The latest on Martha from The Wall Street Journal...
Investigators Search for Obstruction, False Statements;
Merrill Assistant Reverses His Account of Transaction
By CHARLES GASPARINO and JERRY MARKON
Staff Reporters of THE WALL STREET JOURNAL
Updated June 26, 2002
Federal prosecutors have widened their probe of home-decorating maven Martha Stewart beyond insider trading to include possible obstruction of justice and making false statements, a person with knowledge of the matter say. At issue is whether Ms. Stewart misled prosecutors in explaining why she sold shares of ImClone Systems Inc. late last year immediately before damaging news on the company was made public.
Adding pressure on Ms. Stewart, the assistant to her Merrill Lynch & Co. stockbroker has reversed his initial account of the transaction, people familiar with the matter said. The sales assistant, Douglas Faneuil, conceded that he initially misled the brokerage firm's lawyers and the Securities and Exchange Commission when he backed up an account by Ms. Stewart and her Merrill broker, Peter Bacanovic, as to the reason behind Ms. Stewart's stock sale, these people said.
THE STEWART EFFECT
• Stewart's Woes Have Impact on Competitors, Licensees
Like ripples on the surface of her perfect consommé, the effects of Martha Stewart's currently imperfect situation are spreading within and beyond her empire, making winners of some individuals and businesses and losers of others.
Federal prosecutors, market regulators and Congress are examining the suspicious trading of ImClone stock by Ms. Stewart and others, including former chief executive Samuel Waksal and members of his family, in the days leading up to ImClone's announcement on Dec. 28 that the Food and Drug Administration had refused to consider an application for its cancer-fighting drug, Erbitux.
Now, federal prosecutors are boring in on statements by Ms. Stewart and Mr. Bacanovic on the reasons for Ms. Stewart's stock sale. Mr. Bacanovic has told Merrill officials and the SEC that he had a prearranged agreement with Ms. Stewart to sell the stock, the people said. Ms. Stewart sold nearly 4,000 shares of the biotechnology company's stock on Dec. 27, one day before the company's announcement on Erbitux was released. Ms. Stewart, a friend of Mr. Waksal, has cited such an agreement in her public statements to deny the suggestion that she illegally traded on inside information.
But Mr. Faneuil, a 26-year-old sales clerk who has worked for the firm for about a year, now has told Merrill lawyers that he was unaware of any such arrangement and that he concocted his initial account after being pressured by Mr. Bacanovic, people familiar with the matter said. Merrill officials have said they believe Mr. Faneuil would have known about the arrangement if one had existed. The reversal by Mr. Faneuil, who took the order to sell Ms. Stewart's shares from Mr. Bacanovic, has fueled growing skepticism at Merrill that any such selling pact ever was struck, the people said.
Mr. Faneuil's turnabout could prove to be significant to the unfolding investigation because it casts doubt on the existence of a pre-arranged selling agreement. The U.S. Attorney's office in Manhattan plans to interview Mr. Faneuil again on the matter, people familiar with the matter said.
On Friday, Merrill placed Messrs. Bacanovic and Faneuil on paid administrative leave, citing "factual issues regarding a client transaction" as the reason for the move.
Ms. Stewart's lawyer and personal spokeswoman couldn't immediately be reached to comment on the widening probe.
Mr. Faneuil couldn't be reached for comment. Jamie Moss, a spokeswoman for Mr. Faneuil's attorney, Marc Powers, declined to comment about Mr. Faneuil's discussions with Merrill and SEC investigators. Mr. Powers didn't return calls. Richard M. Strassberg, a lawyer for Mr. Bacanovic, declined to comment. A spokesman for Merrill had no comment.
Earlier this month, Mr. Waksal was charged with insider trading for allegedly tipping off family members and trying to sell his shares before the FDA news was made public. Ms. Stewart is a close friend of Mr. Waksal, who at one point dated Ms. Stewart's daughter.
Now, investigators are examining other people who may have been told about the FDA action, including Ms. Stewart and her broker, Mr. Bacanovic -- a former ImClone employee who has served as a financial adviser for a coterie of well-heeled clients. They include Mr. Waksal and members of his family, including his daughter, Aliza, whom investigators say sold ImClone shares after being told by her father about the FDA rejection.
Little is known about Mr. Faneuil. According to his employment data listed on National Association of Securities Dealers records, Mr. Faneuil spent some time working at D.E Shaw & Co., an investment firm, from 1997 through April of last year. Other of his past employers listed on the documents are Vassar College, Bennington College and Bill's House of Pizza, Boston, N.Y., where he worked from 1991 through 1993.
On Tuesday, shares in Ms. Stewart's home-decorating company, Martha Stewart Living Omnimedia Inc., rose $1.05, or 8.4%, to $13.60 in 4 p.m. composite trading on the New York Stock Exchange. But shares of the New York-based company have declined 25% since Ms. Stewart's stock sale in December.
The issue of whether a pre-arranged sale agreement existed has been controversial from the start. Ms. Stewart has said -- and her lawyers have told Congress -- that she struck a verbal agreement in late November that would trigger the sale of ImClone stock at below $60. Mr. Bacanovic said it was placed in December, and has said he has notes to back it up. But verbal stop-loss agreements are uncommon on Wall Street to avoid confusion; most brokers officially log such arrangements into the firm's computer system to keep a detailed record of the trade.
Even with the new revelation, many of the facts involving the trading of Ms. Stewart's shares remain unclear. Among the issues still murky: What exactly did Ms. Stewart know about the FDA action before she sold her shares. Mr. Bacanovic has told Merrill lawyers that one reason he sold shares was because there were negative rumors in the market about the stock, rather than because of any direct knowledge of the FDA action.
If Ms. Stewart merely sold shares because of market rumors, she wouldn't have violated federal insider trading laws. Indeed, a key element to any insider-trading charge is intent: Ms. Stewart must have known that they were trading on material non-public information.
A potential and more problematic issue could be obstruction of justice, legal experts said. This would have occurred if any of the individuals involved in the matter concocted a story, for instance, about a stop-loss arrangement, when none existed, thus misleading federal investigators in the process.
Unlike insider trading, "an obstruction-of-justice case is usually fairly straightforward; in insider trading, you have to prove intent, so the cases can be more difficult," said Michael Lazerwitz, a former federal prosecutor and now a partner at Cleary Gottlieb Steen & Hamilton in Washington, D.C.
Write to Charles Gasparino at charles.gasparino@wsj.com and Jerry Markon at jerry.markon@wsj.com |
