NEW YORK (CNN/Money) - The Securities and Exchange Commission notified embattled drugmaker ImClone Systems Inc. that it may take action against the company for alleged improper disclosure of information about its cancer drug, ImClone said Wednesday.

ImClone's former chief executive, Sam Waksal, was arrested and charged with insider trading last week, after allegedly tipping off family members before news broke that the Food and Drug Administration rejected the firm's application for its cancer-fighting drug Erbitux. Waksal's friend, home design guru Martha Stewart, is also being questioned by federal investigators on the same matter. She has not been charged. Waksal has denied any wrongdoing.

ImClone said in a statement that it plans to respond to the agency regarding the so-called Wells notice, and repeated that it intends to cooperate fully with the SEC's investigation.

Wells letters are sent to potential targets of commission investigations. They function as a warning and afford recipients the opportunity to explain to the SEC why an investigation is not justified. But not every company that gets a Wells notice ends up being investigated.

In rejecting the Erbitux applications, the FDA notified ImClone that its application was scientifically incomplete and that it did not contain the data needed to evaluate the clinical effectiveness of Erbitux.

The letter added that problems with ImClone's data had been discussed at a meeting on Aug. 11, 2000, and in a letter dated Jan. 26, 2001. Yet ImClone revealed none of that information to investors.

In a telephone conference with investors shortly after the announcement of the FDA rejection, Waksal said, "I was rather stunned when we got the letter... I have to tell you this was unexpected," according to the Cancer Letter.

Congressional investigators probing the matter want to know whether Stewart's broker, Peter Bacanovic, a Merrill Lynch employee, may have advised Stewart to sell her shares on Dec. 27 after completing a sell order for Waksal on behalf of his daughter Aliza, earlier in the day, a source close to the investigation told CNN/Money Wednesday.

Stewart has repeatedly denied having any insider knowledge and said she had arranged a pre-existing order for Bacanovic to sell her shares if the price dipped below $60, which it did on Dec. 27.

Bacanovic was apparently traveling in Europe Wednesday and had not been subpoenaed by the committee.

Attempts to reach Bacanovic and Merrill Lynch were unsuccessful late Wednesday. Earlier in the day, Merrill refused comment except to confirm it is cooperating with the investigations. Merrill has publicly announced support for its broker, saying, "Peter Bacanovic is a long-standing, respected and valued employee of Merrill Lynch."

According to the source, Bacanovic executed an order to sell $2.5 million worth of ImClone shares for Waksal's daughter, Aliza, on the morning of Dec. 27. Later that day, Bacanovic was asked to sell an additional 79,000 shares, worth $4.8 million, that Waksal wanted gifted to Aliza. However, Bacanovic declined to execute that order.

The SEC said in its indictment of Waksal that he tried for two days to sell the 79,000 shares for about $5 million, but two different brokers would not execute the orders.

At 1:40 p.m. that afternoon, Bacanovic executed Stewart's trade of 3,928 shares. The next day, Dec. 28, the FDA said it refused to consider the application for ImClone's cancer drug, Erbitux.

People close to the matter confirmed to CNN/Money Wednesday that Stewart has turned over phone records and logs from her private jet to congressional investigators on the House Energy and Commerce subcommittee. Those records show that Stewart tried to call Waksal on the day of her trade, but he never called her back. Stewart also called her home answering machine, sources said.

Stewart's attorney, James Fitzpatrick, also authorized the release of the Stewart stock ticket reflecting the ImClone transaction.

"I think they're looking to see when she called her broker to tell him to sell," said U.S. Rep. Eliot Engel, D-N.Y., a member of the House Energy and Commerce Committee, which is investigating the matter. "We all know when she sold, but when did she give the orders to sell?"

People close to the congressional investigation told CNNfn that investigators believe Stewart's broker might have handwritten notes that could document when she asked the broker to sell her ImClone stock if the price were to fall below $60 a share.

Stewart has said she had a standing order to sell her shares if the price dipped below $60. ImClone stock traded as high as $63.50 and as low as $57.47 on Dec. 27 before closing at $58.30. It then tumbled to $46.46 on Dec. 31, the first day of trading after the FDA's announcement.

ImClone (IMCL: up $0.33 to $11.41, Research, Estimates) stock has declined further since then, although it rose Wednesday.

Stewart has repeatedly denied that she had any inside information about the FDA action before it was made public Dec. 28, and she repeated that during an appearance in New York Wednesday.

"Contrary to what you might have read, I am cooperating fully with the House Committee on Commerce and Energy," she said, reiterating the she had no inside information and that her trades were "entirely proper and lawful."

"I have nothing to add on this matter today, and I'm here to talk about our terrific company," she told people at a media conference in New York.

Meanwhile, shares of Martha Stewart Living Omnimedia Inc. (MSO: up $2.05 to $16.45, Research, Estimates) jumped Wednesday, rebounding after a recent slide on worries that a probe by congressional and federal investigators could hurt her company. The company also affirmed it would meet Wall Street forecasts for profits for the second quarter.

Separately, Merrill Lynch confirmed Wednesday that former pharmaceutical analyst Eric Hecht issued a research note on Dec. 27 in response to questions from the firm's sales desk about unusual price movement in ImClone's stock. In the note, Hecht said there was public speculation that the FDA may send a "refuse to file" letter regarding ImClone's application for Erbitux, which the company says is a promising treatment for colon cancer.

"We believe that over the next six months, IMCL will have their file activated and we expect the product to be approved in 2002," Hecht wrote. Merrill added that Hecht's note was based on publicly available information and his own research and that the brokerage firm was continuing to cooperate fully with investigators.

Ironically, Merrill Lynch (MER: Research, Estimates) recently agreed to pay $100 million and reform its procedures on analysts' recommendations after charges that analysts kept criticisms of companies private in order to keep businesses happy and help attract investment banking business to the firm.

Separately Wednesday, Martha Stewart Living Omnimedia said it expects earnings of 15 cents a share on sales growth of about 15 percent. That's in line with analyst forecasts, according to earnings tracker First Call. New York-based Martha Stewart Living also said ad pages in its flagship magazine rose 12 percent in the second quarter.