The Star Witness In the Martha Stewart Case:
How Should the Jury Evaluate His Insider Trading Testimony, When No Insider Trading Charge Has Been Brought?

By JONNA SPILBOR
Monday, Feb. 09, 2004

Most newly anointed brokers begin their Wall Street careers at the bottom of the totem pole -- often doing little more than catering to the administrative needs of their superiors. They'll fetch the coffee, take a message, and occasionally, make a trade.

When Douglas Faneuil began working as a broker's assistant at Merrill Lynch, he was so wet behind the ears, you could have wrung him out. Faneuil even referred to himself as "Baby".

But now "Baby" says he grew up fast -- too fast. Why? Because the broker he assisted was Peter Bacanovic. And one of Bacanovic's clients was Martha Stewart.

Still in his twenties, and no longer working on Wall Street, "Baby" is now the key government witness in the case against domestic-diva-turned-defendant Stewart and her broker, Bacanovic. Indeed, in the end, the entire case is likely to boil down to a credibility contest: The word of the business-savvy Stewart and Bacanovic against the word of the fresh-faced Faneuil.

After all, the rest of the evidence against Stewart and Bacanovic is circumstantial. And though Judge Miriam Goldman Cedarbaum has remarked that this circumstantial evidence is "strong," Faneuil's testimony, as direct evidence, is bound to be stronger. But only if the jury believes it.

Yet the jury may find Faneuil too dramatic to be credible. Last week, Faneuil's testimony often sounded as if it were taken straight from the movie Wall Street. Faneuil seemed to cast himself in the role of Bud Fox -- the young, heroic stockbroker who risked his own liberty to expose the ruthless wrongdoings of his superiors.

Of course, Wall Street, the movie, was fiction. But so too may be the testimony of the government's star witness -- and it is up to jurors to decide. Evidence of Faneuil's admitted drug history is likely to count against him in their credibility determination.

Today, Faneuil begins a second week of testimony. As he does so, jurors must be wondering: How firmly must I believe him, in order to convict?

In this column, I will argue that the answer to this question is closely related to an odd decision the Stewart prosecutors made: The decision, in what is essentially an insider trading case, not to charge the defendant with insider trading.

The Strange Indictment Against Stewart: Failing to Charge Insider Trading

The indictment against Stewart was strange, to say the least. It was a case of a dog that didn't bark -- and the "dog" here was the insider trading charge.

The government alleged that Stewart acted on non-public information when, in December 2001, she sold her nearly four thousand shares of ImClone stock just one day before bad news caused the stock price to tank.

Specifically, the government believes -- and Faneuil has testified -- that Stewart learned that her friend, and ImClone head, Sam Waksal and his daughter were dumping their shares of ImClone, and therefore decided to dump her own. Who told her? According to Faneuil, he did, but he was reluctantly following Bacanovic's instructions.

Obviously, the gist of this claim is insider trading. The claim is that Stewart, due to her friendship with Waksal, and her broker's knowledge of his doings, managed to escape taking the hit that other ImClone stockholders took.

But the government did not charge Stewart with insider trading. Instead, it has charged her with conspiracy, obstruction of justice, and securities fraud.

Specifically, the government believes that Stewart lied to the government when it investigated her stock trade -- claiming that the trade was made pursuant to a prior "sell" order, which the government says never existed. It also believes that Stewart similarly lied to stockholders, and the public, in an attempt to keep the price of her own company's stock high by convincing them she was innocent of any wrongdoing, and would eventually be exonerated.

Although these allegations led to the current charges (and by the way, even Judge Cedarbaum has openly acknowledged the fraud charge as "novel"), insider trading is unmistakably the main artery of the case, with all of the charged crimes flowing from it. But, again, it isn't charged as a crime.

If Insider Trading Isn't Charged, Why Is Faneuil's Testimony On It Admissible?

Since insider trading isn't charged, readers may wonder: Why is Faneuil allowed to testify about it? Isn't Stewart on trial for the crimes charged in the indictment -- and only those crimes? So the government shouldn't be telling the jury about other bad things it thinks she did, right?

In brief, the answer is yes -- but with exceptions. In federal trials, the admissibility of uncharged acts (also called prior bad acts) is governed by Federal Rule of Evidence 404(b).

Rule 404(b) excludes evidence of other crimes, wrongs, or acts if it is offered to demonstrate a defendant's propensity to commit the charged act. So, for example, if Stewart were charged, instead, with robbing a liquor store, then the government couldn't offer evidence of its belief that she also committed insider trading.

But Rule 404(b) also say that prior bad act evidence may be admissible if it is offered for other purposes. (Also, another test must also be satisfied: The trial judge must find that the jury could reasonably conclude that the acts occurred, and that the defendant was the actor.)

What are those other purposes for which prior bad act evidence can be admitted? According to Rule 404(b), they include proof of motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake.

In this case, for instance, the government may be offering Faneuil's testimony that Stewart traded on inside information in order to show why it believes she later lied about those very trades. The government may contend, that is, that the trades gave her a motive to lie: If she hadn't done a bad thing, then she wouldn't have had to cover it up later. To show the cover-up itself -- the theory goes -- one must first show what the defendant needed to cover up.

Why the "Reasonable Doubt" Requirement Doesn't Apply to Faneuil

So it seems that the government is putting Faneuil on to show motive. But motive isn't an element of any crime (including those charged here) -- so it need not be proven beyond a reasonable doubt.

To convict Stewart, the jury must be convinced beyond a reasonable doubt that she made false statements, and obstructed justice. But it need not be convinced beyond a reasonable doubt of her motive for doing so. And that motive, as noted above, is the subject of Faneuil's testimony.

All this leads to a strange anomaly: At least in theory, the jury need not be convinced, beyond a reasonable doubt, of what Faneuil says, in order to base a conviction upon it. So some witnesses will have to be believed beyond a reasonable doubt, but Faneuil isn't one of them.

Which witnesses will have to be believed beyond a reasonable doubt? To begin, suppose the government investigators who spoke to Stewart testify that she made false statements to them. Obviously, the fact that a statement was made, and the fact that it was false, are elements of the false statements charge. And again, all elements must be proven beyond a reasonable doubt. So if the jury doesn't believe the investigators beyond a reasonable doubt, it cannot convict Stewart of making false statements. And of course, that's as it should be.

Not so with Faneuil, however. The jury can disbelieve him, or have questions about his testimony, and still convict Stewart. For instance, it might believe that Stewart actually did nothing wrong, but that she was so paranoid that she might be wrongfully convicted anyway, that she starting devising a series of lies to defend herself. After all, it wouldn't be the first time that a cover-up became far worse than what it was covering up in the first place.

Omitting to Charge Stewart With Insider Trading Is Unfair

If all this strikes you as unfair to Stewart, I couldn't agree with you more. The government should not be allowed to divest a defendant of her due process right to proof beyond a reasonable doubt in a criminal proceeding by sleight of hand charging decisions. And that is precisely what's happened here.

Jurors should have to believe Faneuil beyond a reasonable doubt in order to convict Stewart. Technically, because of the government's clever -- and partial -- indictment, that's not the law. But let us hope that we can count on the common sense of jurors to ensure fair treatment of the defendant.

If jurors cannot believe "Baby" beyond a reasonable doubt, then it should not convict the grownups in the room. Star witnesses should offer star performances -- if they are not credible, then cases ought to fall apart. If Faneuil fails to convince, the case should be over.


Jonna M. Spilbor is a frequent guest commentator on Court-TV and other television news networks, where she has covered many of the nation's high-profile criminal trials. In the courtroom, she has handled hundreds of cases as a criminal defense attorney, and also served in the San Diego City Attorney's Office, Criminal Division, and the Office of the United States Attorney in the Drug Task Force and Appellate units. In 1998, she earned certification as a Court Appointed Special Advocate with the San Diego Juvenile Court. She is a graduate of Thomas Jefferson School of Law, where she was a member of the Law Review.

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