Martha indicted, resigns
Stewart exits as CEO after pleading not guilty to charges related to her sale of ImClone stock.
June 4, 2003: 8:13 PM EDT
By Jake Ulick, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Martha Stewart resigned Wednesday as chairman and CEO of the company she founded, just hours after a federal indictment accused her and her former stockbroker of lying to investigators who were probing her profitable sale of ImClone Systems stock.

Martha Stewart arrives at federal court in New York.

Stewart will no longer run the media and homemaking empire Martha Stewart Living Omnimedia, according to a statement from the company that said the CEO and chairman jobs will be split between two individuals, effective immediately.

But Stewart, 61, will remain on the board and continue to serve as what the company called its "chief creative officer."

Earlier, a nine-count, 41-page indictment of Stewart painted a picture of a coverup in which Stewart and her former broker at Merrill Lynch, Peter Bacanovic, obstructed justice and made false statements.

But the accusations sidestepped a question that has captivated the public for a year: Did insider information allow the former stockbroker and one-time New York Stock Exchange director to avoid losses in her ImClone Systems Inc. investment?

"This criminal case is about lying, lying to the FBI, lying to the SEC and lying to investors," James B. Comey, the U.S. Attorney for the Southern District of New York, told a news conference. "This is conduct that will not be tolerated by anybody."

Stewart entered federal court in Manhattan and surrendered to federal authorities. At a nine-minute arraignment Wednesday afternoon, she and Bacanovic each pleaded not guilty to all nine counts, possibly paving the way for a trial that would draw tremendous publicity. They were released without bail.

The indictment comes a year after it was revealed that Stewart in late 2001 sold 3,928 ImClone shares a day before a regulatory setback sent the stock tumbling. Investigators had been trying to determine what Stewart, a friend of ImClone's then-CEO Samuel Waksal, knew ahead of a sale that netted the multi-millionaire about $229,000.

Wednesday's indictment focuses on Stewart's public statements and private dealings with investigators during the past year.

Specifically, she was charged with two counts of making false statements, while one false-statement charge was made against Bacanovic. Each faces one count of obstruction of justice, and Bacanovic was charged with perjury and making and using false documents.

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Martha Stewart is indicted in the ImClone stock scandal on five counts, and her former broker, Peter Bacanovic, on four counts. CNNfn's Chris Huntington reports.

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The lone charge of securities fraud leveled against Stewart deals with making false statements regarding her own company, Martha Stewart Living Omnimedia, that allegedly defrauded investors by artificially propping up the stock price.

Martha Stewart's lawyers seized on the absence of insider trading charges, the focus of so much speculation.

"The indictment reveals that the predicate for the entire investigation -- the accusation that Martha Stewart sold her ImClone shares based on inside information -- has proven to be false," her lawyers, Robert Morvillo and John Tigue, said in a statement.

That matter will be left to a civil suit filed Wednesday by the Securities and Exchange Commission in federal court in Manhattan. The suit accuses Stewart of getting an illegal tip from Bacanovic saying that Waksal, and Waksal's daughter, had placed orders to sell ImClone shares on the morning of Dec. 27, 2001.

Determining the truth about what happened between Stewart, her stockbroker and the ImClone shares may be difficult, according to one legal expert.

Are federal prosecutors being too hard on Martha Stewart?

"The problem has always been who said what to whom and the lack of a paper record," said Jeffrey D. Bauman, a law professor Georgetown University.

Stewart became one of the nation's wealthiest people by taking Martha Stewart Living Omnimedia Inc. public in October 1999 during the last gasp of the 1990s bull market. But the company whose identity is so tied to Stewart's became unprofitable this year and has lost millions in market value as customers defected and legal costs climbed.

In the CEO's job, Stewart will be replaced by Sharon Patrick, the company's president and chief operating officer. Jeffrey Ubben, whose investment firm ValueAct Capital Partners owns 22 percent of the company's class A stock, has been elected chairman.

"My decision reflects the enormous sense of responsibility I feel to our shareholders and to all those who have worked so hard to make Martha Stewart Living Omnimedia a success," Stewart said in a statement that announced her resignation.

The company also said that Arthur Martinez, a director and former chairman and CEO of Sears Roebuck, has been named "lead director" and will preside over all board meetings.

Ahead of Stewart's resignation, but after her indictment, shares of Martha Stewart Living Omnimedia (MSO: Research, Estimates) jumped 48 cents, or 5 percent, to $10. But the stock is still down 47 percent over the last year.

According to the terms set during Wednesday's arraignment, Stewart must give the court 72 hours notice if she intends to travel outside the country. Bacanovic was asked to turn in his passport.

A guilty conviction on all counts could mean a prison sentence of as much as 30 years for Stewart and 25 years for Bacanovic, the U.S. Attorney's office said.

Criminal indictment against Stewart
SEC insider trading complaint
from FindLaw (

On Dec. 28, 2001, a day after Stewart sold her shares, ImClone (IMCLE: up $0.77 to $34.32, Research, Estimates), a New York-based biotechnology company, said the Food and Drug Administration rejected its application for cancer drug Erbitux, sending ImClone shares tumbling.

Stewart had long maintained that she had an agreement with her broker to sell the shares when they fell below $60. But both the SEC's suit and the indictment dispute that contention, saying Stewart sold the shares after learning that Waksal, who left ImClone last year, was trying to unload his stock.

"By selling when she did, Stewart avoided losses of $45,673," according to the SEC.

That kind of profit motive is, of course, minimal for Stewart, who in 2000 and 2001 was named on Forbes magazine's list of the 400 wealthiest Americans.

In criticizing the charges against their client, Stewart's attorneys cited the government's record on corporate fraud.

Are the charges being filed "because the Department of Justice is attempting to divert the public's attention from its failure to charge the politically connected managers of Enron and WorldCom who may have fleeced the public out of billions of dollars?" the lawyers said in their statement.

They also asked if the government brought the case "because (Stewart) is a woman who has successfully competed in a man's business world by virtue of her talent, hard work and demanding standards?"

But in an informal Web site poll, a majority of more than 64,000 readers said the government was not being too hard on Stewart.

"The worst thing they could do is bring this case and lose it, so they must be very confident in their case," said Jeffrey Toobin, CNN's legal correspondent, who interviewed Stewart this year for the New Yorker magazine.

Bacanovic's lawyer, Richard M. Strassberg, said the charges "victimize an innocent man -- Mr. Bacanovic in order to further the government's more than year-long pursuit of Ms. Stewart in a case that is unprecedented in many ways, and appears to be in the criminal justice system solely because of Ms. Stewart's celebrity status."

Waksal is due to be sentenced this month on the securities fraud charges he pleaded guilty to last year. Recent optimism over ImClone's cancer treatment, Erbitux, has pushed ImClone stock up six-fold since October.  Top of page

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