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Martha Stewart’s Insider Trading Scandal
Martha Stewart's Insider Trading Scandal

Martha Stewart’s Insider Trading Scandal

Martha Stewart was convicted Friday of obstructing justice and lying to the government about a superbly timed stock sale — a devastating verdict that probably means prison for the woman who epitomizes meticulous homemaking and gracious living.

Stewart, 62, grimaced and her eyes widened slightly upon hearing the verdict, and she later released a statement maintaining her innocence and promising an appeal.

The convictions jeopardize the media empire that Stewart carefully built over the years in becoming the nation’s premier homemaker — an image she put forth by way of magazines, TV programs and everything from cookie cutters and garlic presses to bedsheets and pillows. Martketing experts have said that the company is so closely tied to her name and face that the effect could be devastating.

The government now may press to have her removed from the board of her company. She stepped down as chief executive after being indicted last summer but remains as chief creative officer.

Stewart was found guilty of conspiracy, making false statements and obstruction of justice. The charges carry up to 20 years in prison at sentencing June 17, but she will most certainly get much less than that under federal sentencing guidelines.

Her ex-stockbroker, Peter Bacanovic (search), 41, was convicted of conspiracy, perjury, making a false statement and obstruction of justice, but was acquitted of making a false document.

“Maybe it’s a victory for the little guys who lose money in the market because of these kinds of transactions,” said juror Chappell Hartridge.

Stewart left the courtroom with a somber expression, and she did not speak to anyone at the defense table before going to a holding room away from the media. She and Bacanovic must report to a probation office within a week for processing.

Stewart spent most of her last hour before the verdict checking her watch and twirling a pen in her fingers. Her daughter, Alexis Stewart (search), was in tears after the verdict.

“I am obviously distressed by the jury’s verdict but I continue to take comfort in knowing that I have done nothing wrong,” Stewart said in a statement on her Web site.

The jury of eight women and four men reached the verdicts on the third day of deliberations in the case.

Stewart’s conviction came on a volatile day of trading in her company, Martha Stewart Living Omnimedia (MSO). The stock shot up on word of a verdict, then trading was briefly halted. The stock plummeted after trading resumed.

The charges centered on why Stewart dumped about $228,000 worth of ImClone Systems (IMCL) stock on Dec. 27, 2001, just a day before it was announced that the Food and Drug Administration had rejected ImClone’s application for approval of a cancer drug. The announcement sent ImClone’s stock plummeting.

Stewart and Bacanovic claimed they had a standing agreement to sell when the price fell below $60. But the government contended that was a phony cover story and that Stewart sold because she was tipped by her broker that ImClone CEO Sam Waksal (search) was frantically trying to dump his own holdings.

Waksal later admitted selling his stock based on advance word of the FDA decision. He is serving seven years in prison for insider trading.

Stewart, who averted more than $51,000 in losses by selling when she did, was not charged with insider trading; instead, she and her broker were accused of lying about the transaction and altering records to support the alleged cover story.

Stewart was easily the most recognizable face in the government crackdown on corporate crime that began with the collapse of Enron in 2001. Stewart’s supporters claim she was being targeted because of her celebrity status.

The government’s star witness was Douglas Faneuil (search), a former Merrill Lynch & Co. (MER) assistant who said he passed the tip about Waksal to Stewart on orders from his boss, Bacanovic.

Faneuil said that when he told Bacanovic about a flurry of selling by the Waksal family that morning, Bacanovic blurted: “Oh my God, get Martha on the phone.” He also said Bacanovic pressured him to lie about the transaction.

Prosecutors further contended Bacanovic doctored a worksheet of Stewart’s portfolio after the fact by making the notation “(at)60” next to her ImClone stock. A forensics expert with the Secret Service testified that the mark was made in a different ink.

In addition, Stewart’s personal assistant testified Stewart altered a computer log of a Dec. 27, 2001, message from Bacanovic, then immediately told her to restore the log to its original wording.

Also, a longtime Stewart friend, Mariana Pasternak, testified Stewart confided that she had known the Waksals were selling. Pasternak said Stewart added: “Isn’t it nice to have brokers who tell you those things?”

But Pasternak admitted on cross-examination that the remark may have been something she herself thought, not something Stewart said.

In closing arguments, prosecutor Michael Schachter (search) said the story about the arrangement to sell ImClone at $60 was “phony,” “silly” and “simply an after-the-fact cover story.” He said Stewart and her broker “left behind a trail of evidence exposing the truth about Martha Stewart’s sale and exposing the lies they would tell.”

For its part, the defense tried to discredit Faneuil as an admitted drug user and a liar. When the scandal broke, he initially backed up his boss, but later pleaded guilty to a misdemeanor, saying he had received an extra week of vacation and a free airline ticket for keeping his mouth shut.

Stewart did not testify, and her lawyers called only one witness during a defense that lasted less than an hour.

In closing arguments, defense attorney Robert Morvillo (search) said that the conspiracy as outlined by the government was too sloppy to be true. He urged the jury to let Stewart get back to “improving the quality of life for all of us.”

“If you do that,” he said, echoing Stewart’s slogan, “it’s a good thing.” Stewart could have faced even more prison time, but the judge threw out the most serious charge — a securities fraud count that alleged she deceived investors in her own company when she publicly declared her innocence in the scandal. The judge had referred to the charge as “novel.”

At times, the trial seemed more fodder for gossip columns than the financial pages. Stewart’s arrival each day was chronicled by a barrage of photographers and camera crews, with the tabloids taking careful note of her expensive handbags and stylish heels. Celebrities Rosie O’Donnell, Bill Cosby and Brian Dennehy all showed up in court in support of Stewart.

Stewart had a reputation before the trial as a ruthless businesswoman, and in court she was portrayed as rude, insulting, demanding and cheap. According to testimony, she once threatened to take her business elsewhere because she did not like her brokerage’s telephone hold music.


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