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Business Observer Friday, Jan. 30, 2004 18 years ago

Martha Stewart Bets (Tampa edition)

Investors hope attorney Robert Morvillo will resuscitate the fortunes of Martha Stewart Living Omnimedia Inc. by rescuing its 62-year-old founder and former chairwoman from six or more years in prison.

Martha Stewart Bets (Tampa edition)

Investors hope attorney Robert Morvillo will resuscitate the fortunes of Martha Stewart Living Omnimedia Inc. by rescuing its 62-year-old founder and former chairwoman from six or more years in prison.

By David Glovin

Bloomberg News Service

NEW YORK - During his closing arguments in a 1998 immigration-fraud trial, defense attorney Robert Morvillo denounced the government's witnesses one by one as he plucked their photos off a prosecution chart. In a concluding flourish, he dumped them on the prosecutor's table.

"Mr. Morvillo, that was a phenomenal job," said Assistant U.S. Attorney Patrick Smith, applauding for the jury in the hope of defusing a performance even the judge called "remarkable."

Morvillo's command of the courtroom and his appeal to juries weren't lost on Martha Stewart, the entrepreneur with a reputation as a detail-driven diva of home decorating and entertaining. Stewart has hired the former federal prosecutor to keep her out of prison on obstruction-of-justice and securities-fraud charges. The first witness took the stand in her criminal trial last week in Manhattan federal court.

"If you had Mr. Morvillo as your attorney, you would be taking direction," Stewart told CNN's Larry King.

Morvillo didn't win the 1998 immigration-fraud case, despite his summation. "He's not Superman," said defense attorney B. Alan Seidler, who represented a co-defendant in a case Morvillo lost five years ago. Seidler said Morvillo did a respectable job, not an outstanding one. "He's part of the white-collar legal establishment."

In Manhattan, where about 90% of federal criminal trials end in conviction, Morvillo has won about half his approximately 15 trials as a defense lawyer.

'Willing to yell'

A Corporate Crime Reporter survey of hundreds of attorneys last year ranked Morvillo as the 10th-best white-collar defense lawyer in the U.S.

Merrill Lynch & Co. often hired Morvillo to negotiate with regulators, said Stephen Hammerman, a former Merrill general counsel. "If you have a lawyer who's willing to yell at you when he thinks you're wrong, even if you're holding the paycheck to pay him, that's very beneficial," said Hammerman, who is the top legal adviser to New York City Police Commissioner Raymond Kelly.

Investors hope Morvillo will resuscitate the fortunes of Martha Stewart Living Omnimedia Inc. by rescuing its founder from six or more years in prison.

Stewart has turned to Morvillo, who once headed the criminal division in the Manhattan office of the U.S. Attorney, to fight charges that she lied to investigators about why she sold shares two years ago in ImClone Systems Inc.

Stewart's friend

Samuel Waksal, a friend of Stewart who was then ImClone's CEO, is serving 87 months in prison for insider trading of the company's shares. Stewart stepped down as her company's CEO last June.

"Bob Morvillo is the perfect lawyer for her," said Larry Soderquist, director of Vanderbilt University Law School's Corporate Securities Law Institute. "Martha Stewart could put off a jury by being too hoity-toity," he said. Morvillo "is not part of the New York social scene. He's not a fashion plate."

In November, Morvillo wore a rumpled suit to court as he escorted Stewart, who carried a Hermes handbag and wore a chocolate-colored cable-knit sweater.

A lot at stake

Stewart, her investors in Martha Stewart Living and prosecutors all have a lot riding on the trial. The government charges Stewart with conspiracy to obstruct justice, obstruction of justice, two counts of making false statements to investigators, and securities fraud.

Stewart built a company with a $565 million market value, four magazines, a television show, book publishing, and housewares sold through catalogs and retailers, including Kmart Holding Corp. The company's shares have fallen 37%, to $11.97 since the accusations against Stewart first became public on June 6, 2002.

If Stewart is convicted, "the company is going to have trouble. It will have to go through a major transformation and then has to survive that," said Dennis McAlpine, founder of independent research company McAlpine Associates in Scarsdale, N.Y. "Do they stay in business? Probably. But can they be as big as they were?"

Loss forecast

The company, which draws 57% of its revenue from advertising and magazine sales, posted an average annual profit of $20 million from 1998 to 2002. For 2003, it's expected to lose $2.77 million.

"Advertisers have used her problems as a leverage factor to get lower rates," said David Baker, who helps manage $500 million at Boston-based North American Management Corp. and sold his Martha Stewart Living shares last year. "The stock price will go up if she's acquitted. She has a mound of cash, so the valuation looks compelling - if she gets acquitted."

The Justice Department has much at stake, too, as it presses investigations into fraud at WorldCom Inc. and Enron Corp., and prepares for criminal trials against executives at Adelphia Communications Corp. and HealthSouth Corp. A loss "would signal that they've been too aggressive in going after high-powered executives," said Joshua Cohn, a lawyer at Cohn Lifland Pearlman Herrmann & Knopf in Saddle Brook, N.J.

An acquittal would be the second recent black eye for the government. In October, a judge declared a mistrial in the obstruction-of-justice case of former Credit Suisse First Boston banker Frank Quattrone.

Opposing Morvillo is Assistant U.S. Attorney Karen Patton Seymour, 42, who heads the criminal division in the prosecutor's office - the same post Morvillo held.

Stewart and her former Merrill Lynch broker, Peter Bacanovic, are accused of conspiring to obstruct a government investigation into her sale of ImClone shares. Bacanovic will stand trial with Stewart.

Prosecutors say Bacanovic's assistant, Douglas Faneuil, tipped Stewart that ImClone CEO Waksal was trying to sell his stock in the company, prompting Stewart to sell her 3,928 shares.

The day after Stewart's Dec. 27, 2001, sale, the U.S. Food and Drug Administration announced it had rejected ImClone's application to market the cancer drug Erbitux. ImClone shares fell 18% in a day. By selling earlier, Stewart avoided losing $51,222, prosecutors said.

Stewart later told government investigators that she sold her shares because she and Bacanovic had agreed she'd dispose of them if the shares fell to $60. Prosecutors say Stewart was lying.

The government has also charged Stewart with stock fraud, accusing her of duping investors in her company when she said she sold her ImClone shares because of the $60 sell order.

Stewart says she responded to congressional leaks that she'd sold her ImClone shares on inside information. Morvillo says the charge is an infringement of Stewart's free speech rights, and that prosecutors have never before accused someone of securities fraud for proclaiming their innocence to unfounded rumors.

Faneuil, 28, the government's chief witness, has pleaded guilty to a misdemeanor - lying to authorities who were investigating Stewart's sale - and has agreed to cooperate with prosecutors. He has admitted receiving extra pay and vacation from Bacanovic, 41, for misleading the Securities and Exchange Commission and the FBI.

Prosecutors say there's evidence Stewart changed a message in her office computer four days before meeting with them. They say the message from her assistant - which read, "Peter Bacanovic thinks ImClone is going to start trading downward" - was altered to read "Peter Bacanovic re imclone." Then, they say, she told her assistant to restore the original message.

"The circumstantial evidence that something seems strange is all over the indictment," said Greg Markel, head of litigation at Manhattan-based Cadwalader, Wickersham & Taft.

Even with Faneuil's testimony, the government's obstruction case seems largely circumstantial, said Markel. Prosecutors lack a witness who can detail the alleged scheme based on conversations with Stewart, and jurors may be hesitant to convict Stewart on obstruction because she wasn't charged with insider trading.

Morvillo wins praise from adversaries, including former Assistant U.S. Attorney Bradley Simon, for his skill at cross-examinations, including one that led to an acquittal for John Zaccaro, the husband of former U.S. vice presidential candidate Geraldine Ferraro.

In that 1987 bribery case, Morvillo got the key government witness to admit that he didn't think Zaccaro had been soliciting a bribe for a politician, even though Zaccaro had told the witness that his company could win a contract in return for "a substantial amount of money."

The losing prosecutor, Paul Pickelle, said Morvillo "intimidated the judge into letting him" ask questions favorable to Zaccaro. It "was good lawyering," Pickelle said.

"Where's the beef?" Morvillo said in his summation in that case. "Where's the crime? Where's the proof? What are we doing here?"

Morvillo graduated from Columbia Law School in 1963 and joined the U.S. Attorney's office in 1964. Except for a two-years in private practice, he stayed there until 1973, helping bring a series of police corruption cases that later became the basis for the book and film "Prince of the City."

White-collar defense

That year, Morvillo and two other veterans from the prosecutor's office - John Martin and Otto Obermaier, both later named top federal Manhattan prosecutors - launched one of the city's first white-collar defense firms, now known as Morvillo, Abramowitz, Grand, Iason & Silberberg.

Morvillo, who declined to be interviewed, still lives in Rockville Centre, N.Y., the Long Island town where he was raised. He gets fees of about $650 an hour for representing a diverse clientele that has included Daiwa Bank Ltd., which was accused of a $1.1 billion fraud, and "The Sopranos" actor Robert Iler after Iler's robbery arrest. Daiwa wound up paying $340 million as part of a guilty plea. Iler pleaded guilty to only a misdemeanor.

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