Martha Stewart Is Convicted in Insider-Trading Scandal Summary

  • Last updated on November 11, 2022

In a stunning, but temporary, fall from grace, home-design guru Martha Stewart was convicted of multiple federal felonies for selling stocks immediately before those stocks were expected to decrease in value. Stewart was convicted not of insider trading but rather of lying to government agents about a trade that was not illegal.

Summary of Event

On March 5, 2004, after deliberating for three days, a jury of four men and eight women convicted Martha Stewart, chief executive officer of Martha Stewart Omnimedia, of making false statements to the federal government, obstruction of justice, and conspiracy to make false statements and obstruct justice. Prosecutors argued that Stewart hindered a government investigation of suspected insider trading in a biotechnology firm called ImClone Systems, which was founded and being run by Samuel Waksal. [kw]Stewart Is Convicted in Insider-Trading Scandal, Martha (Mar. 5, 2004) [kw]Insider-Trading Scandal, Martha Stewart Is Convicted in (Mar. 5, 2004) Stewart, Martha Securities and Exchange Commission;and Martha Stewart[Stewart] Bacanovic, Peter ImClone Systems Waksal, Samuel D. Faneuil, Douglas Insider trading;and Martha Stewart[Stewart] Stewart, Martha Securities and Exchange Commission;and Martha Stewart[Stewart] Bacanovic, Peter ImClone Systems Waksal, Samuel D. Faneuil, Douglas Insider trading;and Martha Stewart[Stewart] [g]United States;Mar. 5, 2004: Martha Stewart Is Convicted in Insider-Trading Scandal[03390] [c]Business;Mar. 5, 2004: Martha Stewart Is Convicted in Insider-Trading Scandal[03390] [c]Corruption;Mar. 5, 2004: Martha Stewart Is Convicted in Insider-Trading Scandal[03390] [c]Drugs;Mar. 5, 2004: Martha Stewart Is Convicted in Insider-Trading Scandal[03390] [c]Law and the courts;Mar. 5, 2004: Martha Stewart Is Convicted in Insider-Trading Scandal[03390] Cedarbaum, Miriam Goldman

ImClone’s business prospects depended almost entirely on its cancer treatment drug, Erbitux. Erbitux On December 26, 2001, Waksal learned that the U.S. Food and Drug Administration was not going to approve Erbitux. Waksal tried to sell all of his personal shares of ImClone stock, even attempting to have his stake transferred to a family member to be sold. Stewart, who also had shares in ImClone, sold her entire stake on that same day. The jury found that she lied to government agents about her reasons for selling her shares.

Martha Stewart leaves a federal courthouse in New York City after being sentenced on July 16, 2004, in an insider-trading scandal.

(AP/Wide World Photos)

As it turned out, Waksal and Stewart shared the same financial consultant at Merrill Lynch: Peter Bacanovic. Bacanovic was on vacation at the time, but his assistant, Douglas Faneuil, called him on December 27 to inform him of Waksal’s attempted sale. According to telephone records, Bacanovic immediately called Stewart’s office and left a message at 10:04 a.m., which was recorded in the company’s computer system by Stewart’s personal assistant, Ann Armstrong, as “Peter Bacanovic thinks ImClone is going to start trading downward.” Later that day, Stewart called Bacanovic’s office and reached Faneuil, who informed her—as directed by Bacanovic—that Waksal had tried to sell his entire stake of ImClone. Stewart ordered Faneuil to sell all 3,928 of her shares of ImClone, which he did the same day. ImClone stock collapsed in response to the company’s announcement on December 28 of the FDA decision not to approve Erbitux. Had Stewart waited until after December 28 to sell her stock, she would have lost close to fifty thousand dollars.

By early 2002, the House Energy and Commerce Committee, the U.S. Securities and Exchange Commission (SEC), the Federal Bureau of Investigation (FBI), and the U.S. Attorney’s Office had all commenced investigations into Waksal’s attempted stock sale and, in the process, noticed the timing of Stewart’s sale as well. SEC lawyers interviewed Bacanovic on January 7, 2002, at which point Bacanovic explained that in mid-December, 2001, he and Stewart had agreed that they would sell her ImClone stock if were to drop below sixty dollars per share.

A few weeks later, SEC lawyers, FBI agents, and federal prosecutors asked to meet Stewart. However, before that meeting took place, Stewart sat at her assistant’s desk, found the record of the December 27 phone message from Bacanovic, and—in her assistant’s presence—altered the message to read, “Peter Bacanovic re: ImClone.” Stewart quickly asked her assistant to restore the message to its original state. On February 4, 2002, Stewart, accompanied by legal counsel, met with government lawyers and agents. At this meeting, Stewart said that she and Bacanovic had agreed sometime before early December to sell her ImClone stock if it dropped below sixty dollars per share. She also described her December 27 phone conversation as between herself and Bacanovic, not Faneuil.

Bacanovic testified formally before the SEC on February 13 and essentially repeated his statements from his January interview. SEC lawyers, FBI agents, and federal prosecutors also interviewed Stewart again, by telephone, on April 10; she repeated that she and Bacanovic had agreed on when to sell her ImClone stock, and she said that she did not remember hearing on December 27 that Waksal was trying to dump his ImClone stock.

On June 4, 2003, federal prosecutors indicted Stewart and Bacanovic on nine separate counts. In addition, the SEC charged Stewart with securities fraud. The securities fraud charge was unusual because it was based not on Stewart’s sale of ImClone stock but rather on her public statements of innocence. According to the SEC, Stewart made these statements with the intention of deceiving purchasers of her company’s stock.

The criminal trial began on January 20, 2004, and lasted for six and a half weeks. Stewart was represented by Robert Morvillo, an experienced criminal defense attorney. The lead prosecutor was Assistant U.S. Attorney Karen Patton Seymour, then head of the criminal division. The key witnesses against Stewart and Bacanovic were Faneuil, Armstrong, and Mariana Pasternak, a friend of Stewart. Pasternak testified that, while vacationing together in Mexico, Stewart mentioned that Waksal’s stock was plunging and that she had sold her shares, observing, “Isn’t it nice to have brokers who tell you those things?” The jury evidently credited the testimony of these witnesses (although it did acquit Bacanovic of a separate count alleging that he had forged a worksheet to bolster the claim that a prior agreement to sell existed).

On July 17, the trial judge, Miriam Goldman Cedarbaum, sentenced Stewart to five months in prison and five months of home detention, fined her thirty thousand dollars, and ordered nineteen months of supervised release following confinement. Although Stewart was freed on bail pending appeal, she opted to serve her prison sentence nevertheless. On October 8, she reported to Alderson Federal Prison Camp in West Virginia and served her sentence. Following the story outside the minimum-security facility for women was the media, which broadcast from outside the complex for several weeks. The U.S. Court of Appeals for the second circuit rejected her appeal. Upon her release from prison, the media followed her to her home in New York and watched her every move. Stewart embraced the publicity.

Impact

Stewart’s conviction had a mixed impact on her iconic image. Many credited her for accepting responsibility for her actions and requesting she enter prison before her appeals were processed. Her Talk shows talk show Martha Stewart Living (television) Martha Stewart Living went off the air three days after the guilty verdict, but Stewart resurfaced on daytime television with a new program called The Martha Stewart Show, which made its debut on September 12, 2005.

After Stewart completed her prison term, Mark Burnett, producer of the popular reality television shows Survivor and The Apprentice, approached her to star in a spinoff of the latter to be called The Apprentice: Martha Stewart. That show aired on NBC in the fall of 2005, but its ratings were considered sub-par and it was not renewed.

Because the trial judge dismissed the securities fraud charge, some critics of the prosecution argued that Stewart had been convicted of lying about something that was not itself a crime. Other critics perceived gender bias among prosecutors. Stewart, a powerful businesswoman, was convicted for what many considered a trivial matter, while the federally indicted male executives of scandal-ridden corporations such as Enron, Worldcom, and Tyco remained free. (Within a couple of years, however, state and federal prosecutors obtained convictions in virtually all high-profile cases involving the executive officers of these companies, who would receive prison sentences in excess of twenty years each, but for crimes much more serious and far-reaching than those of Stewart.)

On August 7, 2006, Stewart and Bacanovic agreed to settle insider trading civil charges brought against them by the SEC on June 4, 2003, for the December, 2001, ImClone stock sales. In its press release announcing the agreement, the SEC said,

Under the settlement, Stewart and Bacanovic agree to pay disgorgement and penalties. Stewart also agrees to a five year bar from serving as a director of a public company and a five year limitation on the scope of her service as an officer or employee of a public company. In August 2004, the commission barred Bacanovic from associating with a broker, dealer or investment adviser.

Finally, in an ironic twist, the FDA reversed itself and approved Erbitux in February, 2004, for use as a cancer treatment drug. Had Waksal not panicked in December, 2001, and acted hastily to sell his company shares, neither he nor Stewart would be convicted felons. Stewart, Martha Securities and Exchange Commission;and Martha Stewart[Stewart] Bacanovic, Peter ImClone Systems Waksal, Samuel D. Faneuil, Douglas Insider trading;and Martha Stewart[Stewart]

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Byron, Christopher M. Martha Inc.: The Incredible Story of Martha Stewart Living Omnimedia. New York: J. Wiley, 2002. Unauthorized biography of Stewart and her company by a reporter with The Wall Street Journal.
  • citation-type="booksimple"

    xlink:type="simple">Dershowitz, Alan M.“With Lawyers Like These . ..” The Wall Street Journal, March 8, 2004. An editorial that castigates Stewart’s legal team, written by a well-known Harvard law professor and legal commentator.
  • citation-type="booksimple"

    xlink:type="simple">Glater, Jonathan D. “Martha Stewart’s Sentence: The Corporate Role—Stewart Likely to Influence Her Company, Even from Jail.” The New York Times, July 17, 2004. Examines the legal impact of Stewart’s conviction on her ability to run her business from outside the corporate office.
  • citation-type="booksimple"

    xlink:type="simple">Hays, Constance L., and David Carr. “Before Facing Judge, Stewart Is Out and About.” The New York Times, July 15, 2004. Describes Stewart’s actions and mental-emotional state before she was sentenced.
  • citation-type="booksimple"

    xlink:type="simple">Hays, Constance L., and Leslie Eaton. “The Martha Stewart Verdict: The Overview—Stewart Found Guilty of Lying in Sale of Stock.” The New York Times, March 6, 2004. A recap of Stewart’s trial the day after the jury in the case rendered its verdict of guilty on multiple charges.
  • citation-type="booksimple"

    xlink:type="simple">Turow, Scott. “Cry No Tears for Martha Stewart.” The New York Times, May 27, 2004. An article that supports Stewart’s conviction for conspiracy, obstruction of justice, and making false statements to federal authorities.

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