Martha Stewart Insider Trading Charges
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- This article documents litigation in the United States involving ImClone Systems and Martha Stewart.
In 2002, media celebrity Martha Stewart was investigated for alleged insider trading, after selling 3,928 shares of ImClone Systems on December 27, 2001.
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[edit] Background
On December 28, the Food and Drug Administration announced it would not review ImClone's application for Erbitux, which the company touted as a promising cancer drug. ImClone's stock plunged over 70 percent in the month after the news came out. Stewart was a friend of ImClone founder Samuel Waksal (who supposedly dated Stewart after first dating her daughter Alexis), who has since pleaded guilty to six counts related to insider trading before the announcement. On June 6, 2002, the U.S. House Energy and Commerce Committee, which was already investigating dubious ImClone trading, announced that it was probing Stewart's stock sale. On June 25, 2002, she appeared on CBS' The Early Show, and when asked by Jane Clayson about the ImClone scandal during a cooking segment, she replied, "I just want to focus on my salad." On October 3, 2002, Stewart resigned from the board of directors of the New York Stock Exchange. Through all the investigation and allegation, Stewart kept her public persona intact, focusing on her homemaking specialties and downplaying or ignoring the increasing clamor for answers about her role in the scandal.
[edit] Criminal charges
[edit] Indictment
On June 4, 2003, a federal grand jury in Manhattan indicted Stewart and her former broker Peter Bacanovic on nine criminal counts from the U.S. Securities and Exchange Commission (SEC). By selling when she did, the government alleged Stewart avoided losses of $45,673. The charges included securities fraud, obstruction of justice, and conspiracy. Stewart was not indicted on the original investigative focus, insider trading, but only for the coverup that ensued. Stewart plead not guilty, saying she had a standing order with Bacanovic to sell her shares if ImClone stock fell below $60. Stewart resigned as CEO and chairman of Martha Stewart Living Omnimedia on the same day she was indicted, but remained on the company's board.
The day after her indictment, Stewart took out a full-page advertisement in USA Today and launched a website with an open letter of defense "to my friends and loyal supporters." She said, "I want you to know that I am innocent — and that I will fight to clear my name... The government's attempt to criminalize these actions makes no sense to me... I am confident I will be exonerated of these baseless charges."
On the day she was indicted, the SEC also filed a related civil complaint [1] against Stewart with charges of insider trading. [2] The civil charges were stayed pending the criminal proceeding. [3]
[edit] Trial
Stewart's trial was initially set for January 12, 2004, at the request of her lawyers who said they needed plenty of time to analyze the evidence. The trial eventually began on January 20 in New York City presided over by U.S. District Judge Miriam Goldman Cederbaum. During the trial, Stewart maintained her innocence.
On February 27, 2004, Judge Cederbaum threw out the charge of securities fraud which could have led to up to 10 years in prison and a million dollar fine. The judge called the charge "unfounded" and said that "no jury could feasibly find it to be accurate."
[edit] Verdict
The jury deliberated for three days following the five-week trial before reaching its verdict. On March 5, 2004, Stewart was found guilty by a jury of eight women and four men on all four remaining counts against her: conspiracy, obstruction of justice, and two counts of making false statements.[4] Although convicted of all counts, Stewart was not convicted of each "specification" within those counts. Notably, she was not found guilty of one of the most publicized charges: having falsely claimed that there was an agreement to sell her shares when they fell to $60.00. Compare indictment [5] with verdict form [6] (note Specification One of Count Three and Specification Two of Count Four). The jury did find, though, that Stewart lied and obstructed justice on other grounds, including her claim that she was reminded of the prior $60.00 agreement and urged to sell on that basis. Compare indictment [7] with verdict form [8].
The maximum sentence for these convictions combined is 20 years in prison. Sentencing was set for June 17. Following Stewart's conviction, a message was posted on her website, reading, in part, word to Kelly and Kasie "I am obviously distressed by the jury's verdict but I continue to take comfort in knowing that I have the confidence and enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail."
On January 6, 2006, a Federal Appeals court upheld[9] Martha Stewart's conviction of lying to investigators regarding the suspicious timing of the sale of her stocks in the publicly traded company ImClone just prior to news of that company's cancer drug being rejected by the FDA being made public.
[edit] Fallout after conviction
On March 8, 2004, Viacom pulled Martha Stewart Living from its CBS and UPN affiliates, after having moved the show during Stewart's trial from prime daytime timeslots into less desirable early-morning slots (e.g., 2:05am in New York). [10] On March 15, Stewart resigned from the board of Martha Stewart Living Omnimedia. Stewart had already resigned from the boards of The New York Stock Exchange and Revlon Cosmetics. On May 18, MSO announced that Martha Stewart Living, was going into hiatus, with no announced date of return.
In an unrelated matter, Stewart faced more legal trouble in February 2004 as her company, Martha Stewart Living Omnimedia, was sued by Kmart for allegedly "double-counting" royalty payments and advertising spending. The companies signed a seven-year deal in 2001 to market Martha Stewart Everyday brand home decorating, garden products, and housewares through Kmart stores. Kmart filed for bankruptcy protection seven months later and has since closed 600 of its 2,100 stores. On April 26, 2004, Kmart withdrew its lawsuit, having reached an agreement with Martha Stewart Living Omnimedia to amend the terms of the June 2001 contract and to extend it through 2009.
On May 21, 2004 , Larry Stewart (no relation), a United States Secret Service lab director who testified for the government against Martha Stewart, was charged with two counts of perjury. Stock in Martha Stewart Living Omnimedia jumped as much as 23 percent on the news. Larry Stewart was an expert witness about the ink on a broker's worksheet, testifying that the note about selling ImClone shares when it dropped below $60 was different from the rest of the ink on the document. The charges arose when Susan Fortunato, a USSS co-worker, complained that she had in fact done the analysis and that it had never been examined by Stewart. Although the jury at the perjury trial felt that Larry Stewart had taken unfair credit for the work done, it did not amount to perjury and he was found not guilty on October 5, 2004. The jury had trouble believing Fortunato, feeling that she had an axe to grind with Stewart.
[edit] Sentencing
On July 8, a motion for a new trial was denied and sentencing was set for July 16. Martha Stewart and Peter Bacanovic were each sentenced to five months in prison, five months of home confinement, and two years probation for lying about a stock sale, conspiracy, and obstruction of justice. Stewart was ordered to pay a $30,000 fine, while Bacanovic was fined $4,000. The judge stayed the sentence while they prepared their appeals. [11]
On September 15, 2004, accompanied by her lawyers and members of the board of directors of Martha Stewart Living Omnimedia, Stewart held a press conference to announce her decision to begin serving her sentence as soon as possible while vowing to continue ahead with her appeal. The event was featured live on national television. On September 21, she was ordered by US District Judge Miriam Cedarbaum to surrender by October 8 to begin her sentence. On September 29, the Federal Bureau of Prisons announced that Stewart would serve her sentence at the federal prison camp in Alderson, West Virginia, denying her request to serve it at the federal prison in Danbury, Connecticut. She reported to Alderson Federal Prison Camp early in the morning on October 8. Alderson is a minimum security prison, the lowest level of security in the Bureau of Prisons. There are no fences, and inmates are generally free to walk around the compound unescorted. Stewart, who said her prison nickname was "M. Diddy"[citation needed], reportedly got along quite well with her fellow inmates and kept herself busy with assigned cleaning tasks. She was released on March 4, 2005 at 12:30 AM.
On January 6, 2006, an appeals court denied Stewart's appeal and upheld the jury's verdict.
[edit] Release
After being released from Alderson, Stewart began to serve her home confinement at her estate in Bedford, New York. During the confinement she was permitted to leave her property for up to 48 hours a week to conduct business, but was required to wear an electronic ankle bracelet transmitter to monitor her location at all times. On August 3 (her 64th birthday), Stewart's lawyers announced that her home confinement was extended for three weeks, until August 31, reportedly because she violated terms of the confinement.
In October 2005, Stewart was denied entry to Canada under their "no-convicts rule" due to her status as a convicted felon. She had planned to attend a Thanksgiving festival in Nova Scotia's Annapolis Valley. Within two days of the story's breaking, Stewart was granted her work visa to enter Canada and attend the festivities. A TV movie Martha: Behind Bars (2005), starring Cybill Shepherd as Stewart, was based on her time in prison. A previous movie also starring Shepherd had also been screened, titled Martha, Inc.: The Story of Martha Stewart (2003).
[edit] Civil case
The criminal process having concluded, the judge in the civil case lifted the stay. [12] Stewart filed her response to the complaint on May 25, 2006. [13] A hearing was set for November 17, 2006 [14], but the suit was settled on August 7, 2006. Under the terms of the settlement, Stewart did not admit or deny any wrongdoing. She agreed to pay $195,000, the statutory maximum penalty of three times the losses avoided plus interest. Stewart is also barred from serving on the Board of Directors of a publicly traded company for five years. [15]
