SEC Likely to Charge Martha Stewart

Times Staff Writers

Securities and Exchange Commission staffers have notified Martha Stewart that they will recommend filing civil insider-trading charges against the homemaking tycoon in connection with her sale last December of shares of ImClone Systems Inc., a source said Monday.

The move marks a major setback for Stewart, who also is the focus of a criminal investigation into the circumstances surrounding the sale of her ImClone shares. She has steadfastly denied any wrongdoing but has seen her public image -- and by extension, the fortunes of her publishing and home-furnishings empire -- damaged by the deepening scandal.

Her friend Samuel D. Waksal, former chief executive of ImClone, pleaded guilty last week to criminal charges in what has become one of the splashiest insider trading cases to hit Wall Street since the days of Ivan Boesky in the late 1980s.

The SEC’s enforcement staff this month sent Stewart a so-called Wells Notice -- a formal notification that the staff is asking the five SEC commissioners for approval to file civil securities-fraud charges against Stewart, the source said.


Under SEC procedure, Stewart has the right to file a written response to the Wells Notice giving her side of the story. The final decision on whether to bring charges rests with the SEC commissioners, but the commission normally follows staff recommendations, legal experts said.

“By this time, the staff has checked and double-checked its facts and feels it has enough evidence to go forward,” said Houston securities lawyer Christopher J. Bebel, a former SEC enforcement official. “The commissioners aren’t going to want to go on record frustrating their staff’s investigation.”

An SEC spokeswoman declined to comment Monday on the Stewart case.

Stewart had no comment on Monday’s developments, a spokeswoman said. In previous statements, Stewart has denied breaking the law.


The company she chairs, Martha Stewart Living Omnimedia Inc., also declined to comment.

News of the SEC action, first reported on the Wall Street Journal’s Web site, came after the close of trading. Martha Stewart Living Omnimedia shares rose 25 cents in after-hours trading after closing at $7.50 on the New York Stock Exchange.

Besides the SEC’s civil probe, Stewart also is under criminal investigation by the U.S. Department of Justice, which is trying to determine whether she lied about her sale of ImClone shares.

She sold $227,000 worth of ImClone stock Dec. 27, one day before the biotech company announced a damaging ruling from the U.S. Food and Drug Administration against its most promising cancer drug, Erbitux.


When the stock resumed trading after the ruling was announced, it plunged 16% in a day. Had Stewart’s sale come at the end of that day, she would have received about $45,000 less for her shares.

The SEC could seek to force Stewart to disgorge any ill-gotten gains, which in this case would be the losses that she avoided by selling before the FDA ruling became public, the source said. The agency also could seek a penalty of up to three times the ill-gotten gain.

The commission also could seek to bar Stewart from ever again serving as an officer or director of a public company, the source said. That could be the sharpest penalty for Stewart, as it would banish her from the company she founded and whose products are synonymous with her image.

Stewart, a former stockbroker, stepped down from the board of the New York Stock Exchange this month.


ImClone founder Waksal pleaded guilty to six felonies, including insider trading and bank fraud, in connection with sales of about $10 million worth of ImClone shares by his father and daughter and his own attempted sale of shares worth $5 million--all just ahead of the FDA ruling.

On Monday, U.S. authorities filed a civil lawsuit seeking forfeiture of $9.7 million in four separate accounts controlled by Waksal’s family members, according to court papers filed in U.S. District Court in Manhattan.

Legal experts believe that the prosecutors are trying to squeeze Waksal for evidence against Stewart. Waksal has not cooperated, but the lead U.S. prosecutor said last week that the government is free to bring Waksal to trial on the seven felony charges not covered by his plea, or to file new charges against him. Prosecutors also could use potential charges against Waksal’s daughter and elderly father as leverage to get his cooperation.

Lawyers for Stewart said last week that the Waksal plea had nothing to do with their client.


After Waksal’s arrest in June, Stewart issued a statement saying that her sale was triggered by a previous arrangement with her Merrill Lynch broker to sell the stock if the price fell below $60 a share. However, the broker’s assistant who initially confirmed the existence of the sales arrangement has since changed his story.