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Government Moves Closer To Indicting Martha Stewart
U.S. Seeks Criminal Charge of Celebrity, Who Is Expected to Relinquish CEO Post
By MATTHEW ROSE, KARA SCANNELLand LAURIE P. COHEN
Staff Reporters of THE WALL STREET JOURNAL
NEW YORK -- After a 16-month investigation that put a high-profile face to allegations of corporate greed, the government is set to file civil and criminal charges against Martha Stewart that would threaten her position at the media company she founded, as well as its financial future.
In a written statement, Martha Stewart Living Omnimedia Inc. said it has been informed by Ms. Stewart's lawyers that the U.S. attorney's office in Manhattan is seeking an indictment against Ms. Stewart "in the near future." The company also said it is expecting a civil lawsuit from the Securities and Exchange Commission. Ms. Stewart consistently has denied wrongdoing, but she could step down from her chief-executive and chairman posts as early as Wednesday. The case of Ms. Stewart, who built from scratch a media empire based on the domestic arts, has been accompanied by a constant barrage of publicity in part because of its potent mixture of celebrity and crime.
Barring any last-minute settlement, charges could be brought as early as Wednesday, people familiar with the matter say. The Justice Department is likely to bring criminal obstruction-of-justice charges although these could be broadened to include other charges, the people say. The SEC is likely to file civil charges of insider trading, though the agency still is making final its position, according to people familiar with the matter. The SEC could add some lesser charges as well, these people said. The action comes days after settlement talks broke down in the matter.
In connection with the case, the U.S. attorney may also bring charges against Peter Bacanovic, her former Merrill Lynch & Co. broker, according to a person familiar with the matter.
A Martha Stewart Living spokeswoman declined further comment, as did representatives for Ms. Stewart, the U.S. attorney's office and the SEC.
The likely charges represent the latest maneuver in a seemingly intractable standoff between the government and Ms. Stewart that dates to early 2002 when federal authorities began investigating her sale of nearly 4,000 ImClone Systems Inc. shares just before the biotechnology company released some negative news about its cancer drug Erbitux. Just last weekend, scientists reported Erbitux provided substantial benefits to colon-cancer patients in clinical trials.
More broadly, the expected charges illustrate an aggressive stance by securities regulators in pursuing insider-trading cases, and they won't be easy to prove. Previously, regulators typically filed charges when defendants received stock tips directly from corporate insiders. In this instance, Ms. Stewart is likely to be accused of receiving inside information on ImClone Systems stock not from Samuel Waksal, ImClone's founder, but from her brokerage contacts at Merrill Lynch. At the same time, prosecutors are under some pressure from the public and Congress to show that celebrities aren't governed by a different set of laws.
Ms. Stewart's defense could potentially be that even if she was told that Dr. Waksal and his family members were selling ImClone shares, she didn't have specific information about why they were doing so.
"She's only inferring it's bad news about the drug, but she doesn't know what the news is," observes Alan Bromberg, a professor of securities law at Southern Methodist University in Dallas. "It is less than hard fact and this may be a precedent-setting insider-trading case because of the uncertain degree of materiality of what she knew." To prove a case against her, the SEC would have to show, by a preponderance of evidence, that Ms. Stewart traded on material information.
A criminal-obstruction charge would be more serious, and has a higher legal hurdle. To prove such a charge, prosecutors must convince a jury, beyond a reasonable doubt, that Ms. Stewart "corruptly endeavored to influence, intimidate or impede" a continuing investigation. If convicted of such a charge, Ms. Stewart could face a penalty of as much as 10 years in prison.
Ms. Stewart's lawyers have argued that she didn't corruptly influence or impede the investigation because her argument about a sell order didn't prevent the government from investigating her or the Merrill employees with whom she spoke.
The two sides had been in detailed settlement talks until several days ago. One offer that was on the table was the government would be willing not to bring an insider-trading charge against Ms. Stewart if she agreed to plead guilty to making a false statement to investigators, people familiar with the matter say. Also key to the government's offer was that Ms. Stewart be charged with a crime that carried with it potential jail time, the people say. Ms. Stewart wasn't willing to agree that she lied to investigators nor was she willing to accept any jail time, these people say.
Asked about settlement discussions, Robert Morvillo, a lawyer for Ms. Stewart, said: "When the defense and the government have confidential conversations, they should stay confidential." He declined to comment further. A statement issued earlier by Mr. Morvillo, said, "if Martha Stewart is indicted, she intends to declare her innocence and proceed to trial."
Ms. Stewart has contended that she had a pre-existing agreement with her Merrill broker, Mr. Bacanovic, to sell her ImClone shares if the price fell below $60 each, an account that Mr. Bacanovic corroborated.
But a Merrill trading assistant, Douglas Faneuil, who had initially backed up the account, later said Ms. Stewart sold her shares only after he told her that Dr. Waksal and his daughter Aliza were also trying to sell. Mr. Faneuil pleaded guilty to a misdemeanor and agreed to cooperate in the criminal investigation. Mr. Faneuil also told government investigators he was pressured by Mr. Bacanovic to corroborate the account. At Merrill, Mr. Bacanovic served as a financial adviser for well-heeled clients with ties to Dr. Waksal, including Ms. Stewart.
It's not clear what charges the U.S. attorney may bring against Mr. Bacanovic. His lawyer, Richard M. Strassberg, said, "Mr. Bacanovic maintains his innocence and will be vindicated of any wrongdoing."
Ms. Stewart could relinquish as early as Wednesday her roles as chairman and CEO at Martha Stewart Living, according to a person familiar with the board's thinking. One possible scenario is to replace her with President and Chief Operating Officer Sharon Patrick as chief executive with former Sears, Roebuck & Co. Chairman Arthur Martinez as chairman, this person says. Another person close to the board said the situation is still "fluid" and their promotions are not a certainty.
Ms. Stewart may step down only temporarily, however, on the assumption that her legal problems may at some point be resolved in her favor. She would also likely retain some kind of creative role at the company. Any decision, however, would have to be made with the approval of Ms. Stewart, who controls the company.
Martha Stewart Living's annual meeting, held Tuesday, was "very quiet," according to Mr. Martinez. He said about 80 people attended, adding that Ms. Stewart videotaped an address, but didn't attend herself. At the meeting, some shareholders voiced support for the embattled home-decorating celebrity.
"I think she's being railroaded," said John Hoitsma, who said he owned 100 shares of the company and had owned them for three years.
Speaking at a sidewalk news conference after the company's annual meeting, Mr. Martinez said the company "has many assets, the assets include our brands, the resource that is Martha Stewart, our extra strong financial position with almost $180 million in cash on our balance sheet, in the bank, and importantly the 600 odd people who form the core of the Martha Stewart organization."
The company, which has built a business around the Martha brand in areas such as magazines, television, and household products, has been struggling with the weight of the government's investigations as well as an overall difficult environment for media companies. The company has reported losses for its past two quarters and in early May said it expected to report a second-quarter loss of three to five cents a share from "continuing operations," citing its legal and public-relations costs as well as falling ad revenue for its flagship magazine. Advertising pages for Martha Stewart Living fell 28% in the first quarter.
In selling ads, "they are bending in places where they didn't necessarily have to go and bend before," said Felicia Ferber, vice president and print group director for Grey Global Group's MediaCom media-services agency, which represents clients such as Panasonic and Hasbro. "When she was on top, without this dark cloud over her head, there was probably not as much flexibility," she added.
In some ways, say analysts, Ms. Stewart's legal woes are exacerbating some pre-existing problems in the business, such as increased competition to Martha Stewart Living from newer lifestyle magazines such as Real Simple, published by AOL Time Warner Inc.'s Time Inc., and Hearst Corp.'s O, The Oprah Magazine. In March, the company scaled back its long-suffering direct-commerce group, eliminating 7% of its overall work force. The bankruptcy of Kmart Corp., which sells a range of Martha Stewart products and emerged from bankruptcy-court protection less than a month ago under the new name Kmart Holding Corp., has been another significant problem.
In 4 p.m. New York Stock Exchange composite trading Tuesday, Martha Stewart shares fell $1.68, or 15%, to $9.52. Some Wall Street analysts have been staying away from the stock altogether. Kevin Gruneich, a media analyst with Bear, Stearns & Co., said he placed the company on an "underperform" rating in July 2002. Mr. Gruneich added: "The risk was just too high."
--Deborah Solomon, Brian Steinberg and Charles Gasparino contributed to this article.
Write to Matthew Rose at matthew.rose@wsj.com, Kara Scannell at kara.scannell@wsj.com and Laurie P. Cohen at laurie.cohen@wsj.com
Updated June 4, 2003 12:37 a.m.
KJC |
