Henry Blodget, a former securities analyst, lives in New York City. Read his full-disclosure statement about his potential conflicts of interest in covering the Martha Stewart trial here. For a complete listing of Blodget's dispatches, see Slate's Guide to the Martha Stewart Trial, which also has links to related Slate articles.

Martha: How it came to thisIn early January 2002, the Securities and Exchange Commission launched an investigation into suspicious trading in the stock of ImClone Systems. On Dec. 27 and 28, 2001, just before ImClone announced that the FDA had unexpectedly refused to review its new cancer drug, Erbitux, the stock had sold off sharply on extreme volume (see previous dispatch). Less than a week later, on Jan. 3, the SEC conducted a telephone interview with a 27-year-old broker's assistant at Merrill Lynch named Douglas Faneuil. In this interview, which presumably covered the activities of three clients—Dr. Samuel Waksal, Aliza Waksal, and Martha Stewart—Faneuil allegedly "did not truthfully reveal all he knew concerning the actions of [his boss, Peter Bacanovic] and the reasons for [Martha Stewart's] sale of ImClone stock on December 27^th." What Faneuil did not reveal, presumably, was that he had allegedly told Stewart about Sam Waksal's attempted sale.

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Four days later, on Jan. 7, the SEC interviewed Peter Bacanovic, also by telephone. In this interview, Bacanovic allegedly made two false statements with the intention of misleading the investigators. These statements now constitute Count 2 of United States v. Martha Stewart and Peter Bacanovic: "False Statements by Peter Bacanovic."

1. Bacanovic stated that, on Dec. 20, Stewart told him that she had decided to sell her ImClone stock if the stock fell to $60 per share (allegedly a lie because Stewart did not tell him this).
   
2. Bacanovic stated that, on the 27^th, he spoke to Stewart and told her that ImClone had fallen below $60, and she had told him to sell it (allegedly a lie because Bacanovic did not actually speak to Stewart on the 27^th—Faneuil did).

Only 10 days after the ImClone trade, therefore, and apparently before talking to Stewart (no contact is reported or alleged), Bacanovic described the $60 understanding that would later become Stewart's alibi. This likely suggests one of two things: Either Bacanovic had already, on his own, fabricated the story and Stewart later adopted it, or he was telling the truth.

Also, intentionally or not, Bacanovic stated—incorrectly—that Stewart spoke to him on the 27^th, not to Faneuil. Assuming that Bacanovic knew by then that Faneuil had told Stewart about the Waksal sales, he would, as the prosecution suggests, have had a motive to say this, regardless of whether Faneuil volunteered the sale information or, as Faneuil now says, Bacanovic asked him to relay it. If Bacanovic asked Faneuil to relay the information, Bacanovic might have wanted to protect himself and Stewart (he, if not Stewart, would know that Faneuil shouldn't have shared the information). If, on the other hand, Faneuil volunteered the information, Bacanovic might have wanted to protect Faneuil and Stewart (whether or not Faneuil relayed "material nonpublic information," Bacanovic wouldn't win points with Stewart by telling the SEC that, prior to her trade, she had had information that she shouldn't have had). In any case, by Jan. 7, only 10 days after the trade, two key concepts—the "$60 agreement" and the idea that, on the 27^th, Stewart talked to Bacanovic, not Faneuil—had already been introduced.

Nine days later, on Jan. 16, Stewart and Bacanovic met for breakfast in an unspecified location in New York (not a secret location, just unspecified). Eleven days after that, on Friday, Jan. 25, the FBI and the U.S. attorney contacted Stewart to request an interview. Later (how much later isn't specified), Stewart placed a call of unspecified duration from her cell phone to Bacanovic's cell phone.

The following Monday, Jan. 28, the SEC issued a document request to Merrill Lynch, seeking, among other things, documents relating to Stewart's account. Two days later, Bacanovic gave Merrill officials the "Unrealized Gain/(Loss)" sheet that he had used as the basis for the tax-loss selling discussion on Dec. 20 or 21. On the sheet were handwritten marks in blue ballpoint ink, mostly check-marks in front of the names of stocks (presumably the stocks Stewart had subsequently sold). Two of the marks were circles around stocks, the second of which was ImClone. After the name ImClone, moreover, was another mark—"@ 60." In one of the sexiest allegations in the indictment, the U.S. attorney alleges that Bacanovic added the "@ 60" after the inquiries began, with the aim of providing false documentary corroboration for the bogus $60 story (Count 5: "Making and Using False Documents by Peter Bacanovic").

The evidence for the allegation is that the "@ 60" notation was apparently written with blue ballpoint ink that is "scientifically distinguishable from the ink used elsewhere on the worksheet." Although this "added-later" theory seems plausible, it also seems plausible that Bacanovic, like other executives, had more than one pen on his desk. In the trial, this point will presumably hinge on whether the "@ 60" is "scientifically distinguishable" from all of the other handwritten marks on the page (15, in the partially redacted copy released by the House Committee on Energy and Commerce) and whether all of the other marks are scientifically the same. If so, it will seem implausible that, in the middle of his conversation with Stewart, Bacanovic switched pens only when he made the ImClone notation (although it is also presumably possible that, sometime in the next two trading days, while Bacanovic was selling 22 of Stewart's stocks, he recalled the $60 conversation and made the notation as a reminder).

The next day, Thursday, Jan. 31, about a week after the U.S. attorney contacted Stewart to set up an interview, she apparently had a long conversation with at least one of her attorneys, a team that then included John F. Savarese and Lawrence B. Pedowitz of the New York-based Wachtell, Lipton, Rosen & Katz. "Immediately following" this conversation, Stewart browsed through her computerized phone log, reviewed Bacanovic's message from the morning of Dec. 27, and then changed it from "Peter Bacanovic thinks ImClone is going to start trading downward" to "Peter Bacanovic re ImClone." Sometime later, she told her assistant to change the message back to its original wording.

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