Martha Stewart Sale of Stock Under Inquiry
By Jerry Markon

06/14/2002
The Wall Street Journal
C1
(Copyright (c) 2002, Dow Jones & Company, Inc.)

FEDERAL PROSECUTORS ARE actively investigating whether Martha Stewart had inside information when she sold her shares of ImClone Systems Inc. stock in late December, even though Ms. Stewart had signaled her intention to sell as early as October.

Investigators are looking at whether Ms. Stewart had any contact with former ImClone Chief Executive Samuel Waksal or anyone else who could have tipped her off that a promising ImClone cancer drug would soon be rejected by regulators, a person close to the case said.

Ms. Stewart, the home-decorating doyenne and a friend of Dr. Waksal, sold 3,928 shares of ImClone on Dec. 27, the day before the company announced that the Food and Drug Administration had refused to review the application for the drug, Erbitux.

The stock of Ms. Stewart's New York Stock Exchange-listed company, Martha Stewart Living Omnimedia Inc., fell 1.3% yesterday on top of a 12% plunge the day before in the wake of the arrest of Dr. Waksal.

Dr. Waksal was arrested early Wednesday by the Federal Bureau of Investigation and charged with tipping off family members -- who traded on the information -- and trying to sell his own shares before the price plunged. Federal authorities are continuing to investigate family members and others involved in ImClone trading who could be connected to Dr. Waksal, including Ms. Stewart.

Dr. Waksal has denied the allegations.

A spokeswoman for Ms. Stewart, Allyn Magrino, declined to comment yesterday beyond a statement that Ms. Stewart issued Wednesday, in which she denied wrongdoing.

Ms. Stewart, who worked as a stockbroker on Wall Street in the late 1960s, said in the statement that she had tried to sell her entire ImClone stake in late October in a tender offer made by Bristol-Myers Squibb Inc. to all ImClone shareholders. Bristol-Myers bought a 20% stake in ImClone, for $70 a share, but the offer was oversubscribed. Ms. Stewart, like other ImClone investors, said she was able to sell only 20% of the 5,000 shares she held at the time.

A few weeks later, Ms. Stewart said, she and her broker agreed that she would sell her remaining 3,928 ImClone shares if the stock price fell below $60. Ms. Stewart hasn't described the agreement in detail and hasn't said precisely when it took effect. Her spokeswoman declined to answer questions about the agreement yesterday, and her lawyers didn't return phone calls.

The sketchy information has frustrated congressional investigators, who are also looking into Ms. Stewart's transactions as part of a broader probe of the ImClone matter and whether the FDA should be more open with the public about its private communications with drug companies about potential products.

"I don't know if anyone has been able to pin [Ms. Stewart] down on the date" of the agreement to sell, a person familiar with the congressional probe said. "It's obviously been thrown out as a vague matter of weeks, different shades of this and that."

The timing of the agreement could be significant to investigators because ImClone's share price dipped below $60 on five occasions between Oct. 29, when the Bristol-Myers tender offer was completed, and Nov. 12. If Ms. Stewart's agreement to sell was in place during that time and she didn't sell her shares, prosecutors could use that information to support an inference that she sold on Dec. 27 because of inside information.

Federal investigators are also examining telephone records "to see if there were any means of contact, direct or indirect," between her and Dr. Waksal in the days before she sold, the person close to the case said.

Without proof of such contact as evidence that Ms. Stewart was told what is known as "material and nonpublic information" that could affect ImClone's stock price -- such as the pending FDA rejection -- it would be hard for prosecutors to make a case, legal specialists said.

"There would have to be some proof of communication" to create an inference that Ms. Stewart, or anyone else, sold on inside information, said John H. Sturc, a lawyer for Gibson, Dunn & Crutcher and former Securities and Exchange Commission enforcement official.