in their best interest to avoid that issue all together? Or am I misunderstanding something?

Brooke Masters: the next question addresses the same issue, so I'll answer them together.

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London, United Kingdom:
Do you agree that the government failure to charge Martha Stewart with insider trading and their strong opposition to allowing the defense to demonstrate a lack of motive to obstruct justice -- is effectively denying her a fair trial? Why should they be so opposed to allowing her lawyers to lead evidence that there was no insider trading crime and that she had no motive to lie? It seems as though they are after her to make a celebrity case at any cost. Do you agree?

Brooke Masters: The judge has ruled that the state of the law on exactly what constitutes insider trading is irrelevant.

The reason Cedarbaum did this is that this is all motive evidence and the only thing that matters for motive is what Stewart THOUGHT the law was. The defense is entitled to try and show she didn't think she had committed insider trading, Cedarbaum said.

The judge also said it would confuse the jury to hear contradictory testimony about what the law is. (insider trading law is incredibly confusing--I say that as someone who has to write about it)

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Washington, D.C.: Ms. Masters- Do you have a background in law or business? Both? Just curious.

Brooke Masters: I studied law in college but did not go to law school. I've been covering courts for the Post since 1996, though the first six years were focused on non-business-focused issues including the death penalty, espionage and the first amendment

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Washington, D.C.: What about the Martha Stewart trial have you found to be most fascinating?

Brooke Masters: The lawyers are all very talented which makes it unusually compelling.

It's also been fun looking for celebrities and getting a sense of Stewart's lifestyle.

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Bethesda, Md.: Can you tell us the things Martha Stewart is being accused of that are so much worse than the accusations against corrupt executives at WorldCom, Enron, and other companies who have not even been charged with crimes? My sense is that, given the nature of her charges, that she is being prosecuted far more vigorously than other, more deserving, people out there.

Brooke Masters: Clearly Stewart is charged with lesser crimes (her maximum prison time is under 10 years) but I don't think it is fair to say she's being prosecuted more vigorously--Fastow is doing 10 years in prison. Kozlowski is facing 30 or more if he's convicted when that trial finishes later this month. Sullivan is looking at 20 years if he is convicted, as are the Rigas family members who allegedly looted Adelphia. I think Health South founder Richard Scrushy is facing similar time if convicted

I would say you are confusing publicity with prosecution. Martha's getting more media coverage. Also her case is simpler and was uncovered before some of the others so it's going to trial first.

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Moosejaw, Sask.: How come the trial isnt't be televised? Doesn't the general public have a right to attendance in real time? The judge is - inspite of the silk robes, high priced education, and tony house - a PUBLIC SERVANT. Doesn't the trial already hinge on two different systems of justice: RICH and POOR?

Ranger Doug

Brooke Masters: the federal courts ban televisions from all trials. It's not special treatment for Stewart.

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Washington, D.C.: I certainly don't like the woman but: she can't be accused of insider trading and now she's on trial for lying about something she can't be accused of in the first place? Am I going nuts here or has this country's priorities been skewed?

Brooke Masters: She has been charged with CIVIL insider trading. She is on trial for trying to obstruct that investigation by lying to the SEC.

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Arlington, Va: Your own columnist, Mrs. Harold Evans, otherwise known as Tina Brown opined today about Mr. Faneuil's cupid's bow mouth, his email to his boyfriend and carried on further about the "prancing" stockbroker. Were Faneuil and Bacanovic involved sexually?

Brooke Masters: I have no idea. The trial has studiously avoided mentioning the sexuality of either man.

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Philadelphia, Pa.: How is her demeanor during testimony?

Brooke Masters: Stewart has been quite grim. She blew her nose right after her secretary melted into tears on the stand on Monday, but it's not clear to me whether it was just her cold (she's been blowing her nose a lot)

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Winthrop, Mass.: Also, following up on an earlier post, doesn't much of the government's case boil down to: Well, you must have been lying when you said you couldn't recall this-or-that, because of course anybody would remember committing a crime.

Brooke Masters: On the message issue, yes, they do say that she must have been lying when she said she didn't remember the message because she had personally tampered with it four days earlier.

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Washington, D.C.: It is disturbing to see a young person, just starting his career and having ruined by scandal. Faneuil was put in a difficult position. One never thinks that their boss would ask them to do something illegal. And even if a boss does ask-- how can you fight him/her? What do you think Faneuil should have done to protect himself or avoid this situation?

Brooke Masters: Tough call. I think he would have had a better chance of surviving if he had told the truth when Merrill Lynch first asked about the trade.

There's been a lot of talk around New York about how the bright young things who work as executive assistants are treated so badly.

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Reston, Va.: OK, I'll bite.

What's the difference between criminal and civil insider trading and why is she being charged with one and not the other?

Brooke Masters: civil insider trading is a charge that the government has to prove by "a preponderance of the evidence" and the worst thing that can happen to you is a big fine and/or being banned from running a public company.

Criminal insider trading has to be proved beyond a reasonable doubt and you can go to prison.

Generally the SEC charges everyone with civil insider trading and then the Justice Department ALSO charges criminal insider trading against cases they think are particularly egregious.

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Washington, D.C.: Just my two cents worth....I think it's important not interpret this case as "being pursued aggressively" when really it's just received more media coverage.

Brooke Masters: Frankly, the Tyco case, which is going on two blocks away from Stewart's trial, involves far more money and could send two people to prison for decades.

But it's been going on for four months and it involves accounting issues and when-was-the-board-told-what kinds of issues and the media finds it boring. (I covered a couple of days of it and nearly fell asleep)

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Oakton, Va.: I think that it is an outrage that the judge has not allowed the defense to challenge the legitimacy of some of the charges against Martha Stewart (relating to her right to defend herself in public comments). I am hoping that at least some jurors will consider the fairness and exaggeration of the felony charges, due to all the pre-trial publicity, and vote to acquit her. Do you think that this is possible---that some jurors will consider the prosecution to be overreaching? Thank you.

Brooke Masters: That's a strategy called jury nullification. Defense Lawyers can't explicitly ask a jury to do it, but they can hint at it and hope.

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Brooke Masters: Thanks everybody for chatting. If there's interest we may try and do this again when we have another day off from the trial.

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