When the WorldCom scandal broke, Martha Stewart must have smiled. Here, surely, was deliverance--a fresh spectacle that would shift the fickle spotlight of the tabloids and TV shows away from insider-trading allegations against the Diva of Domesticity and onto some other supposed villain.
No such luck. If anything, the heat in Stewart's kitchen is rising. Investigators say they are looking into possible obstruction of justice by Stewart, stemming from what they suspect are false statements about her sale of 3,928 shares of stock in drug company ImClone a day before it announced bad news that drove the stock price down.
Stewart has explained that she had given her stockbroker advance instructions to dump ImClone if it fell below $60 a share. At first, the broker, Peter Bacanovic, 40, and his assistant, Douglas Faneuil, 26, backed Stewart's story, investigators say. But Faneuil is now telling his bosses at Merrill Lynch that Bacanovic pressured him to back up Stewart's account.
Faneuil says he knew of no stop-loss order by Stewart, and Merrill officials have found no reliable evidence that such an order existed. They have turned documents from their internal probe over to government investigators. Neither Bacanovic nor Faneuil nor their lawyers would comment.
Stewart had no public comment on Faneuil's allegations. But, alarmed by the precipitous decline in the stock of her company, Martha Stewart Living Omnimedia, she unexpectedly turned up at a conference for institutional investors at Chicago's Four Seasons Hotel and talked up the prospects for her magazine, which has been showing strong advertising growth. Many investors are staying on the sidelines until Stewart is clear of the ImClone case.
What first attracted attention to Stewart's sale of ImClone stock was her close friendship with Samuel Waksal, 54, the company's former CEO who was indicted last month on insider-trading charges. Federal prosecutors allege that Waksal learned on Dec. 26 that the U.S. Food and Drug Administration was about to deny approval to ImClone's cancer drug, Erbitux. Between Dec. 26 and Dec. 28, authorities say, Waksal tried to sell $5 million in ImClone stock; brokers at Merrill and Banc of America Securities blocked him. His daughter Aliza, however, sold $2.5 million of ImClone on Dec. 27. And Stewart sold $228,000 worth on the same day. The next day, ImClone announced the bad news about Erbitux.
Bacanovic next will face questions from a congressional committee and the Justice Department. Waksal, as well as Stewart, was his client. Investigators are trying to determine whether Bacanovic, knowing that Waksal was desperate to sell his shares, advised Stewart to sell hers without explaining why. If that's the case, lawyers say, Stewart is probably innocent of insider trading. But if she knew about impending bad news from the FDA, she could be in trouble.
Investigators are leaning on Waksal to talk, hinting that they have enough evidence to indict his daughter for insider trading. (Aliza's lawyer would not comment, and Sam Waksal's lawyers did not return calls.) Sources say Bacanovic is seeking immunity in exchange for testimony against others.