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Woes Deepen For Martha Stewart

Oct 4, 2002 | CNN/Money

Prosecutors may have taken a giant step closer to building an insider trading case against home decorating maven Martha Stewart.

The assistant to Stewart's Merrill Lynch stockbroker pleaded guilty Wednesday to taking bribes from the broker, Peter Bacanovic, in exchange for keeping quiet about an alleged stock tip given to Stewart.

The plea is part of a bargain prosecutors struck with the assistant, 26-year-old Douglas Faneuil, who has agreed to testify against Stewart and Bacanovic, which would bring prosecutors a giant step closer to charging Stewart.

"She's at the top of the pyramid and the government wants to put the pyramid on top of her," former federal prosecutor and SEC attorney Seth Taube said. "First you flip Faneuil, then you flip Bacanovic, and then you go for the top of the pyramid."

Stewart has not been charged with any crime, and has repeatedly denied any wrongdoing. Her spokeswoman, Allyn Magrino, declined comment for this story Thursday.

Quits NYSE seat
Separately Thursday, Stewart voluntarily resigned her seat on the New York Stock Exchange board of directors, just four months after being appointed.

At issue is whether Stewart was acting on privileged information when Bacanovic called her on December 27 to allegedly tell her that her friend, Sam Waksal, then CEO of ImClone Systems Inc., was trying to sell millions of dollars worth of his own shares in the firm, according to prosecutors. Stewart sold about 4,000 ImClone shares that day.

If Waksal had been successful in selling his stock, prosecutors might have had a weaker case against Stewart, since Waksal's sale would have been disclosed in a Securities and Exchange Commission filing, making it public knowledge.

Also working against Stewart is the fact that she was once a professional stockbroker. That means she should have been aware of, or alert to the likelihood of, the confidentiality rule Merrill Lynch imposed on its broker-client relationships, according to Jacob Frenkel, a former Securities and Exchange Commission enforcement officer.

"You're painting a picture of more compelling evidence," said Frenkel, who now heads the white collar crime unit at the Smith, Gambrell & Russell law firm in Washington, D.C.

Cancer drug
Waksal was notified on December 26 that the Food and Drug Administration had refused to consider an application for the ImClone cancer drug Erbitux. The next day, he allegedly tipped off family members about the pending rejection and urged them to sell their shares as he himself tried to do.

The following day, December 28, the FDA publicly announced its decision. On December 31, the first day ImClone shares traded following the announcement, the stock dipped 16 percent to $46.46, according to prosecutors.

Stewart sold about 4,000 shares of ImClone en route to a holiday in Mexico, on the same day Waksal tried to sell his shares.

Stewart has maintained that she and Bacanovic had an agreement that the broker would sell her shares if the price dipped below $60 a share, which it did last December 27. But Stewart and Bacanovic have yet to provide investigators with concrete proof that such a "stop-loss" order existed.

But Faneuil's testimony is likely to weaken her defense.

"It means that the prosecutors are already having the name plate written to go over the jail cell," Frenkel said.

The government's complaint claims that Faneuil did not tell SEC attorneys and the FBI about Waksal's or Stewart's trades during two interviews, but that he later voluntarily came forward with the information.

"What it means is they have locked down a key cooperator who can, at a minimum, disprove what has been a publicly articulated key element of her defense, that being the stop-loss order," Frenkel said.

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