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Martha Stewart is learning the hard way that hell hath no fury like politicians scorned -- especially during an election year. The U.S. Attorney for the Southern District of New York and the Securities & Exchange Commission already are investigating the domestic doyenne's sale of ImClone Systems stock (IMCL
). And there are no holds barred in a parallel House Energy & Commerce Committee investigation of whether Stewart, founder of Martha Stewart Living Omnimedia (MSO
), was guilty of insider trading when she dumped 3,928 ImClone shares a day before the Food & Drug Administration rejected the tiny biotech company's application for approval of its anticancer drug.
The lawmakers are really turning up the heat. On Aug. 20, Stewart's lawyer delivered 1,050 pages of phone records, e-mail, and other documents to the committee, which had threatened to subpoena the records if it didn't receive them by that date. Panel investigators will now spend a few weeks sifting the material to get a clearer picture of the events surrounding Stewart's Dec. 27 sale of ImClone shares.
They'll also be looking for evidence that the celebrated homemaker was tipped off about the FDA decision before she sold. And if investigators aren't satisfied with the information, the committee may call Stewart in to testify. "If we can't get the full story, we ought to subpoena her," says Representative James Greenwood (R-Pa.), chairman of the subcommittee on oversight and investigations. Stewart spokeswoman Allyn Magrino declined to comment for this story.
BAD TIMING. Why are lawmakers so determined to get to the bottom of the Martha mess? One reason is that they strongly suspect that Stewart lied to them when she said, through her attorney, that her sale of ImClone shares was based on a late-November agreement with her broker to sell if the stock went below $60. And if there's one thing that really gets lawmakers angry, it's being publicly dissed. "We will never be able to conduct a meaningful investigation in the future if people are allowed to come before the committee, lie, and get away with it," says committee spokesman Ken Johnson.
It's no help to Martha Stewart that she's, well, Martha Stewart, a high-profile CEO at a time when voters' anger at Corporate America is at fever pitch. And Capitol Hill pols are under pressure to calm investor jitters about the markets, especially with elections looming in November. Says Greenwood: "We have a big job to do here in the post-Enron environment to restore confidence in the marketplace so investors get back in." Stewart should be quite familiar with investors' distrust: Her company's stock closed on Aug. 21 at $8.91, down 54% from June 6, when news broke of her sale of ImClone shares.
The committee's move on Martha is part of its broader inquiry into trading in ImClone shares that originally centered on former Chief Executive Samuel Waksal. On Aug. 7, he was indicted on insider trading, bank fraud, and other charges. Prosecutors also allege that Waksal destroyed documents to impede a federal inquiry, allegations that prompted ImClone on Aug. 14 to sue Waksal to recover some of the $7 million in severance it paid him.
FAMILY TIES. The House committee isn't easing up on Waksal, either. On Aug. 19, Johnson said committee Chairman W. J. "Billy" Tauzin (R-La.) may ask the Justice Dept. to consider charging Waksal with lying to Congress and obstructing a congressional inquiry. The same day, Tauzin and Greenwood sent a letter to ImClone's current chief executive seeking written assurance that no records were destroyed and requesting a slew of documents relating to Waksal's expense accounts, offshore bank accounts, and phone logs.
Stewart is under suspicion is part because she's a good friend of Waksal's, and because her Merrill Lynch broker, Peter Bacanovic, is a former ImClone employee who's also a broker for Waksal's daughter Aliza. House investigators' interest was piqued when they saw Stewart's name on a phone log of Waksal's incoming calls. Lawmakers have been frustrated by conflicting accounts of what prompted her sale of ImClone stock and by her refusal to speak personally with committee investigators to clear up the inconsistencies.
Bacanovic is said to have told investigators that his discussion with Stewart about selling the stock if it dipped below $60 took place in mid-December, not November. According to several other reports, Bacanovic's assistant, Douglas Faneiul, has told investigators that there never was a prior agreement to sell and that Bacanovic told him to alert Stewart that Waksal was selling his shares and she should dump them, too.
TOUGH CALL. Despite the competing versions of reality, proving insider trading against Stewart may not be easy. To press a criminal case, prosecutors need concrete evidence that an ImClone insider gave her information about the impending FDA announcement. That proof may be hard to come by, says Seth Taube, who chairs the securities litigation practice at law firm McCarter & English and is a former SEC enforcement official as well as former assistant U.S. attorney.
"You don't actually know what was said between Martha Stewart, her broker, and Waksal," says Taube. "You've got the fact of a phone call, but no recording of the phone. It's all circumstantial evidence." In criminal cases, prosecutors must prove guilt beyond a reasonable doubt.
The SEC may have a better shot in a civil case, where the bar is set at a preponderance of the evidence, says Taube. Legal observers think prosecutors will squeeze Waksal and Bacanovic to implicate Stewart. Still, if it turns out that Bacanovic or Faneiul merely warned her that the Waksals were selling their shares -- rather than conveying word of the impending FDA decision -- prosecutors may be stymied.
MARTHA-GATE? In lieu of insider-trading charges, prosecutors may try to bring obstruction-of-justice or perjury charges if they can prove Stewart lied in her replies to their inquiries or to Congress. "Many a white-collar case gets prosecuted for obstruction of justice or perjury in lieu of the underlying charges because the defendant makes the mistake of lying early in the investigation," says Taube. "That's how they got [President Richard] Nixon."
Lawmakers need no reminding that the coverup is usually easier to prove than the crime. That's why they'll keep the pressure on Stewart, even as the feds close in.
Borrus is covering the Martha Stewart case from BusinessWeek's Washington bureau Edited by Douglas Harbrecht
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