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Interview with John Coffee

Aired June 3, 2003 - 19:40   ET


ANDERSON COOPER, CNN ANCHOR: Now we mentioned Martha Stewart stock earlier in the program. It wasn't only -- it wasn't the only reason people were talking about her today. At least one shareholder wanted to know whether she had stepped down.

ARTHUR MARTINEZ, DIRECTOR, MARTHA STEWART OMNIMEDIA: A shareholder asked in the meeting if it was true that Martha had resigned. As chairman as chief executive of the company. I responded that this was categorically untrue. Martha remains the chairman and chief executive of Martha Stewart Living Omnimedia.


COOPER: You might ask, why would anyone think Martha Stewart had stepped down now. As Jamie Colby reports, it's because yet another bit of bad news that became public today. Take a look.


JAMIE COLBY, CNN LEGAL CORRESPONDENT: Early in life, Martha Stewart longed for the spotlight. And over the years, the former caterer built a billion dollar empire becoming a symbol of homemaking, decorating and party planning.

JEFFREY TOOBIN, CNN LEGAL ANALYST: She lived the dream of every middle class housewife who has been told, you know, your cookies are so good, you could really sell them some day.

COLBY: CNN legal analyst Jeffrey Toobin profiled Stewart in the February issue of the "New Yorker."

TOOBIN: I sensed a lot of fear. She knew that the stakes were enormous for her.

COLBY: The aroma of criminal prosecution has wafted around Stewart for more than a year following a stock sale in December 2001 that came under federal and SEC investigation. Accusations of alleged insider trader left Stewart the subject of satire.

DAVID LETTERMAN, ENTERTAINER: I saw her in the hall way earlier today. She was showing people how to turn federal subpoenas into attractive party hats.

COLBY: And an unauthorized and often unflattering TV movie.

UNIDENTIFIED FEMALE: And for god's sake, did not ask former low!

COLBY: This week Stewart's company, Martha Stewart Living Omnimedia, announced the dame of domesticity is about to be branded, not by a new line of sheets or towels but by a federal indictment. In her last appearance on the "Early Show" where the heat was so hot, Stewart left the kitchen and her deal to contribute to the show, she denied any wrong doing.

MARTHA STEWART, CEO, LIVING OMNIMEDIA: I have nothing to say on the matter. I'm really not at liberty to say. And as I said, I think this will all be resolved in the very near future and I will be exonerated.

COLBY: But with the fame and notable fortune, Stewart earned a reputation for being a difficult and demanding diva.

TOOBIN: I think it's a combination of things. She is the embodiment of domestic perfection. She has set herself up that way and that makes you a target.

STEWART: I have been the subject of very favorable reporting and very unfavorable reporting. And throughout the years, this is not new to me.

COLBY: Toobin says the investigation has already cost Martha many millions.

TOOBIN: As of February, before she had been charged with anything, this scandal had cost her at least $300 million in the decline of her holdings and in out of pocket legal costs.

COLBY: That number does not include what the investigation may have cost Stewart's reputation.

Jamie Colby, CNN, New York.


COOPER: $300 million. Unbelievable.

Joining me now is John Coffee, a professor at Columbia Law School and director of the new Center for Corporate Governance.

Professor Coffee, thanks for being with us.

An indictment of Martha Stewart is said to come very soon. What is it going to entail as far as we know?

JOHN COFFEE, PROFESSOR, COLUMBIA LAW SCHOOL: Well, actually, even before an indictment, the government could arrest her. They could file a criminal complaint and they could either arrest her, as they've done in some cases, or require her to surrender to authorities as they've done in other cases.

COOPER: A criminal complaint based on the insider train trading charges or other things?

COFFEE: There are multiple possibilities here. There is certainly insider trading. I don't think the government if they indict or go forward will leave that out. If there were only a plea bargain, the government might limit it to a charge of false statements, and a charge of obstruction of justice. More likely, if this goes forward, they'll throw it all together and we'll have all those charges together.

COOPER: You're saying she could actually be led out in handcuffs somewhere.

COFFEE: Well, you've asked one of the most interesting questions.

Will the government dare do a perp walk with Martha Stewart?

There is a danger that would backfire. There is a kind of ceremonial humiliation that really achieves no law enforcement purpose. And it's always questionable whether that kind of punishment should precede the trial and the conviction. But in her case, or the case of any woman, the government may just go a little too far, and create a little bit of public distaste for what the government is doing.

COOPER: That's an interesting point you bring up. Because there have been other CEOs we've seen basically been given a perp walk, lead out in handcuffs. You're saying though that might backfire in this case. Is that because of her public persona and maybe because she is a women? We haven't seen a female CEO been lead out.

COFFEE: They've done it both ways. Couple weeks ago, Mr. QUESTION: avoided the full-scale perp walk and was permitted to surrender to authorities and not be arrested in the humiliating fashion and brought to court house and given the full scale perp walk. The full-scale perp walk was given to Adelphia and the WorldCom executives. The government here may want to be just a little more discrete. Certainly prosecutor, if they think she's guilty. But things like the person walk achieve no law enforcement purpose. They do, however, set up a kind of feeding frenzy, a media circus.

COOPER: I want to show you a quote her lawyer has said. She, of course, Martha Stewart, continues to maintain her innocence. She has all along. Innocence on the insider trading charges. Her lawyer issued this statement saying, quote, "If Martha Stewart is indicted, she intends to declare here innocence and proceed to trail. She's also, as you mentioned, facing potential civil suits.

COFFEE: She's facing both an SEC action that almost certainly will be brought. And a variety of class actions. The most serious thing that could happen on the civil side is the SEC has the authority, after Sara Banes Oxley (ph), to seek to disbar her and prevent her from serving as officer and director of any publicly held company if they say she has been guilty of securities fraud or manipulation. That again is a judgment call. I'm not sure if the SEC is going to want to try to prevent the shareholders of her company from electing her to any position. Simply because they believe that she is unfit because of her misconduct. All of this is questions that have to be made yet in the future.

COOPER: Is it surprising to you that she decided not to step down at CEO today?

We just got that word today.

COFFEE: We'll still see what happens. I suspect what she'll do is take a leave of absence. She doesn't have to formally step down. I would suspect the board and her lawyers are all talking to her about taking her leave of absence that could leave her holding these titles. But she's simply not going to have time to run a company if she's preparing to defend herself in a very time consuming criminal justice setting.

COOPER: Is it as simple as a matter of time?

If she's indicted, technically she could remain a CEO.

You're saying she wouldn't because she wouldn't have the time to build a defense as well?

COFFEE: I think that's one reason. I think there will be pressure from the board of directors which has the ability to remove her from office, even though her employment contract will remain in effect. There are other reasons, including the party she deals with, the banks, the government, all of them are going to want to deal with someone else rather than the person facing indictment.

COOPER: Let's talk about how big a hit this has been for her. You heard Jeffrey Toobin saying at least $300 million. Obviously if she's indicted, it will end up costing more in legal fees, but just in reputation fees. The company is her. I mean, Martha Stewart Living Omnimedia is all about Martha Stewart. And she's a major shareholder as well.

COFFEE: Controlling shareholder.

COOPER: Yes, controlling shareholder.

What happens to the company, first, if she's indicted and second, if she's convicted?

COFFEE: Well, I think the market has already discounted the high probability that she will be indicted. So that price may have fallen by late today as far as it's going to go.

COOPER: It was down like 18 percent today. You're saying that's already built in the notion she may be indicted.

COFFEE: But if she's convicted, I think there is no possibility that she would be able to return to high executive office with this company. Think the board probably has already had to face that problem for the last six months, and develop some scenarios for how they will run the company in the future. It is difficult. How do you run a company without its principal brand?

That's really the board's problem more than hers.

COOPER: So it's both -- there are insider trading charges. There is also obstruction of justice charges.

Do you specifically know what those are?

COFFEE: Well, the government believes -- I think this is the reason the government is being fairly retributive, that Martha Stewart lied to them and caused the Merrill Lynch broker, Mr. Faneuil, to lie to them about the existence of a stop lose order. That would be a perfectly good defense. That there was a preexisting order to sell the stock if the price fell below a certain point. There does not appear to have been such a stop loss order. And it appears to have been a fabrication as way of deflecting the government investigation. If they can show her involvement in that, they can charge her about both false statements and obstruction of justice and those could involve several years in prison potentially.

COOPER: John King -- John Coffee, sorry, appreciate you joining us, Professor Coffee. It's good to talk to you.


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