Martha Stewart Indicted; Pleads Not Guilty
June 5, 2003 (ABCNews.com) Martha Stewart and her stockbroker pleaded not guilty Wednesday to charges stemming from an insider trading scandal that has plagued the domestic doyenne for more than a year.
Stewart and Peter Bacanovic were charged in a nine-count indictment returned by a federal grand jury investigating her sale of ImClone stock. The Securities and Exchange Commission also filed a civil securities fraud lawsuit against the pair, accusing them of illegal insider trading.
Criminal charges against Stewart, 61, include making false statements, obstruction of justice and perjury, while charges against Bacanovic include perjury and obstruction, according to a statement from the U.S. attorney's office in Manhattan.
At a news conference in Manhattan, U.S. Attorney James B. Comey said both Stewart and Bacanovic conspired to cover up the reason behind her trading in biotechnology company ImClone.
Stewart had been under investigation for selling almost 4,000 shares of ImClone shortly before the Food and Drug Administration rejected the company's application for approval of a colon cancer drug. The FDA rejection sent ImClone's stock plummeting.
Comey said Bacanovic provided bogus documents to support the claim Stewart had a pre-existing agreement with the broker to sell her stock if the price dropped below $60 a share. But, according to the indictment, Bacanovic's trading assistant Douglas Fanueil allegedly told Stewart at Bacanovic's behest members of the Waksal family had been attempting to sell the stock.
Stewart is friends with ImClone founder Samuel Waksal, who is due to be sentenced for criminal fraud next week. And over the past year, federal prosecutors in Manhattan and SEC investigators had been looking into whether Stewart had advance word of the news.
"This criminal case is about lying -- lying to the FBI, lying to the SEC and lying to investors," said Comey. "That is conduct that will not be tolerated. Miss Stewart is being prosecuted not because of who she is, but what she did."
Stewart's lawyer, Robert Morvillo, has said she will declare her innocence and proceed to trial. Stewart entered the U.S. District Court building in Manhattan earlier Wednesday, running a gantlet of waiting news reporters and photographers without saying anything.
Stewart, Broker Face Civil Charges
The SEC civil charges against Stewart and Bacanovic allege the two engaged in trading on information that was unavailable to the public.
The SEC is seeking an order requiring Stewart and Bacanovic to disgorge the losses Stewart avoided through her allegedly unlawful trading, plus civil monetary penalties.
The SEC is also seeking an order barring Stewart from acting as a director of, and limiting her activities as an officer of, any public company. Stewart is been chairwoman and chief executive officer of Martha Stewart Living Omnimedia Inc.
Stewart made around $228,000 on her sale of 3,928 shares of ImClone on Dec. 27, 2001, the day before the FDA's announcement by the close of the trading day on Dec. 28. News of the rejection sent ImClone's stock tumbling 16 percent at the close of trading the following Monday, Dec. 31. By selling when she did, Stewart avoided losses of $45,673.
Shadow Over an Empire
The scandal has put a cloud over the lifestyle guru's empire over the past year. Earnings of her Martha Stewart Living Omnimedia have suffered as a result of her legal problems, which the company admits have taken a toll on her business.
Her company includes magazines, a television show, newspaper columns, Internet marketing and the Martha Stewart Everyday line of home products, which is sold at Kmart. The company reported sales of $295 million last year.
Since news broke last June that the House Energy and Commerce Committee, which led the investigation into ImClone trading, was investigating Stewart's stock, the company's stock has dropped from $19.23 a share to a little over $9, a decline of around 51 percent.
Stewart did not appear at a shareholder meeting in New York on Tuesday, but instead sent a videotaped message in which she apologized for not attending. She did not address the investigation.
The company has said that Stewart will not step down as chief executive, but one of the contingencies management will need to consider is whether she will be able to function as CEO while she's mounting a legal defense.
What's Next for Martha
Former federal prosecutor and white-collar crime expert Robert Mintz told ABCNEWS' Good Morning America that Stewart's case could be a classic example where the alleged coverup is worse than the crime itself.
"If the government is able to prove that she fabricated evidence, that she lied to authorities and she got other people to lie on her behalf, it's going to be a very difficult case for the defense," said Mintz.
Christopher Byron, author of Martha Inc.: The Incredible Story of Martha Stewart Living Omnimedia , told Good Morning America he thinks it's unlikely that Stewart will be taken to jail.
"This thing is a very sensitive situation in terms of public opinion, and that could backfire big time on the government if this woman were treated like an ordinary criminal who stuck up a liquor store," he said.
As for Kmart, where Stewart's line of home furnishings has been extremely popular, some shoppers say they'll stick by Stewart for now.
"Yes, I would still buy Martha Stewart products, even if she were indicted," said one woman.
-- Paul Eng; ABCNEWS' Richard Esposito, Betsy Stark and Ramona Schindelheim contributed to this report.