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SEC Likely To Charge Stewart

Oct 22, 2002 | CBSMARKETWATCH.COM The Securities and Exchange Commission's decision to notify Martha Stewart that it is considering civil charges against her makes it almost a certainty that it will file those charges, and in no way acts as an obstacle to regulators following up with a criminal case, legal experts said Tuesday.

Stewart received a "Wells" notice from the SEC last month, which gives individuals under investigation a chance to respond to allegations before charges are filed. But while Stewart is allowed to make her case against regulatory action, the SEC rarely changes its mind once it files its intentions, experts said.

"There is statutory right for Stewart to be notified and argue her case, but the odds that she will be able to convince the SEC not to proceed are not statistically high," said Robert Mintz, an expert on white-collar crime and former U.S. prosecutor.

The Wells notice means that the SEC has determined that there is a basis to go forward on civil grounds against Stewart, said Stan Twardy, a former U.S. attorney for the state of Connecticut and now criminal defense lawyer with Day Berry & Howard.

The New York Times reported Tuesday that Stewart's attorneys have already responded to the Well notice. SEC staff must study her answer and recommend to the commission whether to go forward with charges. There is no set deadline requiring the Commission to bring action within a certain time.

If the SEC chooses to proceed, then federal prosecutors will likely follow with criminal charges against Stewart, Mintz said.

"In all likelihood, the civil suit will now commence and all eyes will turn to criminal prosecutors to await a determination whether a parallel criminal charges will also be brought," Mintz said.

The question now is whether Stewart's actions are actually criminal, Twardy said.

The government's strongest case against Stewart is for obstruction of justice, Mintz said. It appears that Stewart lied about the stop/loss order and instructed others to lie.

"The cover up has overtaken the crime itself," Mintz said.

A spokesman for the U.S. Attorneys office for the Southern district of Manhattan declined comment.

Settlement?

But Seth Farber, a partner with law firm Dewey Ballantine and a former federal prosecutor, said the Wells notice gives no indication that government attorneys will file criminal charges against Stewart.

Many times the SEC will use the Wells notice to initiate a dialogue with individuals that sometimes leads to a settlement, Farber said.

"I don't think the Wells notice makes a bit of difference," he said. "I don't think you can read anything into what prosecutors will do."

Government attorneys have a higher burden of proof than the SEC, Farber said, who also pointed to Faneuil's guilty plea with the government, which actually came after Stewart was reportedly served with the Wells notice.

"Stewart is under a lot of pressure but we haven't seen the last chapter in this book yet," Farber said.

If the SEC does decide to file civil charges against Stewart, the homemaking guru could choose to settle and enter a consent order where she does not admit any guilt, said Day Berry's Twardy.

In such a deal, Stewart would have to promise not to violate securities laws, experts said. Arthur Andersen LLP signed a similar agreement last year for its audit work of Waste Management.

Andersen paid $7 million and agreed to an injunction with the SEC that forbade it from future wrongdoing. In June, Andersen was convicted of obstructing justice for its handling of Enron Corp. records. The six-week trial and conviction destroyed the once powerful accounting firm, which is no longer performing auditing work and has less than 1,000 employees.

Similarly, Stewart would have to pay back the money she made off the sale of ImClone shares last year, Twardy said.

And if Stewart does sign a consent order, "it will make the public wonder why she paid," he said.

Martha's role at MSO

The Wells notice also revived speculation that Stewart may be forced to resign from the head of Martha Stewart Living Omnimedia. The scandal has already forced home-making guru to resign from the board of the New York Stock Exchange

But even if f the SEC does choose to go forward and charge Stewart, the domesticity diva can retain her position at the helm of the company.

An MSO spokeswoman declined comment Tuesday, saying only: "Martha Stewart is chairman and CEO of Martha Stewart Living Omnimedia and as such she continues to fulfill her business and creative responsibilities."

Shares of the Martha Stewart Living Omnimedia surged $1, or 13.33 percent, to $8.50 Tuesday.

The case

Stewart sold 4,000 shares of ImClone Systems stock one day before the Food and Drug Administration rejected the biotech's cancer drug application, Erbitux. The news caused ImClone shares to plunge.

Stewart has repeatedly denied any wrongdoing for selling shares of ImClone shares late last year.

Stewart, who has not been charged with any crime, has maintained that she a stop/loss order with her Merrill Lynch broker, Peter Bacanovic, to sell her ImClone shares if they fell below $60.

Bacanovic's assistant, Douglas Faneuil, initially backed the story but then later recanted.

Earlier this month, Faneuil agreed to cooperate with prosecutors and pleaded guilty to a misdemeanor charge for accepting money or other valuables for not informing investigators regarding inside information allegedly given to Stewart.

Last week, ImClone founder Sam Waksal pleaded guilty to several insider-trading charges related to his role in the affair. Stewart is a close friend of Waksal.

Stewart allegedly was informed that the Waksal and his family were selling their ImClone shares, which caused the domesticity diva to dump her stock.

A spokeswoman for Martha Stewart declined comment. Attorneys for Stewart and Bacanovic could not be reached for comment. The SEC declined comment.

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