Thursday, June 5, 2003

Stewart indicted, resigns as CEO

By Erin McClam
The Associated Press

NEW YORK - Martha Stewart, the prim perfectionist who became a cultural paragon of taste, style and "good things," was indicted Wednesday in a stock-trading scandal that threatens her media empire and could land her in prison.

Hours later, she stepped down as CEO of her media empire.

A statement from Martha Stewart Living Omnimedia Inc. said Stewart would remain on the board, but not as chairman.

The resignation came after federal prosecutors in Manhattan accused Stewart of selling stock in December 2001 based on illegal privileged information - then covering her tracks and lying to investigators and shareholders.

Stone-faced and speaking deliberately, she told a federal judge: "Not guilty."

The indictment resulted from an investigation into Stewart's decision to sell almost 4,000 shares of biotech drug maker ImClone Systems Inc. Dec. 27, 2001 - the day before an unfavorable government report on ImClone sent its stock price tumbling.

• Martha Stewart, 61, guru of domestic style and gracious living. Chairman and CEO of Martha Stewart Living Omnimedia. Sold 4,000 shares of ImClone Systems Inc. Dec. 27, 2001 - the day before bad news on an ImClone drug from government regulators sent the stock price tumbling. Indicted Wednesday on securities fraud and obstruction of justice charges.

• Peter Bacanovic, former broker at Merrill Lynch. Has reportedly said he and Stewart decided in early December 2001 to sell ImClone shares if the stock price fell below $60 a share. Indicted Wednesday on perjury, obstruction of justice charges.

• Samuel Waksal, founder of ImClone and longtime friend of Stewart. Has pleaded guilty to six criminal counts in the ImClone scandal, and admitted tipping off his daughter Aliza to sell ImClone stock before it plummeted on the bad news. Has also admitted dodging more than $1 million on sales tax on nine paintings he bought from an art gallery. Scheduled to be sentenced Tuesday.

• Douglas Faneuil, former assistant to Bacanovic at Merrill Lynch. Has told investigators Bacanovic ordered him to tell Stewart that Waksal was selling his shares. Pleaded guilty last year to a misdemeanor charge of accepting gifts to keep quiet about Stewart's stock sale. Has agreed to testify against Stewart and others. Has not been sentenced.

Stewart has denied she was tipped off. But the resulting scandal has hung over her media empire of home products, TV appearances and magazines on cooking and decorating.

The 41-page indictment charges Stewart with securities fraud, conspiracy, obstruction of justice and making false statements - charges that carry up to 30 years in prison and $2 million in fines.

The Securities and Exchange Commission Wednesday filed a lawsuit leveling similar charges and seeking to ban Stewart from being a director of a public company and limit her activities as an officer of a public company.

The charges spell not just serious legal headaches for Stewart, but a crisis for her company, which has struggled since she first became embroiled in the stock scandal a year ago.

Prosecutors and securities regulators also charged Peter Bacanovic, Stewart's stockbroker, who the government says fed insider information to Stewart through an assistant.

Bacanovic was charged with five counts, including perjury and obstruction of justice in the criminal indictment. The charges carry up to 25 years in prison and up to $1.25 million in fines. He also pleaded not guilty to all charges.

Under federal guidelines, Stewart and Bacanovic both would likely face far less than the maximum prison sentences if they were convicted on all counts.

The SEC suit asks the court to force Stewart and Bacanovic to pay more than $45,000 - the amount the government claims Stewart saved by dumping ImClone stock.

The criminal indictment says Stewart unloaded her shares of ImClone based on illegal inside knowledge that the family of ImClone founder Samuel Waksal was planning to sell its shares ahead of the government news.

Stewart's sale of the stock came one day before the Food and Drug Administration announced it would not review ImClone's application for approval of Erbitux, which the company had touted as a promising cancer drug. ImClone's stock subsequently plunged.

The indictment does not claim Stewart had specific knowledge of the FDA decision - only that she knew the Waksals were planning to sell. She was not charged with insider trading, a more difficult charge to prove than fraud.

The securities-fraud charge claims Stewart deliberately misled shareholders in her company, Martha Stewart Living Omnimedia, last summer, playing down the ImClone investigation to keep her company's stock price from falling.

Stewart is a friend of ImClone founder Waksal, who is to be sentenced next week in Manhattan federal court after pleading guilty to six counts in the insider-trading scandal.

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