This is the story of how Martha Stewart saved $50,000 and lost $166 million trading stocks. Earlier this month, Sam Waksal, the former chief executive officer of biotech company ImClone ( IMCL), was arrested in his Soho loft and charged with insider trading. On Dec. 27, 2001, it is alleged, Waksal got wind that the Food and Drug Administration would on the next day announce its rejection of ImClone's application for its anticancer drug Erbutix. Waksal is charged with giving a heads-up to family members and other associates, who then proceeded to dump hundreds of thousands of shares on Dec. 27 and Dec. 28, saving millions of dollars when the stock fell nearly 20% on Dec. 31. How does the domestic doyenne figure in all this? On Dec. 27, Stewart, whose daughter once dated Sam Waksal, sold her entire 3,928-share Imclone position at $58 per share. By selling ahead of the bad news, Stewart saved $49,532. But the trade has cost her far more -- her stock in her own company lost nearly $166 million in value, and her reputation suffered incalculable damage. Regulators are now investigating Stewart's stock trades, and Stewart has categorically denied any wrongdoing. But as a professional decorator and caterer like Stewart knows, appearance and taste matter almost as much as substance. And while circumstantial, the evidence trickling out makes Stewart's denials about as tough to swallow as a brisket that has been braised for just 30 minutes instead of the requisite three hours. When news of her sale was first reported in early June, Stewart said it was triggered by a stop-limit order she had placed with her Merrill Lynch broker, Peter Bacanovic. In this case, said Stewart, the order was set at $60. And on Dec. 27, the stock did indeed fall below $60 for the first time in several weeks. Innocent enough.
There's only one problem: Merrill apparently has no written or digital record of the stop order. And according to The Wall Street Journal, Bacanovic's assistant, Douglas Faneuil, has provided information suggesting that none ever existed. Now, it's hard to believe that someone so famously meticulous -- OK, anal -- would place a stop-order on a stock and not get the routine documentation. (If I place one on my Fidelity account, I receive printed confirmation in the mail within three days.) And Stewart, who once worked as a stockbroker, is no financial naif. Besides, if she was just a passive investor in ImClone -- and not an active trader -- why did she allegedly call Sam Waksal on the afternoon of Dec. 27 seeking information? More circumstantial evidence: Stewart's broker is a former ImClone executive and counted Sam Waksal and Waksal's daughter among his clients. Phone records show Bacanovic and Stewart talked on Dec. 27, right before her shares were sold. Investigators are looking into whether Bacanovic sold the Waksal shares on Dec. 27 and Dec. 28. Bacanovic has been placed on leave by Merrill, for "factual issues regarding a client transaction." This is not a good thing. Is Stewart guilty of insider trading? Probably not. My theory: Bacanovic got the information from someone connected to ImClone, probably Waksal, and blew out the ImClone positions held by all his clients, including Stewart. But Stewart is certainly guilty of other offenses. How could someone as savvy as Stewart not realize that trading ImClone stock on material nonpublic information, through a broker who also manages money for ImClone insiders, and then saying publicly that there was a stop order when there was no documentation to back up the assertion, would reek as much as a six-day-old unrefrigerated salmon mousse? Even more significant, how could she not realize that a disclosure that even hints of wrongdoing -- especially in this environment -- would cause lasting damage to her company?