Updated from 3:29 p.m. EDT Calling the season's biggest Wall Street scandal a "tragedy," federal prosecutors charged Martha Stewart and her stockbroker, Peter Bacanovic, with nine felony counts Wednesday, saying a conviction could mean jail time. Both defendants pleaded innocent. Wednesday evening,
Stewart announced she would step aside as CEO and chairwoman of Martha Stewart Living ( MSO). She will remain a board member and serve as chief creative director. A day after she missed her company's annual meeting, Stewart appeared at the federal courthouse in Lower Manhattan on a rainswept afternoon. Stewart and Bacanovic, a former Merrill Lynch broker, now face charges stemming from her sale of some 4,000 shares of ImClone Systems just before the biotech stock plunged in December 2001. Wednesday's 41-page indictment charges both Stewart and Bacanovic with conspiracy, obstruction of justice and making false statements. Bacanovic is also charged with perjury, accused of giving false testimony under oath to the Securities and Exchange Commission. Stewart, meanwhile, is charged with securities fraud. If convicted of all the criminal charges, Stewart faces up to 30 years in jail and fines of up to $2 million. Meanwhile, Bacanovic faces 25 years in prison and fines of up to $1.25 million. Stewart faces additional sanctions and fines under an SEC civil prosecution. The charges capped a 16-month-long investigation. Ahead of the defendants' pleas, a highly polished news conference saw prosecutors distill the nine counts against Stewart and Bacanovic to one overarching alleged misdeed. "This criminal case is about lying," U.S. Attorney James Comey told reporters at the midafternoon news conference. "Lying to the FBI, lying to the SEC and lying to investors. ... This is a tragedy that could have been prevented if only these two had done what parents have taught their children for eons." Stewart's lawyer, Robert Morvillo, issued a statement asserting Stewart's innocence and denouncing prosecutors for using her public remarks about the controversy as the basis for the securities fraud allegation.
In any case, the defense waxed livid. "Martha Stewart has done nothing wrong," Stewart's lawyer said. "Why ... has the government, after nearly a year and a half, chosen to file these charges? Is it for publicity purposes because Martha Stewart is a celebrity? ... Or is it 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 government maintained that its choice was the proper one. "A criminal insider trading charge in these circumstances would be unprecedented," Comey explained at the news conference. "Martha Stewart is famous, but that is no reason to treat her differently than anyone else. The SEC has done the right thing by suing
the defendants for their conduct." To that end, the SEC is seeking an order requiring Stewart and Bacanovic to disgorge all losses they avoided through their illegal trades, plus civil monetary penalties. "This isn't about celebrity, it's about accountability," said Kevin Donovan, assistant director in charge of the FBI in New York. "This is a very strong civil insider trading case," added Wayne Carlin, the SEC's Northeast regional director.
One of the key allegations against Stewart is that she changed the substance of a Dec. 27, 2001, phone message from Bacanovic to Stewart's assistant to make it look less incriminating. In the original message, Stewart's assistant had written that Bacanovic "thinks ImClone is going to start trading down." But prosecutors allege Stewart changed the message to simply this: "Peter Bacanovic re imclone." The alteration could be significant because Bacanovic left the message on the same day that Waksal was unloading his stock. Bacanovic was on vacation at the time but he told his assistant, Douglas Faneuil, to tell Stewart of the Waksal stock sales when she called the office. Prosecutors say that upon getting Bacanovic's message and after talking to Faneuil, Stewart sold all 3,928 shares of ImClone stock she owned for gross proceeds of $228,000. Stewart made things only worse for herself, prosecutors allege, by then making a series of false statements and explanations for the stock sale to the SEC, prosecutors and investigators with the FBI. One alleged deception was Stewart's statement that she did not recall being told that the Waksals were selling their ImClone stock.
One of Martha Stewart Living's largest shareholders, ValueAct Capital Partners, was mum on the developments. George Hamel, a partner in the San Francisco-based investment firm, which has about a 9% equity stake in the homemaking diva's company, said the firm had no comment at this time. Hamel's partner, Jeffrey Ubben, is a director of Martha Stewart Living. As of May 13, according to SEC filings, ValueAct owned 4.2 million shares.
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