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The FBI, the Department of Justice and the SEC have been investigating Stewart since early January 2002, just days after she sold about $228,000 of ImClone stock. It was a decision she made grudgingly, according to testimony given to the SEC by Stewart's broker at Merrill Lynch, Peter Bacanovic, because it meant admitting she was wrong. Bacanovic said he and Stewart had reviewed her entire portfolio in a pre-Christmas session of tax planning and disagreed about what to do with her 3,928 shares of ImClone. "She wanted to hold the stock, and I challenged that by saying, 'The stock has been declining. Why would you hold it? Why are you holding this, considering we sold 50,000 or 40,000 shares months ago?'" Bacanovic said. "I said, 'O.K., if you would not like to sell the stock now, how long are you going to wait before you sell this stock?' ... We determined that $60 a share would be a suitable price, should it ever fall that low. Of course, she never thought it would."
Prosecutors contend that the $60 stop-loss agreement was a false alibi concocted by Stewart and Bacanovic to explain the events of Dec. 27, 2001. Stewart was on her way to a vacation in Mexico, and Bacanovic--then off on his own holiday--had just learned that ImClone co-founder Sam Waksal wanted to sell all the ImClone shares in his Merrill Lynch account, worth $4.9 million. Bacanovic called Stewart's assistant and left the message "Peter Bacanovic thinks ImClone is going to start trading downward."
Had Stewart simply sold on that advice, securities experts say, she probably would not have faced trouble--though Bacanovic might have. But after hearing about Waksal's order, Stewart, ever the micromanager, tried to reach Waksal herself, leaving a message recorded as "Martha Stewart. Something is going on with ImClone and she wants to know what." Although Stewart didn't learn the reason for Waksal's attempted sale--he had been told that the Food and Drug Administration was about to reject an application for approval of ImClone's key drug, Erbitux--she sold her shares and avoided losses of $45,673, the indictment says. Waksal pleaded guilty in October to six counts of securities fraud and obstruction of justice related to his attempted sale. He is scheduled for sentencing this week. In March he partly settled insider-trading charges brought by the SEC.
Insider trading, however, is not the focus of the criminal charges against Stewart and Bacanovic--that is left to the civil charges brought by the SEC. Several defense attorneys and former prosecutors say it would be difficult to make a criminal insider-trading case against the pair because the government would have to prove that Stewart knew the significance of Waksal's sale when she sold the stock. "It's a tricky case," says Greg Markel, a securities-law specialist at Cadwalader Wickersham & Taft in New York City. A broker passing along a tip from one client to another "is not that unusual," says John Teakell, a former SEC litigator in Dallas. (In Bacanovic's case, says a defense attorney, "it probably could have been a lot subtler.")