Judge Cedarbaum’s opinion in United States v. Stewart, 03 Cr. 717 (S.D.N.Y. Feb. 27, 2004), dismissing the securities fraud charge against Martha Stewart, is now available online in PDF form. (You can read a news account of the decision here). The case provides an interesting look at the difficulty of proving intent in criminal securities fraud cases, especially in situations such as this one, where the alleged misrepresentations did not relate directly to the business of the issuer.
The securities fraud charge was always somewhat novel, in that it accused Stewart of fraud in connection with the purchase and sale of stock in her own company, Martha Stewart Living Omnimedia (MSLO), by misrepresentations during the investigation of her sales of ImClone stock in which she [1] “described the [alleged standing order] agreement to sell ImClone at a predetermined price, [2] stated that her trade was proper and [3] denied trading on nonpublic information.” Slip op. at 5. For purposes of the analysis of the Rule 29 motion on the sufficiency of the evidence, the court assumed the falsity of these statements. Id. at 7 n.1. The court found sufficient evidence that Stewart, who owned 60% of MSLO stock in addition to being CEO, closely tracked the stock’s price (including the impact on that price of insider sales, as evidenced by an informal company policy restricting insider sales), and was aware of the importance of her personal reputation to the company, as well as evidence that MSLO stock began dropping on news of disclosure of the investigation into Stewart’s sale of ImClone stock.
The court’s dismissal was based on the finding that the jury would need to rely entirely on “speculation and surmise” to find beyond a reasonable doubt that Stewart’s statements were made with the intent to affect the price of MSLO stock, and that the issue could not be permitted to go to the jury where “the competing intentions appear to be nearly in equipoise.” Id. at 16, 20. As the court concluded, in light of the fact that Stewart had made no statements indicating a concern about the response of MSLO’s stock price to the ImClone controversy (and, apparently, had made no suspicious sales of MSLO stock):
To compound [the] weak evidence [that Stewart’s statements were made with intent to defraud MSLO shareholders] with the reasonable inferences that Stewart possessed many other intents — to protest her innocence or repair her reputation, to reassure her business partners, advertisers, and the consumers of her products — would only invite the jury to speculate.
Id. at 22. The court found that the falsity of the statements alone would not support an inference of intent to defraud:
In some securities fraud cases, the falsity of a defendant’s statements may lend weight to an inference of intent to deceive. But in this case, the falsehoods lack a direct connection to the supposed purpose of the alleged deception. The falsehoods involve Stewart’s personal trade in the securities of ImClone. Evidence of intent to defraud investors of a different company is not readily discernible from the content of the falsehoods.
Id. at 21. In this regard, the court observed that the responsiveness of the statements to questions arising in the media about her ImClone trade did not suggest a connection to MSLO’s stock price:
Because this argument does not distinguish meaningfully between the general public and MSLO investors, it cannot support a permissible inference of intent.
Id. at 16 n. 4. The court also found that the context in which the statements were made did not support the idea that they were targeted at affecting MSLO’s stock price. The first statement was made by her attorney to the Wall Street Journal, but there was “no evidence that Stewart or her lawyer reached out to the Wall Street Journal as opposed to other publications” and “[t]hus, there is no evidence that Stewart chose the forum for the statement.” Id. at 18. The second statement was made in a press release:
The Government argues that Stewart’s intent with respect to the second statement can be inferred from the fact that she released it knowing that it would be widely disseminated in financial publications. This argument, which can be made with respect to any public statement, adds nothing to the evidence of criminal intent.
The third statement was made to a previously scheduled conference of analysts and investors, but the court emphasized that “the fact that Stewart made [this] statement to an audience of analysts and investors cannot retroactively endow her previous statements with a bad purpose,” and found that the evidence that the statement itself was intended to affect MSLO’s stock price was weak, given that Stewart’s statement was only a small part of a larger statement about MSLO, made at an event where there were several other MSLO representatives and representatives of other companies and that neither Stewart nor MSLO organized the conference:
There is no evidence that the negative publicity about ImClone influenced Stewart’s decision to attend and take advantage of a platform from which to reach investors directly.