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U.S. v. STEWART

February 27, 2004.

United States of America,
v.
Martha Stewart and Peter Bacanovic, Defendants.



The opinion of the court was delivered by: MIRIAM GOLDMAN CEDARBAUM, District Judge.

OPINION

Defendant Martha Stewart has moved for a judgment of acquittal pursuant to Fed.R.Crim.P. 29. The motion is granted with respect to Count Nine only.

This is one of those rare cases in which the standard of proof makes a difference in the assessment of the sufficiency of the evidence. The Government argues, in effect, that evidentiary sufficiency is the same in civil and criminal securities fraud cases. However, the law is to the contrary. There was a time when the difference between the civil and criminal standards of proof, specifically "beyond a reasonable doubt," was not a factor in assessing the sufficiency of the evidence. See United States v. Feinberg, 140 F.2d 592, 594 (2d Cir. 1944). That view of the law was explicitly rejected by the Second Circuit in United States v. Taylor, 464 F.2d 240, 242-43 (2d Cir. 1972). Writing for the Court, Judge Friendly stated:
It would seem at first blush — and we think also at second — that more `facts in evidence' are needed for the judge to allow [jurors] `of ordinary reason and fairness' to affirm the question the proponent `is bound to maintain' when the proponent is required to establish this not merely by a preponderance of the evidence but, as all agree to be true in a criminal case, beyond a reasonable doubt. . . . We do not find a satisfying explanation in the Feinberg opinion why the judge should not place this higher burden on the prosecution in criminal proceedings before sending the case to the jury.
Id. at 242 (citation omitted). Judge Friendly drew an explicit connection to the Supreme Court's then-recent determination in In Re Winship, 397 U.S. 358 (1970), that "the Due Process Clause protects the accused against conviction except upon proof beyond a reasonable doubt of every fact necessary to constitute the crime with which he is charged," id. at 364. In Jackson v. Virginia, 443 U.S. 307 (1979), the Supreme Court followed both Taylor and Winship in holding that "[a]fter Winship the critical inquiry on review of the sufficiency of the evidence to support a criminal conviction must be not simply to determine whether the jury was properly instructed, but to determine whether the record evidence could reasonably support a finding of guilt beyond a reasonable doubt," id. at 319.

  In Taylor, Judge Friendly also quoted Judge Prettyman's widely-cited formulation of the proper balancing of the duties of the judge and the jury from Curley v. United States, 160 F.2d 229 (D.C. Cir. 1947): "The true rule . . . is that a trial judge, in passing upon a motion for directed verdict of acquittal, must determine whether upon the evidence, giving full play to the right of the jury to determine credibility, weigh the evidence, and draw justifiable inferences of fact, a reasonable mind might fairly conclude guilt beyond a reasonable doubt." Id. at 233 (quoted in Taylor, 464 F.2d at 243).

  That Judge Friendly's reasoning in Taylor has been applied infrequently only indicates how rare is the case in which the evidence of an essential element of a charged crime is "nonexistent or so meager that no reasonable jury could find guilt beyond a reasonable doubt." United States v. Guadagna, 183 F.3d 122, 130 (2d Cir. 1999) (quoting United States v. White, 673 F.2d 299, 301 (10th Cir. 1982))(internal quotation marks omitted). Indeed, Judge Friendly noted that "while . . . there will be few cases where application of Judge Prettyman's test would produce a different result, we cannot say these are non-existent." Taylor, 464 F.2d at 243. This is such a case.

  Count Nine of the Indictment charges that defendant Stewart made materially false statements of fact regarding her sale of ImClone securities with the intention of defrauding and deceiving investors by slowing or stopping the erosion of the value of the securities issued by her own company, Martha Stewart Living Omnimedia ("MSLO"). In assessing the sufficiency of the evidence, I have concluded that no reasonable juror can find beyond a reasonable doubt that the defendant lied for the purpose of influencing the market for the securities of her company. Another way of putting it would be that in order to find the essential element of criminal intent beyond a reasonable doubt, a rational juror would have to speculate.

  Background

  The criminal charges against Stewart and Bacanovic arose from Stewart's December 27, 2001 sale of 3,928 shares of stock in ImClone Systems, Inc. ("ImClone"). ImClone is a biotechnology company whose then-chief executive officer, Samuel Waksal, was a friend of Stewart's and a client of Stewart's stockbroker at Merrill Lynch, defendant Bacanovic. On December 28, 2001, the day after Stewart sold her shares, ImClone announced that the Food and Drug Administration had rejected the company's application for approval of Erbitux, a cancer-fighting drug that ImClone had previously described as its lead product.

  The Indictment alleges that on the morning of December 27, 2001, defendant Bacanovic learned that Waksal and several of his family members were selling or attempting to sell their ImClone shares. Bacanovic allegedly instructed his assistant, Douglas Faneuil, to inform Stewart of the Waksals' trading activity, and she sold her shares in response to that information.

  According to the Indictment, the defendants then lied about the real reason for Stewart's sale in order to cover up what was possibly an illegal trade and to deflect attention from Stewart in the ensuing investigations into suspicious ImClone trading in advance of the Erbitux announcement. The defendants claimed that they had a standing agreement that Stewart would sell her position in ImClone if the stock fell to $60 per share.

  The Indictment charges the defendants with conspiracy, obstruction of an agency proceeding, and making false statements to government officials. Bacanovic is also charged with perjury and making and using false documents.

  Count Nine of the Indictment charges Stewart, the CEO of MSLO, with fraud in connection with the purchase and sale of MSLO securities in violation of 15 U.S.C. § 78b and 78ff. The count is based on three repetitive public statements she made in June of 2002 after the media began reporting investigations of her ImClone trades by the Securities and Exchange Commission ("SEC"), the United States Attorney's Office, and a congressional subcommittee. In the critical statements, Stewart described the agreement to sell ImClone at a predetermined price, stated that her trade was proper and denied trading on nonpublic information.

  Discussion

  The Supreme Court has held that "scienter," or intent, in the civil securities fraud context, indicates a "mental state embracing intent to deceive, manipulate, or defraud," and is a required element of any claim of securities fraud. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). In a criminal prosecution, the Government must also prove that the defendant acted "willfully," that is, with a realization that she was acting wrongfully. See United States v. Dixon, 536 F.2d 1388, 1395 (2d Cir. 1976). The Government contends that the intent requirement is no different in criminal prosecutions under the securities laws than in civil litigation. The Government is certainly correct that securities law precedent developed in civil litigation has been freely applied in the criminal context. See, e.g., United States v. Newman, 664 F.2d 12, 16 (2d Cir. 1981). But the issue here is not whether criminal cases require a different definition of intent. Civil cases, because of their procedural posture, may not be particularly helpful in assessing a Rule 29 motion predicated on the lack of requisite intent. Few civil securities fraud opinions reach the question of sufficiency of the evidence — the question more frequently is whether the complaint states a claim upon which relief can be granted, or whether the existence of a material fact justifies denial of a motion for summary judgment. See, e.g., AUSA Life Ins. ...


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