Martha probe leaning toward obstruction
Congressional investigators won't offer Merrill broker Baconovic immunity.
June 26, 2002: 7:37 PM EDT

NEW YORK (CNN/Money) - Federal prosecutors are more interested in pursuing an obstruction of justice case against homemaking guru Martha Stewart than an investigation solely centered on insider trading, people familiar with the investigation told CNNfn Wednesday.

The Department of Justice, which is investigating why Stewart sold Imclone Systems shares the day before damaging news about the company became public, is leaning towards an obstruction of justice and false statements case, the sources said.

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Separately, Congressman Jim Greenwood, R-Pa., head of the oversight and investigations subcommittee which is investigating the ImClone scandal, said Wednesday that there may be holes in Stewart's version of events.

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Government regulators and Congress are looking into the sale of ImClone stock by Stewart, former ImClone (IMCL: Research, Estimates) CEO Samuel Waksal and others prior to public knowledge that the Food and Drug Administration had rejected an application for approval of the company's cancer drug, Erbitux.

Stewart and her broker Peter Bacanovic, of Merrill Lynch, have said they had a pre-arranged plan to sell her shares of ImClone if the stock hit $60 per share. Stewart has insisted she did nothing wrong when she sold nearly 4,000 shares of ImClone stock Dec. 27, the day before the FDA refused to consider an application for the company's key cancer drug. She saved between $40,000 and $57,000 by selling when she did rather than on the first trading day after the news of the FDA action was revealed.

Stewart so far has not been charged with any wrongdoing, while Merrill last week placed Bacanovic and his assistant, Douglas Faneuil, on leave. Faneuil has changed his account of what occurred with the sale of the stock, the Wall Street Journal reported Wednesday. Faneuil initially backed up the explanation Stewart and Bacanovic gave for the sale of the stock, but now says he misled investigators, the Journal said.

"The attorneys for Merrill Lynch told me Friday that there were discrepancies in the accounts of the sales as presented by Martha Stewart's broker, Peter Bacanovic, and his assistant, Douglas Faneuil," Rep. Greenwood said Wednesday.

Congressional investigators are not centering their investigation solely on Stewart but are also focusing on Baconovic and Faneuil, Greenwood said. The subcommittee is expecting documents to come from Merrill Lynch Thursday.

"We want to know what did they know about the impending bad news from the FDA coming to ImClone, when did they know it [and] with whom did they share it?" Greenwood said. "Miss Stewart is one of many clients. We're looking at all of them."

Congressional investigators had expected to interview Baconovic this week, but the Merrill broker has engaged new legal representation, which has delayed the meeting.

Bacanovic is considering withholding information from prosecutors unless he is granted immunity, according to a report in USA Today. But investigators are not considering offering Baconovic legal protection. "We're not discussing immunity with Bacanovic nor would we," Greenwood said. "Anyone who violates the law needs to be punished."

Shares of Martha Stewart Living Omnimedia Inc. (MSO: Research, Estimates) dropped nearly 24 percent Wednesday to close at $10.40 while ImClone's stock gained marginally to finish at $9.08.  Top of page