The insider-trading scandal

Martha Stewart
Full Name: Martha Helen Kostyra
Born: August 3, 1941
Birthplace: Nutley, New Jersey
Graduate of Barnard College
2004-2005: Spent five months in prison
Currently hosts the syndicated The Martha Stewart Show

Stewart was indicted in 2003 on criminal charges and faced several civil lawsuit related to her sale of the ImClone stock. According this case, she sold the stock on December 27, 2001, one day before the Food and Drug Administration (FDA) refused to review ImClone system’s cancer drug Erbitux and the stock price tumbled after FDA’s announcement.
The scandal touched some of the ImClone insiders which are:
-John Landes , ImClone’s counsel who dumped $2.5M on December 6
-Ronal Martell, vice president of marketing who sold $2.1M on December 11
-Four other company executives who cashed in shares between December 12 and December 21.

Developments in the scandal

Sam Waksal, the CEO of Imclone and a close friend of Stewart's, instructed his broker Peter Bacanovic who was also Stewart's broker to transferred $4.9M in ImClone stock to account Aliza Waksal, daughter of Sam and she also requested that Bacanovic sell $2.5M of her own ImClone stock and Sam also tried to sell the shares he had transferred to Aliza but was blocked by brokerage firm Merrill Lynch.

Sam was arrested on charges of insider trading, obstruction of justice, bank fraud and in addition to previously filed securities fraud and perjury charges. Although he pleaded innocent for nine months but he eventually plead guilty to insider trading and another six charges. He was later sentenced to more than seven years in prison and ordered to pay $3M fine. Prosecutors continue to investigate his family members who sold $30M of biotechnology company’s shares. His daughter and father also faced a criminal investigation and possible forfeiture of nearly $10M that government contended was obtained from illegal insider trading. In 2006, Sam agreed to pay $3M penalty and his father returned $2M in profits.

Stewart denied that she engaged in any improper trading. Stewart says she was flying in her private jet to Mexico for a vacation with two friends. However, she called her office to check her messages which included one from Bacanovic, with news that her ImClone stock had dropped below $60 per share. Stewart claimed she had previously issued a “stop-loss” order to sell the stock if it fell below $60 per share. She also called Sam but could not reach him. Stewart’s assistant left a message for Sam and wanted to ask him what happen in Imclone but Sam did not call her back.

However, investigator was discovered that she did not sell the stock below $60. Stewart’s explanation that she unloaded her stock because of prearranged sell order collapsed when Douglas Faneuil who was broker's assistant told Merrill Lynch lawyers that Bacanovic had pressured him to lie about stop-loss order. Although Faneuil initially backed Stewart’s story, he later told prosecutors that Bacanovic prompted him to advice Stewart that Waksal family members were dumping their stock and that she should consider doing the same. He acknowledged that Bacanovic never “explicitly” directed him to lie. Faneuil pled guilty to a misdemeanor and received a $2000 fine. Merrill Lynch fired Faneuil. Bacanovic was also fired for declining to cooperate with investigators looking into trading activity of ImClone’s shares anf served five months in prison.

The probe
In August 2002 , investigators requested Stewarts phone and e-mail record on the ImClone stock trade. Congressional investigators could not find any credible record . The committee did not call Stewart to testify- Stewart invoke her Fifth Amendment right to remain silent. After the scandal broke , Stewart and her spokespeople declined to commented . Thus many wonder if she been straight about wonder , why wouldn’t she tell it under oath ? SEC indicated that it was ready to file civil securities fraud charges against Stewart .

The charges
On June 4 2002, a federal grand jury indicted Stewart on charges of securities fraud, conspiracy, making false statement , and obstruction of justice. It alleged that she lied to federal investigators about the stock sale, attempted to cover up her activities. The indictment further accused Stewart of deleting a computer log of the telephone message. Meanwhile, Bacavonic was also indicted on charges of making false statements, making and use false document, perjur, and obstruction of justice. Bacavonic had altered his personal notes to create the impression of a prior agreement for stop loss limit. Additionally, SEC filed a lawsuits accusing both Bacovonic and Stewart of insider trading. At her trial, The indictments for securities fraud were dropped, but the other indictments were prosecuted. As a consequence, Stewart was sentenced to serve 5 months in prison and 5 months in home detention.

Martha Stewart is convicted and sentenced to prison.

In February 2004, the judge threw out the most serious of the charges against Stewart—securities fraud. A jury convicted Stewart on four remaining charges of making false statements and conspiracy to obstruct justice. She was sentenced to serve five months in prison and five months in home detention. She finished her prison time in March 2005.