Last month, criminal prosecutors were gearing up to take on their next witness and civil investigators appeared close to filing insider-trading charges against Martha Stewart. With daily developments breaking in the news media, the case against the style guru had reached a frenzied pitch some observers even expected a conclusion by Thanksgiving.
Now, the case has slipped into the background, and some sources say the investigation has slowed to a near-stop, with no sign of an imminent resolution.
Major players who once had nearly constant contact with investigators say they have not heard from the U.S. Justice Department or the Securities and Exchange Commission in more than a month.
Several attorneys involved in the case, along with sources close to Merrill Lynch, said they last spoke to investigators when Merrill Lynch broker assistant Douglas Faneuil pleaded guilty in early October to a misdemeanor charge related to the case.
Most legal experts agree that Stewart’s troubles are far from over. Investigators are trying to determine whether she had insider information when she sold nearly 4,000 shares of ImClone Systems Inc. stock last December. Samuel Waksal, the founder and former chief executive of ImClone and a friend of Stewart, pleaded guilty last month to six counts of securities and bank fraud.
Stewart, the chief executive of Manhattan-based Martha Stewart Living Omnimedia, has denied any wrongdoing.
Observers say the SEC is now investigating the claims made in Stewart’s response to the agency’s Wells Notice, which it sends to individuals notifying them of potential charges against them.
That effort is not being hampered by the turmoil at the SEC, including the recent resignation of chairman Harvey Pitt, sources close to the agency said.
However, the Justice Department and SEC work together on an “intimate” basis, with often concurrent investigations and settlement discussions, according to former federal prosecutor and former SEC enforcement lawyer Jacob Frenkel. So prosecutors may be watching the civil investigation before moving their own case forward.
“If they [the SEC] were going to drop it, that would probably drop the Justice [case], too,” said a source familiar with the situation. Even if the SEC does make a case, prosecutors might decide the evidence does not meet their burden of proof, which is heavier than in the civil case.
“I wouldn’t be surprised if the SEC brings something and DOJ doesn’t,” said Manhattan attorney Robert Heim, a former SEC investigator. If prosecutors do file charges, though, they won’t wait too long, said securities attorney Marvin Pickholz, who represents Faneuil.
“[The Department of] Justice is not going to let the tail wag the dog,” Pickholz said. “If there’s any potential for a criminal case, there’s no way they would let an SEC civil case go before a criminal case.”
While experts said a Wells submission like Stewart’s often leads to settlement talks, an SEC spokesman refused to comment on whether such talks are ongoing.
In any event, the lack of publicity has benefited Stewart’s company, whose stock price rose from $6 in early October to close at $11.81 yesterday.
“Is the public thinking about Martha Stewart or are they thinking about turkey stuffing and lots of gifts?” asked Frenkel, now with Smith, Gambrell & Russell in Washington D.C. “I would argue it would be the latter.”