Pleads not guilty to charges

By Erin McClam, Associated Press, 6/4/2003

RELATED INFORMATION Some key dates in the scandal surrounding Martha Stewart's sale of her stock in ImClone Systems Inc., a biotechnology company founded by her friend Samuel Waksal: Dec. 27, 2001: Stewart sells almost 4,000 shares of biotech drug maker ImClone. Dec. 28: Food and Drug Administration announces it will not review ImClone's application for Erbitux, which company touts as promising cancer drug. Disappointing news sends ImClone's shares plummeting. June 6, 2002: House Energy and Commerce Committee, which is investigating ImClone trading, says it is probing Stewart's stock sale. June 12: Waksal is arrested, accused of advising family members to sell their shares before the FDA announcement and of trying to dump his own shares. Stewart denies receiving "improper information" before selling shares. July 24: Martha Stewart Living Omnimedia Inc. halves its third-quarter earnings forecast, acknowledging Stewart's legal problems are taking a toll on business. Sept. 10: The House committee asks the Justice Department to begin a criminal investigation into whether Stewart knowingly lied to lawmakers. Oct. 2: An assistant to Stewart's stockbroker pleads guilty to taking a payoff to keep quiet about an alleged insider stock trade and agrees to testify against Stewart. Oct. 3: Stewart resigns from the board of directors of the New York Stock Exchange Oct. 15: Waksal pleads guilty to six counts including securities fraud, bank fraud conspiracy to obstruct justice, perjury. Admits to tipping his daughter to dump ImClone stock, but he does not implicate Stewart. Oct. 21: News reports say Securities and Exchange Commission will file a civil complaint against Stewart. Oct. 31: Stewart's media company reports 42 percent drop in third-quarter profits. March 4, 2003: Company reports first-ever quarterly loss amid fallout from investigation. June 3: Company says federal prosecutors are seeking a criminal indictment against Stewart "in the near future."

NEW YORK Martha Stewart, the prim perfectionist who became a cultural paragon of taste, style and "good things," was indicted Wednesday in a stock-trading scandal. Hours later, she stepped down as CEO of her media empire.

A statement from Martha Stewart Living Omnimedia Inc. said Stewart would remain on the company's board.

The resignation came after federal prosecutors in Manhattan accused Stewart of selling stock in 2001 based on illegal privileged information then covering her tracks and lying to investigators and shareholders.

Stewart pleaded innocent to all charges. Stone-faced and speaking deliberately, she told a federal judge: "Not guilty."

She did not address the indictment in a brief statement that announced her resignation.

"I love this company, its people and everything it stands for, and I am stepping aside as chairman and CEO because it is the right thing to do," Stewart said.

The indictment was the apex of an investigation into Stewart's decision to sell nearly 4,000 shares of ImClone Systems Inc. on Dec. 27, 2001 the day before a troubling government report on ImClone sent its stock price tumbling.

Stewart has denied she was tipped off. But the resulting scandal clouded the media empire of self-branded home products, TV appearances and magazines that made her a multimillionaire.

The 41-page indictment charges Stewart with securities fraud, conspiracy, obstruction of justice and making false statements charges that carry up to 30 years in prison and $2 million in fines.

Securities regulators on Wednesday filed a lawsuit leveling similar charges and sought to ban Stewart from ever leading a public company and to limit her activity as officer of a public company.

Prosecutors and the Securities and Exchange Commission also targeted Peter Bacanovic, Stewart's former stockbroker at Merrill Lynch, who the government says fed insider information to Stewart through an assistant.

Bacanovic was charged with five counts, including perjury and obstruction of justice in the criminal indictment. The charges against him carry up to 25 years in prison and up to $1.25 million in fines.

Under federal guidelines, Stewart and Bacanovic would likely face far less than the maximum prison sentences if they were convicted on all counts.

The SEC suit asks the court to force Stewart and Bacanovic to pay more than $45,000 the amount the government claims Stewart saved by dumping ImClone stock before the bad news hit Wall Street.

Her attorney said Stewart was being unfairly prosecuted because of her extraordinarily high profile, perhaps, or to divert attention from authorities' failure to quickly prosecute white-collar criminals from Enron and WorldCom.

Or, attorney Robert Morvillo asked: "Is it because she is a woman who has successfully competed in a man's business world by virtue of her talent, hard work and demanding standards?"

At a press conference, Manhattan U.S. Attorney James Comey told reporters the case was about Stewart's lies to the SEC, the FBI and to her own investors.

"Martha Stewart is being prosecuted not because of who she is but because of what she did," he said.

Stewart arrived at the Manhattan courthouse with her lawyers at midday, stepping out of a car and shielding herself from light rain with an off-white umbrella. She swept past clambering reporters without saying a word.

At a hearing before U.S. District Judge Miriam Goldman Cedarbaum, Stewart was released without bail until her next court appearance. The judge ordered her to notify authorities three days ahead if she plans to travel abroad.

Stewart is due back in court June 19.

Bacanovic also pleaded innocent to all charges and was set free without bail until his next court date.

The criminal indictment says Stewart unloaded her shares of ImClone based on illegal inside knowledge that the family of ImClone founder Samuel Waksal was planning to sell its shares ahead of the government news.

Stewart's sale of the stock came one day before the Food and Drug Administration announced it would not review ImClone's application for approval of Erbitux, which the company had touted as a promising cancer drug. ImClone's stock subsequently plunged.

The indictment does not claim Stewart had specific knowledge of the FDA decision only that the Waksals were planning to sell. She was not charged with insider trading, a more difficult charge to prove than fraud.

Still, according to the government, Bacanovic's tip on the Waksals was funneled through Douglas Faneuil, an assistant who pleaded guilty last year to a misdemeanor charge of taking gifts to keep quiet about Stewart's stock sale.

Faneuil on Wednesday agreed to an SEC order permanently barring him from working for any brokerage firm or investment advisory business.

Stewart went so far as to delete a computer log of a phone message in which Bacanovic told her he thought ImClone was "going to start trading downward," according to the indictment.

The government also said Bacanovic altered his personal notes about Stewart's portfolio after he learned the government was investigating her, trying to create the impression he and Stewart had a prior agreement to sell ImClone if it fell below $60 a share.

The securities-fraud charge claims Stewart deliberately misled her own shareholders last summer, playing down the ImClone investigation in a clear attempt to keep her company's stock price from falling.

The charges spell not just serious legal headaches for Stewart but a crisis for her company, which has struggled with a publicity nightmare since she became embroiled in the stock scandal a year ago.

A fascinated public has watched Stewart try to keep her highly profitable public persona intact, doling out advice on decorating or preparing a tasty dinner on television, while news headlines have focused on the criminal cases of close friends or her legal troubles.

The scandals had affected earnings at the company, which have been slumping. Revenue in the first quarter of the year dropped 15 percent from the same period a year earlier.

Stewart told The New Yorker magazine in January she has lost about $400 million because of the company's declining value, legal fees and lost business opportunities. And shares of the company have fallen from $19 to around $10 on Wednesday.

Stewart is a friend of ImClone founder Waksal, who is to be sentenced next week in Manhattan federal court after pleading guilty to six counts in the insider-trading scandal.

Waksal could get six to seven years in prison, plus fines. His defense team is seeking a lighter sentence, and prosecutors are seeking a heavier one claiming Waksal cheated ImClone shareholders as far back as 1986.

Waksal has admitted he tipped off his daughter Aliza to sell ImClone stock before it plummeted on the bad news. But he has not implicated Stewart, and his plea was not part of an agreement to cooperate with prosecutors.

Martha Stewart Living Omnimedia reported sales of $295 million and a staff of 580 last year. It includes publishing, television, merchandising, Internet commerce and direct mail.

The company produces Martha Stewart Living and Martha Stewart Weddings magazines, a newspaper column, a television show and the popular Martha Stewart Everyday line of home products, like towels and sheets.

The company named Sharon Patrick, its president and chief operating officer, as its new CEO. Jeffrey Ubben, founder of an investment group that owns 22 percent of the company's stock, was named chairman.

Besides her spot on the board, Stewart plans to stay on as the company's chief creative officer, the statement said.