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The Martha Stewart Scandal: A Tempest in a Cuisinart...
Martha Stewart on trial
NEW: Martha Stewart docket report for case
#: 1:03-cr-00717-MGC-ALL
USA v. Stewart, et al

WHAT: Martha Stewart on trial, Case background, documents and more...

By Andrew Ritchie and John Small

I simply returned a call from my stockbroker. Based in large part on prior discussions with my broker about price, I authorized a sale of my remaining shares in a biotech company called ImClone .The government's attempt to criminalize these actions makes no sense to me.'

- Martha Stewart, from

U.S. Attorney James B. Comey says that this case is about lying. In a strange way, he is absolutely correct; we were told that the Martha Stewart investigation was about insider trading. The media told us that Martha had received a tip from her CEO friend Sam Waksal. They even told us that Martha scares away young children on her porch on Halloween and uses her SUV to push around her neighbors handyman. The NY Times told us her company was looking for a new CEO.

You've seen the movie, now read the indictments:

PDF;Martha Stewart Insider-Trading Scandal Indictment (U.S. v. Stewart)

Martha Stewart Sued By S.E.C. Complaint (S.E.C. v. Stewart)


Judge Cedarbaum denies government request for Martha Stewart and Peter Bacanovic documents (December 29,2003,)

Opinion (U.S. v. Stewart) (E-mail Protected by attorney-client privilege) (Oct. 20, 2003)

Litigation Release: Securities and Exchange Commission v. Martha Stewart and Peter Bacanovic

US vs. Waksal (SEC Complaint)

Misdemeanor Information (US v. Faneuil) (Oct. 10, 2002)

Waksal Indictment (US v. Samuel Waksal) (August 7, 2002)

Martha's Empire
Find out about the empire Martha built from scratch and what America stands to lose if Martha is found guilty of the charges...
Send Martha some words of support

As it turns out, all of these things turned out to be untrue. That did not stop over 90% of Rice University students from saying in a recent poll that they think Martha Stewart is guilty of insider trading, a crime for which James Comey did not even charge her. Whether you like Martha Stewart or not, she is an American citizen, and is presumed inocent until proven guilty. Lets let the facts decide the truth in this case; here's what we do know;

On December 27th, 2001, Peter Bacanovic was on vacation in Miami, and Martha Stewart was flying to Mexico for a vacation.

Peter Bacanovic was the broker of both Martha Stewart and ImClone CEO Sam Waksal.

Between 9 and 10 a.m., Bacanovic's assistant at Merrill Lynch, Douglas Faneuil, received a request from the daughter of ImClone's CEO, Sam Waksal, to sell all of the ImClone stock in her account.

Douglas Faneuil also received a request in writing from Sam Waksal to transfer all of the ImClone stock in his account. The request was marked "URGENT—IMMEDIATE ACTION REQUIRED."

Some time round 10 a.m., Douglas Faneuil told his boss Peter Bacanovic about Waksal's daughter's sale and Waksal's attempted sale of their ImClone stock.

In total these shares were worth $7.3 million, a tiny fraction (about 2%) of Sam Waksals holdings in his company.

Sam’s daughter Alizas shares were sold for $2.5 million; following SEC rules, Merrill Lynch refused to sell the remaining $4.8 million of the shares since they belonged Sam Waksal, who was the ImClone CEO.

At 10:04 am, with ImClone trading at approximately $61.50,

Peter Bacanovic left a message that Stewart's assistant, Ann Armstrong, which said "Peter Bacanovic thinks ImClone is going to start trading downward."

Contrary to early news reports of Martha receiving an insider tip from her CEO friend Sam Waksal, she was traveling to Mexico, unaware of the frantic selling going on back in New York.

Three hours later, at 1:26 p.m. ET, Stewart's private jet landed in San Antonio, Texas, to refuel. Martha Stewart checked her messages and then returned a call from her stockbroker’s office at Merrill Lynch. At 1:39, Armstrong patched Stewart through to Bacanovic's office and hung up

The prosecution alleges that Martha Stewart was told that stock in ImClone was trading very heavily and that members of Sam Waksal’s family were selling.

What they do not point out is that two months earlier, in a tender offer form Bristol Myers, Martha Stewart had already tried to sell all of her ImClone stock for $70 per share. But the tender offer was so oversubscribed; Bristol-Myers purchased only 21 percent of the tendered shares, leaving Stewart with 3,928 shares.

Why was everyone selling ImClone?

It is also important to note that on December 27th, trading volume on ImClone was skyrocketing to 7 million shares vs. just 1.5 million shares the day before, and the price was headed down on heavy volume. It is also important to note that by the time Martha returned this call form her broker, ImClone's stock was down about $5 from its opening price, or roughly 10 percent, on five times its usual trading volume. In fact, ImClone had seen several days of unusually heavy trading (5 million shares vs. the avg. 1.5 million) the week of December 17th, as the stock slipped from $70 to the low $60s. Any reasonable investor would be concerned, and they were; that day seven million shares were trading.

At 1:41 p.m., just two minutes after being transferred to Faneuil, Martha hung up. Merrill Lynch completed her sell order shortly thereafter, at an average sale price of about $58. The closing price for the day was $58.30.

At 1:41 p.m., after placing her sell order with Faneuil Martha then called Sam Waksal and left a message on his machine. His assistant later summarized it on a memo pad: "Martha Stewart. Something is going on with ImClone and she wants to know what." He never returned her call.

This is a crucial part of the timeline as it seems to prove several key points: First, it shows that contrary to all initial news reports, Martha Stewart did not receive a tip to sell directly from Sam Waksal; in fact she was concerned enough about the heavy trading and stock price decline that she called him directly to find out what was happening.

Second, contrary to rumors surrounding the congressional investigation, it indicates that Martha Stewart did not know is that the Federal Drug Administration (FDA) was going to reject the application by ImClone for its new cancer-fighting drug called Erbitux the very next day . In fact, many shareholders had already dumped the stock ahead of both the announcement and of Martha Stewart selling. Over 7 million shares were traded that day, and Martha Stewart traded just 3,928 of them. By selling that day, Martha saved a mere $45,000.

In contrast, Sam Waksal did have advanced notice about the FDA rejection and used that information to make improper sales of his own shares, as well as tip off several family members to sell.

Phone records have indicated, however, that Martha and Sam did not talk that day, therefore making it impossible for Martha to have received direct insider information about the FDA rejection of Erbitux.

Waksal was later indicted and found guilty of insider trading, among other charges, and is currently serving a seven-year sentence behind bars.

After more than a year of investigations by the Securities and Exchange Commission (SEC) and the federal government, Martha was not criminally charged with insider trading but was, however, sued by the SEC for the alleged crime.

The government criminally indicted Martha with securities fraud, obstruction of justice, conspiracy and two counts of making false statements, but not with insider trading. Her stock broker, Peter Bacanovic, was simultaneously charged with conspiracy, obstruction and perjury.

The SEC’s Civil Complaint: Why Martha?

Seven million shares of ImClone stock were sold the same day that Martha sold her paltry sum of 3,928. It begs the question: Where are the other ImClone investigations?

Among the people who sold that day were two close friends of Sam Waksal. One of them sold $600,000 worth of ImClone stock and the other sold $30 million worth. Phone records show these sales took place ‘almost immediately’ after these men had contact with Waksal. Neither of these men has been publicly named by federal investigators and neither has been charged.

Another seller was the husband of Martha’s friend Mariana Pasternak, who was with Martha on December 27th, 2001. He sold 10,000 shares and was not questioned by investigators. Even Waksal’s daughter, Aliza, who admitted to having received information from her father to sell that day, escaped prosecution and kept the profits of her sale.

The power of celebrity

So, why are Martha and her broker being sued by the SEC in the ImClone case while other, more suspicious traders are not? Why proceed with the civil charges when the case is so incredibly weak?

For one thing, Martha is a celebrity and the public attention the SEC gains by suing a well-known personality is immeasurable. The fact that her broker, Peter Bacanovic, is also being sued seems incidental when compared to the array of headlines the name "Martha Stewart" has garnered for the SEC.

High visibility means high profile and extensive coverage. In a time when faith in the American economy is shaky and corporate criminals abound, it serves an agency like the SEC well to sue a popular person like Martha Stewart, whether she is guilty of a crime or not. Who, in all of America, after all, does not know the name Martha Stewart?

By charging her, the SEC gives the impression that it is serving its function: supposedly preserving the integrity of the markets. The fact is that corporate fraud has not declined and continues to infect new sectors every day; look to the growing mutual fund scandal, Grassos $195 million pay package, and the fact that Enrons Ken Lay has still not been charged with a single crime.

Who would care if Mary Nobody or Bob Joe-Blow were sued by the SEC? Would their charges be splashed in bold ink across dozens of newspapers and magazines? Of course not. But a name with the cachet and allure of Martha Stewart brings headlines, which in turn brings visibility to an agency that has felt pressure to appear to be serving its purpose in a faltering financial system maligned by mistrust.

It appears their strategy is working. In a June survey by the Sienna Research Institute, 60 percent of those polled thought Martha was guilty of insider trading, even after she was not criminally charged with the crime.

Loose Laws

To complicate matters for Martha, and make it easier for the SEC, the government likes to define insider trading on a case by case basis, making the courts a trial-and-error testing ground that is extremely dangerous for any defendant.

The laws defining insider trading in America are so obscure, and can be bent in so many directions, that even the most skilled traders could wind up unwittingly making illegal trades, depending on how the vague laws are twisted to prove so.

The idea that Martha "should have known better" because she was once a Wall Street trader is absurd, given the murky definitions of trading laws and their case-by-case amendments.

The most clearly defined violators of insider trading laws have been those who have fiduciary responsibility, meaning they are somehow connected to the public company whose shares have been traded in a questionable manner: a CEO, a vice president, a general manager.

For example, as ImClone’s founder and CEO, Sam Waksal had a very clear fiduciary duty with ImClone and blatantly used foreknowledge of an event that would affect his company's stock price to save himself a lot of money.

Martha had no fiduciary responsibility with ImClone, meaning she was not a staff member of the company. She was an outside party who was operating her sale based on information given to her by her stockbroker, which logic would usually define as entirely routine and lawful.

What's more, Martha merely returned a phone call from her stock broker, whose assistant happened to mention that ImClone was trading heavily that day and that the Waksals were selling. He asked her if she would like to sell. Martha said yes. She was simply being a "diligent business person," as she told Barbara Walters on "20/20" November 7.

What illuminating volume of trading law could have helped Martha make a more enlightened decision? None. Her stockbroker and his assistant should have been held accountable for violating Merrill Lynch policy if they told Martha the Waksals were selling. But to charge the broker AND his client with insider trading is a vast stretch.

In an unfortunate twist of circumstance she made the call on a day when her good friend Sam Waksal was telling his family to dump shares before the FDA ruling. For Martha, it was guilt by association.

The SEC has no concrete evidence to support its law suit of Martha and Peter for insider trading, but the burden of proof in civil trials is far less than in a criminal trial and there is nothing stopping the SEC from suing, even if they have little to go on. And so, the SEC pursued the case for well over a year, using taxpayer dollars to fund the investigation.

No matter how the case pans out, it remains a historic one.
Reason magazine pointed out: "Before suing Martha, the SEC had never gone after the customer of a broker who offered his knowledge of what another customer had done as a reason to make a trade."

The only reason we can see for the prosecution of Martha Stewart by the SEC is that it looks good on paper. Or perhaps more aptly, it looks good in the papers.

What's At Stake:

If Martha Stewart and Peter Bacanovic are found guilty of the civil charge of insider trading, they would be required to pay back their sale profits, pay monetary fines and succumb to civil penalties: Martha may be barred from running a publicly traded company ever again, and Peter could have his trading license permanently revoked.

The Criminal Case: Grasping at Straws and Undemocratic

Since the government could not charge Martha Stewart with insider trading, based on a sheer lack of evidence, they decided to go after her for other alleged misdeeds.

What they did was charge her with obstructing an investigation that eventually found her to be innocent. They also charged her with pleading her innocence while the investigation was going on and decided to label it "securities fraud." It apparently didn't matter that Martha’s First Amendment right may be at risk of violation or that in most democratic nations one is innocent until proven guilty and has the right to assert that belief publicly.

They charged her with conspiracy because the ink on one part of a spreadsheet did not match the ink on another part of a spreadsheet in Peter Bacanovic’s office. They charged her, twice, for lying to investigators.

It should be restated that the initial investigation, which was looking for evidence to support an insider-trading charge for Martha and Peter, found nothing damaging at all, even after a year of digging.

First Amendment at Risk

The unprecedented steps the government took on June 4, 2003, in the wake of their embarrassing findings the first time around, should leave most Americans wondering why Martha Stewart has been subjected to this incredible level of scrutiny for a single stock transaction.

The most troubling charge against Martha is that of securities fraud, which hinges on the belief that Martha was committing a crime for saying she was innocent.

After "sources close to a congressional investigation" leaked rumors about the investigation into her affairs, the press ate it up, tearing apart the reputation of a woman who had not been formally charged.

Martha, who had no control over these leaks or the voracious appetite of the media, decided she should remind people that she was innocent until proven guilty.

As Reason magazine puts it: "This was done, the feds say, not for the purpose of clearing her name, but only to prop up the stock price of her own publicly traded company, Martha Stewart Living Omnimedia Inc. In other words, her crime is claiming to be innocent of a crime she was never charged with."

Ironically, Martha would not have had to have publicly declared her innocence if these unnamed sources close to the investigation had kept their mouths shut.

By calling her actions "securities fraud" the government is asserting that anyone who runs a publicly traded company had better keep quiet about their assumed innocence if they happen to be under investigation and just take it on the chin.

In Martha’s case, they are stretching the definition of the crime to the absolute limits of democratic freedom.

It is no wonder that her lawyers, Robert Morvillo and John Tigue, had tried to have this charge kicked to the curb.

In their 122-page memorandum to the judge, filed on October 6, 2003, they say:

"Count Nine, the ‘securities fraud’ charge, seeks to criminalize Ms. Stewart's public declarations that she had not engaged in insider trading in making a personal stock sale. This charge is unprecedented in the seventy-year history of the federal securities laws. It violates the First Amendment, the Due Process Clause, and the securities statute itself."

The other charge that her lawyers sought to dismiss is obstruction of justice. In the same memorandum her lawyers write:

"Count Eight, called ‘obstruction of justice’ by the prosecution (even though it is not based on the obstruction of justice statute), must be dismissed because none of Ms. Stewart's statements could have hindered the SEC investigation and the Indictment does not adequately allege that she was even aware of the SEC investigation when the statements were made."

Her lawyers also tried to have some of the examples of her "false statements" dismissed because they were immaterial to the investigations and were presented to the judge in an inflammatory manner.

All charges will stand, however, as Judge Cedarbaum determined that it will be up to the jury to decide the validity of the charges, noting, however, that the governments Count Nine is a "novel" interpretation of securities laws.

This leaves conspiracy as the most damaging charge against Martha.

The prosecution is alleging that she and Peter Bacanovic conspired to cover up their alleged insider trading by tampering with records while the investigation was going on. Even though the investigation yielded no crime, they are being charged with trying to cover it up, which flies in the face of rationality.

The Prosecution’s Evidence

In fact, the prosecution’s evidence against Martha and Peter is extremely weak, as has been noted by Judge John Sprizzo, a judge overseeing a shareholder suit against MSO.

The prosecution’s star witness is Peter Bacanovic’s assistant, Douglas Faneuil, who executed Martha’s sale that fateful day. He copped a plea with the prosecutors, after initially backing up Martha’s story, in exchange for immunity and a slap on the wrist. He now says he was bribed to corroborate with Martha.

Backing up Faneuil’s latest version of events is a New York gossip columnist named Robert Haskell whom he reportedly spoke to about the case. It has been duly noted by the press that neither gossip columnists nor a man who changes his story to cop a plea do not make the most credible witnesses.

Other witnesses who will testify against Martha include two SEC lawyers. Their agenda is to protect the validity of the SEC as a viable guardian of ethical trading, even though their trading laws are vague to the point of transparency and can be shaped by lawyers to suit anyones interests.

Then there is the ink issue.

The prosecution alleges that Peter added "@60" for Martha’s ImClone holdings on a spreadsheet he used to keep track of Martha’s various portfolio decisions, after the investigation had begun. The "@60" is a reference to an agreement he had with Martha to sell her ImClone stock if it fell below $60 a share, as it did on December 27th, 2001, the day Martha made her sale.

The government says there was no agreement to sell the shares if they traded below $60 and says the ink in this spot of the page does not match the ink on another spot of the page and is therefore an indication that it was written after the investigation into the ImClone trades had begun. Forensic experts say, however, that it is impossible to tell when the "@60" was written.

The most damaging evidence against Martha is a documented attempt to temporarily change an entry in her telephone log. She allegedly asked her assistant to change it from, "Peter Bacanovic thinks ImClone is going to start trading downward" to "Peter Bacanovic. Re: ImClone." She had second thoughts, however, and called her assistant to change it back to its original form.

The prosecution will allege that this is evidence of Martha’s guilty conscious at work. But as Reason magazine argues:

"This aborted tampering with evidence does not prove Stewart was guilty, but does illustrate the uncertainty created by the government’s murky insider trading laws."

There is absolutely nothing illegal with writing a memo saying your stockbroker thinks a certain stock will begin to lose value; is it not a stockbroker’s job to inform clients of potential risks in investments? That she changed the log only proves that she was nervous and unsure of the current, popular interpretation of securities laws. That she changed it back to its original form proves she had good conscience and wanted to do the right thing.

In a recent revelation, the judge in the case ordered the prosecution to submit its list of co-conspirators who had, up until now, remained secret. It also came to light, during the pre-trial hearing held November 18, that the prosecution had seized 17 hard drives from Martha’s company headquarters in Manhattan and had yet to search them for possible evidence against Martha.

Multitudes of people will be watching this case closely, not only to await the fate of the world’s most famous homemaker, but also to see if democracy will prevail.

What’s at Stake: If Martha Stewart is found guilty of all charges she could face a 30-year prison term and a $2 million fine. Her company, Martha Stewart Living Omnimedia, would face severe risk of collapsing in the wake of such a verdict, bringing an end to thousands of jobs. If Peter Bacanovic is found guilty of all charges he also faces a prison term and a hefty fine.

The truth is a bit more complicated than most news headlines would lead you to believe. However, the facts strongly support Martha Stewart's case, and a fair minded jury would have to conclude that this case was in fact one of the greatest witchhunts in American history.