Martha Stewart and the Imclone Scandal

Topics: Stock market, Martha Stewart, ImClone Systems Pages: 12 (3183 words) Published: August 29, 2012
no. 1-0083

Martha Stewart and the ImClone Scandal
On January 20, 2004, jury selection launched the trial of Martha Stewart, Chief Creative Officer and former Chief Executive Officer and Chairman of the Board of Martha Stewart Living Omnimedia (MSO). Nine charges filed by the Federal Grand Jury in New York and the SEC relate to Stewart’s personal sale of $228,000 in ImClone Systems, Inc. stock on December 27, 2001, one day before regulators rejected the biotech company’s cancer drug (Erbitux) and sent its stock tumbling. Communications records show that Stewart placed an 11-minute cellphone call to her assistant at 1:31 P.M. EST on December 27 to check her messages. The call was registered moments after Stewart’s chartered private jet touched down in San Antonio, Texas en route to a vacation in San Jose del Cabo in Mexico. At approximately 1:41 P.M., these records show Stewart being connected with someone at her brokerage firm, Merrill Lynch, in response to a message left by Stewart’s stockbroker, Peter Bacanovic, at 10:00 A.M. that day. At 1:43 P.M., Bacanovic’s assistant Douglas Faneuil executed the trade, selling Stewart’s entire holding of ImClone shares at $58 per share. The timing of the stock sale netted a $40,000 savings for Stewart, which she described on a January 2004 Larry King Live interview as “miniscule, really, about .006 percent of my net worth.” ImClone’s chief executive, Samuel Waskal, pleaded guilty to bank fraud, obstruction of justice, perjury, conspiracy, and insider trading of nearly $12 million in ImClone stock on this same day. Waksal was found guilty of all charges on June 13, 2003, and is now serving seven years in prison.1 Stewart’s stock broker Peter Bacanovic pleads innocent to insider trading charges in the same trial as Stewart.2 In addition to tipping off Stewart, Bacanovic also allegedly helped Waksal’s daughter Aliza sell $2.5 million in ImClone stock on that same day.

The Charges, the Evidence
Nine counts have been filed against Stewart, once a stock broker herself, who now faces up to thirty years in prison if convicted. Significant in its seriousness and the novelty of its application of securities law is the charge of securities fraud filed against Stewart. This charge carries with it a prison term of as many as ten years. Prosecution states that Stewart lied to investigators during their investigation, declaring herself innocent of insider trading in ImClone stock by virtue of a standing verbal stop-loss order for trading ImClone stock in the event that it dipped below $60 – an order Stewart claims she had in place with Bacanovic since November 2001. Feds charge that this statement was deliberately made to try to prop up stock in the company Stewart controls, Martha Stewart Living Omnimedia (MSO). Additional charges include obstruction of justice, which carries a maximum prison term of five years, conspiracy, and making false statements. Stewart’s lawyers argue in court papers that Stewart’s statements and claims of innocence were irrelevant because (a) there existed numerous news reports detailing the investigation, and (b) Stewart’s comments “added nothing significant to the total mix of information.” They also argue that the securities fraud charge 1 2

Waksal, 55, once dated Stewart’s daughter Alexis.

Peter Bacanovic, long-standing close friend of Stewart’s only daughter Alexis, and later Stewart herself, joined Merrill Lynch as a stock broker in 1993 after working for two years as a Marketing Director at ImClone Systems Inc. This case was prepared by Professor Susan Fournier on January 26, 2004 for use in her Strategic Brand management course at Tuck School of Business at Dartmouth College. © 2004 Trustees of Dartmouth College. All rights reserved. For permission to reprint, contact the Tuck School of Business at 603-646-3176.

Martha Stewart and the ImClone Scandal

no. 1-0083

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