Bad times for Martha Stewart

MMR, Nov 4, 2002

NEW YORK -- The Securities and Exchange Commission's enforcement arm intends to recommend filing civil charges of securities fraud against Martha Stewart, according to sources familiar with the investigation. The Justice Department is already investigating the matter.

Neither the SEC nor representatives of Stewart's company, Martha Stewart Living Omnimedia Inc., would comment.

The investigation of Stewart stems from her sale of stock in ImClone Systems Inc. in late December 2001. The biotech firm was founded by Samuel Waksal, a friend of Stewart's. Waksal recently pleaded guilty to insider trading without implicating the home fashion authority.

Stewart sold almost 4,000 shares of ImClone stock shortly before the company announced that its cancer drug, Erbitux, would not be approved by the Food and Drug Administration. She maintained to authorities that the sale was triggered by an established arrangement with her broker to sell the stock when the per-share price fell below $60.

However, after first confirming Stewart's account, the trading assistant at Merrill Lynch & Co. who handled the transaction changed his story, telling investigators that Stewart sold the shares after being told that Waksal and his daughter were disposing of their shares.

The Wall Street Journal characterized the filing of actual insider trading charges as "an aggressive reading" of securities laws. Insider trading cases usually stem from the use of information on transactions that have impact on markets, such as mergers or acquisitions.

In addition to allegations of insider trading, Stewart may face charges that her description of the arrangement for sale of the ImClone stock was false.

If convicted of the civil charges, Stewart would face a fine and might also have to step down as chairman and chief executive officer of Martha Stewart Living Omnimedia. Experts suggest that the SEC would likely try to bar her from serving as a corporate officer or director again. In September the company denied rumors that it was searching for a new chief executive officer.

The ongoing controversy has had a devastating effect on the value of Stewart's company, whose share price has fallen more than 60% since the scandal broke in June.