Martha Stewart may be barred as CEO of her media company

SEC staff said to weigh such a recommendation

October 23, 2002|By BLOOMBERG NEWS

WASHINGTON - The Securities and Exchange Commission's staff may recommend that Martha Stewart be barred from serving as chief executive officer of her media company on grounds she lied about a stock sale, people familiar with the case said.

Stewart, CEO of Martha Stewart Living Omnimedia Inc., has been under investigation into whether she sold ImClone Systems Inc. shares on the basis of inside information and lied about the extent of her knowledge. The SEC enforcement staff notified Stewart last month that it planned to recommend civil charges against her, the people said.

They said she could be fined if commissioners vote to file charges. The Justice Department also is investigating and might file criminal charges. SEC Chairman Harvey L. Pitt has been pushing to bar more executives at public companies after scandals at Enron Corp., WorldCom Inc. and elsewhere.

"Given the emphasis that the SEC has placed on officer and director bars, and on ensuring integrity among corporate officials, it would be consistent for them to try to bar her," said David Gourevitch, a former federal prosecutor and SEC enforcement lawyer.

In the fiscal year that ended Sept. 30, the SEC, under Pitt, more than doubled the number of cases seeking to bar corporate officers and directors to 126, SEC data show.

Stewart's company, Martha Stewart Living Omnimedia Inc., is closely linked to Stewart's image and depends on her to advertise its products and serve as host a daily television show.

Shares of Martha Stewart Living today rose $1 to $8.50 at 4:01 p.m. in New York Stock Exchange composite trading.

Last month, the company's board denied a New York Times report that it was looking for an executive to replace Stewart. Spokesman Steve Lipin repeated the denial yesterday.

Stewart "is doing her job," Sharon Patrick. president of Martha Stewart Living, said in an interview yesterday. "The company is extremely solid."

Some analysts speculated that the company might be taking informal steps to prepare for a possible replacement.

"If I were the decision-makers at Martha Stewart, I would certainly have feelers out there now," said Laura Richardson, analyst with Adams Harkness & Hill who has a "reduce" rating on the shares and doesn't own them.

The company, which publishes magazines such as Martha Stewart Living and sells housewares through retailers such as Kmart Corp., has lost 55 percent of its value since the investigation was reported June 7.

Stewart has repeatedly said that she did nothing wrong in selling 3,928 ImClone shares for $228,000 on Dec. 27, before the company told the public that regulators had rejected the company's application for its Erbitux cancer drug. She has said the trade was triggered by a previous order with her Merrill Lynch & Co. broker to sell if the stock dropped below $60.

ImClone founder Samuel D. Waksal, a friend of Stewart's, pleaded guilty last week to six counts of insider trading, fraud and conspiracy. He didn't implicate Stewart. Her broker, Peter Bacanovic, was fired by Merrill Lynch & Co. this month for not cooperating with investigators.

Bacanovic's assistant, Douglas Faneuil, has told prosecutors that Stewart sold ImClone shares after learning through her broker that Waksal family members were selling their shares. He pleaded guilty to a misdemeanor this month.

The SEC staff is reviewing Stewart's response to its so-called Wells notice and is likely to recommend that charges be filed against her, the sources said. Stewart can be fined if found to have traded on inside information and can be barred from public companies if found to have made false statements, they said.

The SEC's Wells notice increases the chances of charges against Stewart, said Alan Bromberg, a law professor at Southern Methodist University.

"It looks to me like she's a step closer to both civil and criminal prosecution," Bromberg said.

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