Employment Law Attorneys

SEC Charges Martha Stewart With Insider Trading4 min read

The Commission filed charges against Martha Stewart, Chairman and CEO of
Martha Stewart Living Omnimedia, Inc., and Peter Bacanovic, a former
registered representative associated with Merrill Lynch, Pierce, Fenner,
and Smith Incorporated, for illegal insider trading. The Commission’s
complaint, filed in the U.S. District Court for the Southern District of
New York, alleges that Stewart sold stock in a biopharmaceutical
company, ImClone Systems, Inc., on Dec. 27, 2001, after learning
material, nonpublic information communicated from Bacanovic, who was
Stewart’s stockbroker at the time. Bacanovic’s tip was that then-
ImClone CEO Samuel Waksal and his daughter had instructed Merrill Lynch
to sell all of their ImClone stock held at Merrill Lynch. At the time,
according to the complaint, ImClone and the market were awaiting an
imminent decision from the U.S. Food and Drug Administration on one of
ImClone’s key products, a cancer treatment called “Erbitux.” The
Commission alleges that information about the Waksals’ efforts to sell
signaled insider pessimism about the FDA decision, the prospects for
Erbitux, and the future of ImClone. The Commission alleges that, based
on this conduct, Stewart and Bacanovic violated Section 17(a) of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 thereunder.
Specifically, the Commission’s complaint alleges as follows:
* On Dec. 26, 2001, Waksal privately learned that the FDA had decided to
refuse to file ImClone’s biologics license application for Erbitux. On
Dec. 28, 2001, the FDA sent ImClone a Refusal to File (RTF) letter.
After the market closed on Dec. 28, 2001, ImClone issued a press
release, which disclosed that the FDA had issued an RTF letter. By the
close of the next trading day, Monday, December 31, the price of ImClone
stock dropped 16% to $46 per share.
* Early in the morning on Dec. 27, 2001, the day before ImClone publicly
disclosed the FDA decision, Waksal and his daughter placed orders with
Douglas Faneuil (Bacanovic’s assistant) to sell all of their ImClone
shares at Merrill Lynch. Faneuil spent that morning talking to
Bacanovic by telephone (Bacanovic was vacationing in Florida) and others
at Merrill Lynch about Waksal’s and his daughter’s instructions to sell
and whether Waksal could sell his shares, either directly or through his
daughter’s account.
* Also on Dec. 27, 2001, in response to hearing from Faneuil that Waksal
and his daughter had placed orders to sell all of their ImClone stock at
Merrill Lynch, Bacanovic instructed Faneuil to tell Stewart that Waksal
and his daughter had placed orders to sell all of their ImClone stock
held in their Merrill Lynch accounts. Bacanovic’s instructions to
Faneuil violated Merrill Lynch policies prohibiting employees from
sharing confidential client information with other clients and from
effecting securities trades based on transactions of other clients.
* Later on December 27, Faneuil told Stewart that the Waksals were selling
or attempting to sell all of the ImClone stock they held at Merrill
Lynch. Promptly upon hearing that information, Stewart instructed
Faneuil to sell all 3,928 shares of her ImClone stock. By selling one
day before ImClone announced that the FDA had issued an RTF letter,
Stewart avoided losses of $45,673.
* On several subsequent occasions, Stewart and Bacanovic lied to the
Commission, the U.S. Attorney’s Office for the Southern District of New
York, and the Federal Bureau of Investigation about the events of Dec.
27, 2001 and the facts surrounding Stewart’s sale of ImClone stock. For
example, the Defendants fabricated a false alibi for Stewart’s trades,
stating that she sold her ImClone stock because she and Bacanovic had
decided earlier that she would sell if ImClone’s stock price fell below
$60 per share. In addition, Stewart told the government that she did
not recall anyone telling her that day that any of the Waksals were
selling their ImClone stock.
In its lawsuit, the Commission seeks an order requiring that Stewart and
Bacanovic, jointly and severally, disgorge $45,673, representing the
losses avoided by Stewart’s sale of ImClone securities, and that they
pay civil penalties and prejudgment interest. The Commission also seeks
an order permanently enjoining Stewart and Bacanovic from violating the
securities laws, and barring Stewart from acting as a director of, and
limiting her activities as an officer of, a public company.
The Commission acknowledges the assistance of the U.S. Attorney’s Office
for the Southern District of New York and the Federal Bureau of
Investigation in the investigation of this matter. [SEC v. Martha
Stewart and Peter Bacanovic, 03-CIV-4070, NRB, USDC, SDNY ](LR-18169);
(Press Rel. 2003-69)
SEC NEWS DIGEST JUNE 4, 2003 Issue 2003-106