The government hit Martha Stewart and her stockbroker with criminal securities fraud and conspiracy charges yesterday in an insider trading case that has blended celebrity and corporate scandal like no other.
Stewart and her broker, Peter Bacanovic, pleaded not guilty to the nine counts in the 41-page indictment, which also included accusations that they lied to investigators and obstructed justice. Both were released without bail.
Later yesterday, Stewart's company, Martha Stewart Living Omnimedia Inc., announced she was stepping down as chairwoman and chief executive officer while she defends herself against the charges. But Stewart said she would remain a director and continue to help develop her popular homemaking aids.
"I love this company, its people and everything it stands for, and I am stepping aside ... because it is the right thing to do," Stewart said in a prepared statement. "This will enable the company to continue ... without the distraction of my personal legal issues. ... I will continue to be instrumental in the company's creative efforts."
Her lawyers issued a statement vehemently asserting her innocence. They questioned the government's motives in the investigation, which has caught the nation's attention and badly battered her carefully crafted image as a master of stylish living.
If convicted on all counts, Stewart could face up to 30 years in prison and $2 million in fines.
In December 2001, the government alleged, Stewart sold more than $225,000 worth of stock in ImClone Systems Inc. after Bacanovic's assistant told her that Samuel Waksal, her friend and ImClone's then-CEO, was trying to sell a large chunk of the stock.
That constituted insider trading, the Securities and Exchange Commission alleged in a civil suit also filed yesterday. The government said Stewart sold her shares based on important, nonpublic information.
The criminal case hinges on Stewart's actions after the sale. The Justice Department alleged that she lied repeatedly to investigators and investors in her company, Martha Stewart Living Omnimedia Inc., and that Bacanovic lied during the probe and doctored records to cover up the alleged insider trading.
"This criminal case is about lying - lying to the FBI, lying to the SEC and lying to investors," said U.S. Attorney James B. Comey in Manhattan. "That is conduct that will not be tolerated."
Stewart's lawyers harshly criticized the government, saying in a written statement that she "has done nothing wrong" and that "we are convinced ... Martha Stewart will be fully exonerated."
The lawyers said the investigation proves what Stewart repeatedly has asserted: She did not know in advance about an important regulatory setback for an ImClone cancer drug - information that Waksal did know.
As a result, her lawyers said, "Stewart faces criminal charges for obstructing an investigation which established her innocence. This turn of events can only be characterized as bizarre."
Legal experts agreed that an insider trading case based merely on news that Waksal and his relatives were selling, passed on from Merrill Lynch, isn't as clear-cut as it would have been had the government alleged Stewart was told directly about the cancer drug setback.
"I think they're going to run into trouble," said Christopher J. Bebel, an insider trading expert and former Justice Department and SEC enforcement division lawyer.
The government's argument in the insider trading case is that Bacanovic breached his duty to Merrill Lynch by passing on the information to Stewart, and that Stewart benefited from that improper tip, avoiding more than $45,000 in losses.
The SEC's civil suit seeks disgorgement of that amount, to bar Stewart - the chairman and chief executive of Martha Stewart Living - from serving as a director of a publicly traded company, and to limit her activities as a company executive.
One hitch, Bebel said, may come if Waksal testifies that he instructed his brokers that they could tell certain people, including Stewart, about any of his activity in ImClone stock.
The indictment goes into detail about Merrill Lynch's policies on confidentiality of client information, including a section that reads: "You should not `piggyback,' that is, enter transactions after a client's trades to take advantage of perceived expertise or knowledge on the part of the client."
Bebel noted the word "should" might well create problems for the government.
"That's going to get chewed up in a buzzsaw at trial," he said, noting it could be interpreted as advisory and making it more difficult to prove intent to commit fraud.
The SEC, however, said that Bacanovic clearly violated his duty to Merrill Lynch, and that Stewart, a former stockbroker, should have known he had done so and should not have sold stock based on the information.