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Stewart's Story Raises Questions

Aug 13, 2002 | USA Today

As the wheels of justice grind forward in the government's inside-trading case against former ImClone Systems CEO Samuel Waksal, domestic-lifestyle entrepreneur Martha Stewart appears to be getting caught up in the gears.

Stewart, who is a friend of Waksal, sold 3,928 shares of ImClone stock Dec. 27, the same day members of Waksal's family unloaded millions of dollars' worth of stock.

Even though no evidence has emerged that Stewart was aware of an impending Food and Drug Administration ( news - web sites) rejection of ImClone's potential blockbuster drug, Erbitux, prosecutors are starting to zero in on numerous inconsistencies in the explanations Stewart has offered for the fortuitous timing of her sale.

Legal experts say that, based on information that has been made public so far, Stewart is in greater danger of being charged with giving a false statement to the government than of being charged with inside trading.

''Often, the coverup is worse than the crime,'' says Robert Mintz, a former federal prosecutor who is now with McCarter & English.

''I think the obstruction and false statement charges are much stronger than the insider-trading charges,'' says Jack Coffee, an expert in securities law at Columbia University.

Last winter, as federal prosecutors and representatives of the Securities and Exchange Commission began their probe of the Waksal family's massive sale of stock the day before the FDA announcement sent ImClone shares plummeting, Stewart met with government investigators. She said she and her broker had agreed to sell if the share price dropped below $60. On Dec. 27, the share price did dip below $60. Stewart sold her shares at $58.43, netting nearly $230,000.

In June, the House Energy and Commerce Committee began looking into possible illegal trading on inside information at ImClone. It was then that inconsistencies began cropping up in Stewart's account of events:

* Anxious to bring the matter to a close, Stewart's attorneys at Arnold & Porter wrote to the committee, explaining that Stewart had a stop-loss agreement with her broker, Peter Bacanovic of Merrill Lynch.

But investigators were puzzled by several aspects of the letter. In carefully parsed legal language, Stewart's attorneys wrote that she had never received any information about the FDA's pending announcement.

Then Bacanovic's assistant at Merrill Lynch, Douglas Faneuil, recanted earlier statements, telling his superiors and the government that there was no $60 stop-loss order on Stewart's ImClone holdings. Faneuil is cooperating with the government's investigation.

* Stewart's attorneys provided the House committee with a signed affidavit from Ann Armstrong, Stewart's personal assistant, saying that Bacanovic called Dec. 27 between 10 a.m. and 11 a.m., pointing out that ImClone's stock was trending lower.

But the House committee looked at Bacanovic's phone records from that day and found no calls directly from him to Stewart. Committee members are threatening to subpoena Stewart if she doesn't provide satisfactory answers to their queries by Aug. 20.

Critics have suggested that the House Energy and Commerce Committee focus on larger issues and leave investigations of inside trading to the proper authorities. But committee spokesman Ken Johnson says the members are only trying to find out the truth. ''We will never be able to conduct meaningful investigations if people are able to come before the committee, lie and get away with it,'' he says.

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