Martha Stewart has been notified that she faces likely fraud charges for improperly obtaining and using insider information that allowed her to avoid stock losses.
The potential civil charges, to be voted on by the Securities and Exchange Commission, could cost her the job as head of her Martha Stewart Living Omnimedia as well as the standard SEC penalty of triple the losses she avoided by selling 4,000 shares of ImClone Systems stock last December.
Stewart learned of the charges in a Wells Notice, a formal letter sent last week. The SEC’s Enforcement Division plans to recommend that the full commission invoke charges, the notice said. Stewart’s lawyer, her spokeswoman, a spokesman for U.S. Attorney James Comey and officials at the the Securities and Exchange Commission, which prepared the charges, all refused to comment.
But legal experts agree that the charges represent a significant problem for Stewart, even if parallel criminal charges are not filed by the U.S. Justice Department. “It’s pretty serious,” said Laura Unger, former acting chairwoman of the SEC. “It means the [investigation] is pretty far along.”
Unger said in 90 percent of the cases the SEC commission sides with its staff in deciding to file a suit against the object of a probe. Stewart’s lawyer will have 30 days to respond to the charges. The SEC commission will then review that response along with SEC staff’s bill of particulars.
In other developments, Comey’s office in Manhattan filed papers late yesterday seeking civil forfeiture of nearly $10 million that the government charges Samuel Waksal, founder and former chief executive of ImClone Systems Inc., and his family members made by illegal trading on “inside” non-public, material information regarding stock of the Manhattan biotechnology firm.
Last week, Waksal entered a partial guilty plea to six of 13 charges involving the sell-off of ImClone stock before news broke last December that the Food and Drug Administration would reject the company’s application for its promising anti-cancer drug, Erbitux. The guilty plea included charges of bank fraud, insider trading and conspiracy to obstruct justice.
In yesterday’s papers, the government seeks civil forfeiture of those assets as well as an additional $3 million more they charge he and family members made in connection with that scheme.
At issue for Stewart are conversations between her and Samuel Waksal late last year.
ImClone’s stock price had been soaring as the fast-track testing proceeded and as Bristol-Myers bought a 20 percent share in the company. But a year ago, the FDA began questioning the quality of ImClone field tests. As the Bristol-Myers deal was finalized in late October, Waksal and his brother, Harlan, sold more than 20 percent of their holdings, the first time they had sold company stock since 1995.
FDA concern with Erbitux continued through the fall, which paralleled intense discussions among the Waksals, Stewart and their broker, Peter Bacanovic of Merrill Lynch, and his assistant, Douglas Faneuil. A series of telephone and e-mail messages released last month by the House Energy Committee provide rich detail of the conversations, particularly on Dec. 27, and indicate the concern about the pending FDA announcement that it was rejecting ImClone’s application.
Stewart was traveling to Cancun, Mexico, for a two-week vacation and didn’t get a morning message that day from Bacanovic that ImClone shares, then selling for $62.64, would “start trading downward.”
When he had heard nothing from Stewart, Bacanovic sent Faneuil an e-mail message: “Has news come out yet? Let me know.”
Faneuil replied three minutes later: “Nothing yet. I’ll let you know. No call from Martha either.”
At 1:26 p.m., Stewart’s jet stopped in San Antonio for refueling. She made three calls from her cell phone to her home answering machine, to her office and the ImClone offices.
Stewart’s lawyer, Robert Morvillo, has said she and Bacanovic agreed to sell her 4,000 shares when Bacanovic notified her that the share price had dropped below the $60 threshold that they had previously set for selling the stock. At 3:50 that afternoon, Faneuil sent her an e-mail message that the shares had been sold at $58 a share.
One day later, the FDA announced it had rejected the Erbitux application, citing sloppy record keeping by ImClone and challenging ImClone’s claim that only three persons had died within a month of the last Erbitux treatment, when in fact 21 persons had died.