Martha Stewart Indicted on Criminal Charges
By KENNETH N. GILPIN
Martha Stewart, the home-decorating mogul who to many became synonymous with impeccable taste, was indicted by a federal grand jury today on charges of securities fraud, making false statements and obstruction of justice for her handling of a personal stock trade.
Peter Bacanovic, who at the time was Ms. Stewart's stockbroker at Merrill Lynch, was charged with obstruction of justice and perjury for his role in the affair.
Ms. Stewart, 61, breezed into the federal courthouse in Lower Manhattan about noon today holding an umbrella that mostly shielded her from a legion of photographers gathered in the rain near the entrance.
Prosecutors were holding a news conference this afternoon to flesh out the details of the nine-count indictment.
The 41-page document, filed by the United States Attorney for the Southern District of New York, James B. Comey, describes events that began on Dec. 27, 2001. That was when Douglas Faneuil, an assistant to Mr. Bacanovic, informed his boss that Samuel Waksal, who at the time was chief executive of ImClone Systems, and a member of Mr. Waksal's family were seeking to sell all the ImClone shares they held at Merrill Lynch, a stake that at the time was worth more than $7.3 million.
Federal prosecutors have said that Mr. Waksal tried to sell his shares in ImClone, a hot biotechnology company, after learning that the Food and Drug Administration was about to issue a negative report on Erbitux, a cancer drug central to ImClone's commercial viability.
Mr. Faneuil pleaded guilty on Oct. 2 to lying to investigators about his role in the case.
Ms. Stewart's lawyer, Robert Morvillo, said on Tuesday that his client intended to fight the charges and plead not guilty.
Richard Strassberg, who represents Mr. Bacanovic, asserted that his client had done nothing wrong.
Ms. Stewart is a former stockbroker who was elected a director of the New York Stock Exchange just before the scandal broke. She stepped down from that post a day after Mr. Faneuil entered his guilty plea.
Ms. Stewart's friendship with Mr. Waksal is the nexus of investigation into her trading activities, and to the indictment announced today.
In the wake of Mr. Waksal's order to sell his ImClone shares, the indictment alleges, Mr. Bacanovic directed Mr. Faneuil to tell Ms. Stewart that Mr. Waksal was unloading his stock.
Ms. Stewart was traveling when Mr. Faneuil placed his call, but, according to the indictment, he left a message that said, "Peter Bacanovic thinks ImClone is going to start trading downward."
A little more than three hours later, at 1:39 p.m. on Dec. 27, 2001, Ms. Stewart spoke to Mr. Faneuil. Upon learning that Mr. Waksal was selling his ImClone shares, prosecutors said, Ms. Stewart told Mr. Faneuil to sell her holdings in the company, which amounted to just under 4,000 shares. The stock was sold within minutes, yielding Ms. Stewart gross proceeds of about $228,000.
"As a client of Merrill Lynch and as a former securities broker, Martha Stewart knew that information regarding the sale and attempted sale of the Waksal shares had been communicated to her in violation of the duties of trust and confidence owed to Merrill Lynch and its clients," the indictment states.
Mr. Waksal has pleaded guilty to charges of securities fraud stemming from his sale of ImClone stock in the waning days of 2001. He is to be sentenced next week, and faces up to seven years in prison.
The stock sales occurred just days before ImClone disclosed that its application to the F.D.A. for approval of Erbitux, its promising cancer drug, had been rejected because of deficiencies in the company's data.
Earlier this week, a new study concluded that Erbitux is effective against cancer.
Ms. Stewart created Martha Stewart Living magazine in 1990 in partnership with AOL Time Warner's publishing division. She bought out her stake in 1998. At the time, the magazine had annual sales of $180 million. Martha Stewart Living Omnimedia sold shares to the public the following year.
Ms. Stewart retained control of the company by keeping all Class B shares, which have 10 votes each, while selling Class A shares, with one vote per share, to the public.
For a time, the bull market that was raging when the company went public pushed Ms. Stewart's wealth on paper to more than $1 billion.
But in the last three years, her fortune has greatly shrunk, especially in the last year, after reports of her legal troubles surfaced. The stock has lost nearly half its value in the last 52 weeks.
Shortly after news of the indictment was made public, Martha Stewart Living Omnimedia shares were trading at $9.56, up 4 cents. In the past year, the stock has sunk as low as $5.26.
The investigations have cost the New York-based company millions of dollars in legal fees and driven away advertisers and consumers. The soft economy, which has had an adverse impact on advertising revenue throughout the publishing industry, has been an additional problem. So too have been the problems of Kmart, Martha Stewart Living Omnimedia's main merchandising partner.
Martha Stewart Living Omnimedia includes magazines, a television show, newspaper columns, Internet marketing and the Martha Stewart Everyday line of home products. The company reported sales of $295 million last year.
But the company lost money for the first time in the fourth quarter of last year, and posted another losing quarter at the end of March. Executives at the company have said they do not expect the business to improve until the investigation is resolved.
Ms. Stewart built her reputation as an authority on cooking and entertaining with the 1982 publication of "Entertaining," a best-selling coffee-table book featuring recipes and photos of her renovated farmhouse in Westport, Conn. Since then, she has been the author of more than 40 books on a wide range of topics related to the home and entertaining.
As of early this afternoon, it was not clear if Ms. Stewart would step down as chairwoman and chief executive of Martha Stewart Living Omnimedia. According to the company's most recent proxy statement, she could be forced to step down if convicted of a felony.