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CNN LIVE EVENT/SPECIAL

The Case Against Martha Stewart

Aired June 8, 2003 - 18:30   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

ANDREA KOPPEL, CNN ANCHOR: hello, I'm Andrea Koppel at the CNN Center in Atlanta. You're watching a CNN special report, "The Case Against Martha Stewart." Throughout this half-hour, we'll take an in- depth look at the domestic diva herself and her legal woes, and her multi-million-dollar empire. Joining me today here in Atlanta is branding analyst Laura Ries, from Washington, former federal prosecutor Larry Barcella, and from New York, our own CNN Financial News correspondent Susan Lisovicz. Thank you all for joining me today.
SUSAN LISOVICZ, CNN FINANCIAL NEWS CORRESPONDENT: My pleasure.

LAURA RIES, BRANDING ANALYST: Thanks.

KOPPEL: What I would like to do is begin by looking at the legal aspects of the case, and I'd like to begin with you, please, Larry Barcella. Explain to us what the charges are against Martha Stewart and why the government decided to take the attacks that they did?

LARRY BARCELLA, FMR. FEDERAL PROSECUTOR: Well, there are both civil and criminal charges. The SEC filed civil insider trading charges. Interestingly, the U.S. attorney did not file criminal insider trading charges, but what they did file was a combination of charges. They charged her initially with conspiracy to obstruct justice and make false statements and commit perjury as well as a substantive obstruction and false statement as well as a very serious securities fraud case.

KOPPEL: Why isn't this a criminal case?

BARCELLA: Well, those are criminal charges. The insider trading charges are civil not criminal at least because the U.S. attorney said he exercised prosecutorial discretion in not bringing those charges.

He exercised that he said because the legal argument that would have been required to be made to make it an insider trading charge would have been jumping over three or four legal hurdles that obviously he didn't want to. Interestingly, though, the securities fraud charges, which end up carrying a far higher penalty, frankly I think is a more aggressive use of the criminal statute than even the insider trading charges would have been.

KOPPEL: Okay, well let's set this up for folks so that they understand what's at stake here. We're going to look at what Martha Stewart is doing to help her case, namely trying to sway the public that she is not guilty of anything. If she succeeds in doing that will it help her in court?

CNN'S Allan Chernoff tackles that one.

(BEGIN VIDEOTAPE)

ALLAN CHERNOFF, CNN NATIONAL SECURITY CORRESPONDENT (voice-over): Before facing the government in a court of law, Martha Stewart is trying to win in the court of public opinion. An ad from Stewart in "USA Today" pledges, "I will fight to clear my name." Ms. Stewart promotes a new Web site, marthatalks.com, and invites supporters to send her e-mail, all an effort to gain public support.

UNIDENTIFIED MALE: Part of me kind of says, you know, why can't they just leave her alone?

UNIDENTIFIED MALE: I happen to think she's guilty.

UNIDENTIFIED MALE: If she's found guilty, she's pretty much done for.

CHERNOFF: Some defense lawyers say the PR campaign could help Stewart.

ROBERT HEIM, MEYERS & HEIM: This will have an effect on both the government and the court because the government is really looking for the public interest and to do what's right and what's just, and if there is that type of support for Martha Stewart, even if it's subconsciously, it will affect the government and the type of relief it's seeking from a court.

CHERNOFF: Stewart is accused of a cover-up, trying to prevent investigators from learning if she had inside information when she sold stock in biotech firm ImClone. Prosecutors deny they are singling Stewart out.

JAMES COMEY, U.S. ATTORNEY: And Martha Stewart may be famous but that's no reason for treating her differently from any other defendant.

CHERNOFF (on camera): Legal analysts say Stewart's publicity campaign could be a prelude to what they call a sound byte trial with prosecutors saying this is purely a matter of Martha Stewart having lied to the government and the defense saying Martha Stewart is being made to be a scapegoat. A pretrial hearing is scheduled for June 19th.

Allan Chernoff, CNN, New York.

(END VIDEOTAPE)

KOPPEL: OK, let's get at the charges themselves and I'd like to go back to you if I could Larry Barcella and ask you why it is the government decided to go for the security charge and not for insider trading, which I think really did surprise folks, and I'm talking about the criminal charges here. BARCELLA: Well, if I were a cynic and I guess to some extent I am, I would say that it's probably because the securities fraud charges under the federal sentencing guidelines carry a much higher potential penalty than the insider trading charges do.

And, it's interesting, especially in light of the piece you just had that the basis for the securities fraud charges are, in fact, her expressions of innocence. Back in June when she both through her lawyers and then herself issued statements when the information about the information first leaked, she made protestations of innocence.

It's those very protestations that the government is alleging constitute the securities fraud because she's the chairman and CEO of a public company. Therefore, those statements were designed in essence to mislead the street because, as the government alleges, they were false. So, that's a very unique theory in that what you're saying is someone protesting their innocence is, in fact, a basis for a securities fraud charge.

KOPPEL: Susan Lisovicz, she is not the CEO of her company anymore. She stepped down on Friday but she is the chief creative officer and she still is a major shareholder, so is this just wallpapering things over?

LISOVICZ: In some ways, Andrea, it is cosmetic because she is more than, let's face it, just the chief creative officer. She's the founder. She's the namesake. She is the product.

On top of that, she is not only a major shareholder. She is the single by far largest shareholder controlling something like 60 percent of MSO, Martha Stewart Living OmniMedia shares. So, in essence she still has control of the company. Anything that shareholders have to vote for, Martha Stewart can sway just by simply voting her shares.

KOPPEL: Laura Ries, I know that you're not an attorney but I want to tap into your expertise as a branding analyst and as somebody I think who we're used to seeing out in public, that is Martha Stewart has never been shy from cameras but we didn't hear from her until just recently. How do you think that hurt her brand?

RIES: That was the biggest mistake she made. I mean she was such a good personal persona, always being on TV, on "Letterman" making lots of appearances, "Good Morning America" and people really loved hearing from her.

When this scandal hit she suddenly went in hiding and she didn't do those appearances. She hid behind her lawyers and that immediately people questioned, like wait a minute did she do something wrong? Why would you be hiding behind lawyers unless you did, in fact, have something to hide?

And that's very damaging to the brand. The fact, you know, people are making a big deal that she finally came out with this Web site and made this, you know, letter in "USA Today" but hey wait a minute it's been a year since this thing broke. She should have gotten out immediately, come right to the people and given a story and unfortunately the story she's come up with sounds a bit cooked up and I don't think most people are going to believe it.

Whether or not she wins in the court she's really going to win and the brand is going to win in the court of public opinion and whether or not people buy the story or whether or not she comes forward and gives the real truth.

KOPPEL: OK, so if you're her attorney, Mr. Barcella, how do you defend Martha Stewart?

BARCELLA: Well, first of all, from reading through the indictment, it's a very long and relatively detailed indictment but it is clear that a significant portion of the indictment depends on the assistant to her broker, a fellow named Faneuil who pleaded guilty to a minor charge some months ago and he has been cooperating with the U.S. Attorney's Office, the FBI, and the SEC.

It is her word and that of her broker, Bacanovic, versus the broker's assistant, and if you in essence first of all take away that single witness. If that witness has problems with credibility for instance, then much of the government's case, which is built on that, falls apart.

Also, the question is whether or not the government's primary witness knew about some of the conversations that Martha and her broker say that they had between each other when nobody else was around. Who is going to say that that didn't happen?

A lot of the facts that are laid out in the indictment can be taken either way depending upon whether or not you decide to believe the assistant or decide to believe Martha Stewart and Peter Bacanovic.

KOPPEL: You're referring to the primary witness being Doug Faneuil?

BARCELLA: Correct.

KOPPEL: Correct, OK. Well, listen if you want to find out more about Martha Stewart's background tune into "PEOPLE IN THE NEWS" at 7:00 p.m. Eastern.

We are just getting started here folks. Coming up, loving to hate Martha while some people felt bad for the queen of crafts, others thought she got what she deserved. How will the bad PR affect her multimillion dollar empire? We'll tackle that issue straight ahead.

And, what about the Martha faithful, will her legal issues cause her to lose fans? We'll find out when this CNN special, "THE CASE AGAINST MARTHA STEWART" returns after a short break.

(COMMERCIAL BREAK)

KOPPEL: Martha Stewart is someone people either love or love to hate. That is what it's all about.

CNN's Charles Feldman takes a closer look.

(BEGIN VIDEOTAPE)

CHARLES FELDMAN, CNN CORRESPONDENT (voice-over): On the subject of Martha Stewart, the world seems divided. Hearing her signature slogan, "It's a good thing," either makes you want to embrace her or slap her silly.

Those who look up to her see a powerful female role model who created her famous persona of perfection, but others see a darker side, a mean spirited side that conjures up images of Leona Helmsley, another high powered woman the media crowned the queen of mean.

Some suggest that if Martha Stewart was a man her ambitions would be praised and rewarded and sexism surely plays some role in the way some respond to Stewart. But as this "Tonight Show" sketch shows, some people love to hate Martha because she's an easy target.

(VIDEO CLIP OF "THE TONIGHT SHOW")

FELDMAN: Questions are already being raised about whether the Feds are being too hard on Stewart. By the scales of modern day Wall Street scandals, hers doesn't exactly rank among the worst.

Some suggest that the Feds want to make an example of the priestess of home decorating while others argue she's already paid a steep price for a relatively minor transgression.

While the alleged insider inspired sale of her ImClone stock netted her about a quarter of a million dollars, since the scandal erupted shareholders of Martha Stewart's company, including her, have lost about $450 million in stock value. Now, that's hardly a good thing.

Charles Feldman, CNN, Los Angeles.

(END VIDEOTAPE)

KOPPEL: There's much on the line for Martha Stewart. Is her legal battle a recipe for disaster?

Let's continue our discussion on the case against the queen of domesticity. Again our roundtable guests, in New York CNN Financial News Correspondent Susan Lisovicz, from Washington former federal prosecutor Larry Barcella, and joining us here in Atlanta branding analyst Laura Ries.

Let me ask you this, Mr. Barcella, if Martha Stewart were not Martha Stewart, would this be going to trial?

BARCELLA: If Martha Stewart weren't Martha Stewart, this thing would not have gotten blown to the proportions that it did. The government would still in all likelihood be spending some amount of resources looking into the allegations but you wouldn't see the scope of the charges that you see here.

You wouldn't see the amount of resources that have been visited on this, visited on it and you certainly wouldn't have seen the securities fraud count that you have in there which if she's convicted on, and that's a big if, but if she's convicted on carry 15 to 20 years in jail.

KOPPEL: Ms. Ries, if you were on Martha Stewart's payroll right now, how would you try to save the brand Martha Stewart and can the brand remain Martha Stewart if her name isn't on it?

RIES: Right. Her name has to be on it. It is Martha Stewart. She's the brand. She's the company. Even if she's not involved in day-to-day operations, it is still the Martha Stewart company and it will be for a while.

What I would do, well first of all I would have liked to have had this gotten over with a lot sooner. I'm surprised that she couldn't have taken care of it, making some sort of deal way early on and quieted it down.

I think it's due to the fact that she is such a perfectionist and had this feeling that she could just somehow get away with it and get the story out there and convince people that she continues to be perfect and everybody is not perfect.

She needs to come forward and give her side of the story. I think people, people will really forgive you if you make a mistake if you come out and say you're sorry. The biggest problem here is that it's a story about lying and cover-up and that's something that the American public really gets very upset about it and turned off about and that's what's really going to be detrimental to the brand. I mean look that's what got Clinton in big trouble, the lying.

KOPPEL: Well the fact is Martha Stewart and her former broker deny the charges but gosh you know when I go shopping and I go to buy my sheets and I go to buy my cookware, I'm not thinking is this person guilty of lying, so why is that going to affect sales of her product?

RIES: Well, I don't think it's going to have a significant impact on the sheets and the towels and the paint. I think those products are pretty well protected. But remember, that's a very small part of Martha Stewart's company. It's like 17 percent.

Sixty-two percent of the revenues are coming from the magazine and I think the magazine is very susceptible to the public perception of her brand. It's very linked with her having her calendar in there and her yoga appointments and all sorts of stuff.

I suppose now it might have her court dates but it's very linked to her and her lifestyle and her tips, and I think as well advertisers might get very skittish the longer and longer this thing continues on and she gets, you know, dragged through the mud.

They might easily pull out and that could be very damaging to the company and the revenues. And when that status of the magazine maybe declines or no longer is in publication that could have very long term detrimental effects.

LISOVICZ: Andrea, if I can jump in on that, every aspect of Martha Stewart's business has suffered, as Laura alluded to. Advertisers are skittish. DaimlerChrysler, one of the biggest advertisers pulled out a few months ago.

There's a sense not only -- there's never been a question of whether her products are good. She succeeded mightily on that level. There is a question as to whether the chief executive, the chief creative officer, is distracted and that is unquestionable. She certainly is and so you're seeing that.

Another aspect, though that should also be said is that you know Martha Stewart basically re-invigorated the domestic arts category. She was alone in bringing it up to date. There were these sort of (unintelligible) magazines like "Good Housekeeping." She brought along the concept of beautiful layout, really fine paper, and she was alone in that.

She was a pioneer but guess what? It's exploded. "Oprah" tremendously successful magazine has borrowed that layout. So has "Real Simple." Both of them look very similar to Martha Stewart and they are successful magazines.

And, in terms of her cooking show, well guess what? There's a whole cooking channel with personalities like Emeril and Iron Chef, so it's not only her product under fire or her name under fire, it's the fact that there's pretty good competition out there.

KOPPEL: Susan, what really struck me on Friday just from a Wall Street perspective was that her stock went up on Friday after the indictments were issued, why?

LISOVICZ: Well, it's one of the mysteries as to how stock prices trade but let me put it this way, investors have been taking out their anger on MSLO shares for more than a year now. The stock has lost about half its value, so they've spoken.

The day before the indictments came down last week when the company said that an indictment was imminent the share price lost 15 percent. It stabilized since then. We haven't seen anything close to a rally. Why is that?

Because the news is out there, that's maybe one reason and that the company is taking contingency plans and you kind of know, you do know what Martha Stewart is doing now. She's fighting it and she's saying that she'll be acquitted and she's taking it to the public which she had not done.

KOPPEL: OK, well don't go anywhere because we'll be coming right back with more from Susan Lisovicz and other guests.

But first, Martha Stewart's fans boosted her to fame and fortune but are they jumping ship due to her legal dilemmas?

Coming up a look at Martha's faithful and whether they are standing by their woman.

(COMMERCIAL BREAK)

KOPPEL: The millions of customers made the goddess of good taste a very wealthy woman. The question now is will they defect or see Martha Stewart through these troubled times?

CNN's Ceci Rodgers gauges customer loyalty.

(BEGIN VIDEOTAPE)

UNIDENTIFIED FEMALE: I think she's brought good taste to the masses and made it accessible and for that I think she should be sainted.

UNIDENTIFIED FEMALE: I'd rather stick with her until I find out. I feel that she has been somewhat singled out.

CECI RODGERS, CNN CORRESPONDENT (voice-over): Even as the icon of good taste made her color coordinated perp walk, fans were pouring out their support on a save Martha Web site and calling her indictment a tempest in a Cuisinart.

Outside K-Mart where Martha Stewart's sheets, towels, and other household goods are sold, opinions were more varied.

UNIDENTIFIED FEMALE: I think she's done a lot for K-Mart and for the K-Mart image and I was just talking to my mom yesterday about it and we both said well, we really like her things so I'm going to keep on buying them.

UNIDENTIFIED FEMALE: I don't believe that the quality of the name behind it is going to be a name that I want to be associated with in my household, you know. She's crooked.

RODGERS: A marketing firm that measures consumer loyalty said Martha Stewart's index fell following her indictment from a high of 120 fourteen months ago to 79 the morning after she was indicted. Still, most of the Martha faithful appear to be differentiating between Martha the person and Martha the merchandiser.

UNIDENTIFIED MALE: I love her towels because they're soft, so I don't think I'll stop using them because she's in trouble or whatever.

UNIDENTIFIED FEMALE: I have kids and so I try and look at her kid's magazine to try to make (unintelligible). Come on, you know, I live in the real world, you know.

RODGERS: So, it appears the future of Martha's business will depend on her customers and fans separating the real world indictments from the products they love.

(on camera): Martha now waits for her day in court. The question is will her fans still support the domestic diva even if she has to exchange her apron for a government issued tangerine jumpsuit?

Ceci Rodgers, CNN Financial News, Chicago.

(END VIDEOTAPE)

KOPPEL: Now, we have time for some quick final thoughts from our roundtable guests.

Let's start with CNN Financial News Correspondent Susan Lisovicz.

LISOVICZ: Andrea, I think one of the reasons why this case is so fascinating is because of all the irony, you know, the princess of perfection who's being sullied for these less than pleasant charges.

But let me as a financial correspondent focus on one of the ironies. She should have never sold that ImClone stock because it's been rallying over the last few months. The whole reason Sam Waksal dumped it was because of concerns about a promising cancer drug Erbitux. Well, guess what, the ultimate irony is that the FDA may approve that drug. She should have held on to the shares.

KOPPEL: Mr. Barcella, what are your thoughts?

BARCELLA: Well, the other irony is, is the most serious charge, the securities fraud charge, is based on the fact that she proclaimed her innocence. The government leaked the fact that she was under investigation. She responded to those leaks by saying that she was innocent and they used those self same protestations as the basis for the securities fraud charge. That's ironic as well.

KOPPEL: Ms. Ries, what about the brand?

RIES: Well, in terms of the brand the biggest thing are people going to be upset that she lied? And it's that public perception that matters most in branding and I think she's got to make her case to the public.

She's got to talk to them and hopefully she can salvage the company and get back to the business. She needs to be in there baking cookies and making cakes and getting out of court. That's where people love her and that's what's going to resurrect the company.

KOPPEL: You sound like you could be a defense attorney, Laura Ries, branding analyst, thank you so much. Larry Barcella, former federal prosecutor, and of course Susan Lisovicz in New York, thank you all very much.

BARCELLA: Thank you.

RIES: Thanks.

KOPPEL: Well, that wraps up our special report.

Coming up after a short break, we'll check the headlines at this hour.

Then, stayed tuned for more on Martha in "PEOPLE IN THE NEWS" at 8:00 p.m. Eastern. Catch the premier of "CNN PRESENTS: THE SUMMER OF FIRE" a look at the summer of 2002 and one of the most intense fire seasons in 50 years.

And then at 9:00 p.m., "LARRY KING WEEKEND," John Eisenhower discusses his father's presidency and his legacy.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com




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