- The Washington Times - Tuesday, June 3, 2003

Federal prosecutors will soon indict Martha Stewart, the style executive who created a home design and media empire from a catering business, on charges relating to her sale of ImClone Systems Inc. stock.

The U.S. Attorney’s Office in New York intends to ask a grand jury to hand up an indictment “in the near future,” Mrs. Stewart’s company, Martha Stewart Living Omnimedia, said in a statement yesterday that sent the company’s stock plummeting by 15 percent.

The statement prompted rumors that Mrs. Stewart will soon step down from the company that has made her name synonymous with style in millions of American households, but officials denied that yesterday. Mrs. Stewart resigned as a board member of the New York Stock Exchange in October.

“Martha remains chairman and CEO,” Arthur Martinez, a company director, told reporters after a shareholders meeting in New York. “There were strong statements of support for Martha through this difficult time. She expressed her gratitude for that support.”

Mrs. Stewart’s attorney, Robert Morvillo, said she will maintain her innocence and fight the charges, if indicted. Mrs. Stewart, a top donor to the Democratic Party and devotee of liberal causes, has contended that the prosecution is politically motivated.

The Justice Department could pursue Mrs. Stewart on criminal charges involving insider trading, securities fraud and obstruction of justice, attorneys say. She also faces civil charges for the same violations by the Securities and Exchange Commission. Spokesmen for the SEC and U.S. attorney declined to comment.

At issue is Mrs. Stewart’s sale of $228,000 of ImClone stock on Dec. 27, 2001, one day before the stock plunged on a company announcement that the government had rejected its application for the experimental cancer drug Erbitux.

Mrs. Stewart is a close friend of ImClone’s founder, Sam Waksal, who last year pleaded guilty to charges he prompted members of his family to sell more than $10 million of stock before the Erbitux announcement. Mr. Waksal faces up to seven years in jail.

The federal indictment is expected to maintain that Mrs. Stewart got wind of the Erbitux announcement through a Merrill Lynch stockbroker who handled the Waksal stock sales, based on the testimony of the stockbroker’s assistant.

Also at issue is whether Mrs. Stewart and her attorneys lied to congressional investigators by maintaining that she sold the stock under a previous agreement with her broker to sell if the stock dropped below $60. Mrs. Stewart’s nearly 4,000 shares were sold at $58.

In another development, ImClone’s stock soared this week as just-released studies showed that Erbitux may be effective, after all, in treating cancer.

Mrs. Stewart’s case has been hailed in some circles as a showcase of the government’s resolve to pursue even the most celebrated and popular corporate executives when they take advantage of their privileged access to money and information.

“Obviously, this is a situation where her celebrity status was not a plus,” said Steven Molo, a partner at Winston & Strawn. “She is a very visible target, someone of whom it was easy to make an example, and she’s going to pay a price for that.”

Mr. Molo said the Justice Department rarely files criminal charges in cases involving minor insider trading transactions, which in Mrs. Stewart’s case may have yielded only about $40,000 in profits.

Typically, those types of minor violations are handled by the SEC and are resolved with fines and other penalties short of a jail sentence, he said.

Lying to Congress and obstructing justice would amount to more serious crimes, he said. “When you look at the wholesale frauds at WorldCom, Enron and some others, there really is no comparison in terms of both the scale and the harm coming from it.”

Investors lost hundreds of billions of dollars as a result of the accounting scandals at those now-bankrupt firms, whose demises sent shock waves through the stock market.

Some investors in Mrs. Stewart’s company have charged in a class-action lawsuit that she injured them by precipitating a big drop in her company’s stock as a result of the damage done to her reputation by the illicit stock sales. The company’s stock has dropped by more than half to $9.41 since the scandal surfaced.

But others contend that she has caused no real harm to investors or her company, which publishes five magazines, markets housewares through Kmart and other retailers, and sponsors a weekly television show on CBS starring Mrs. Stewart.

“There is serious crime going on in this country, and this sort of foolishness over victimless, undefined offenses is a big waste of time and money,” said Alan Reynolds, a Cato Institute analyst who has written articles urging authorities to “free Martha Stewart.”

Mr. Reynolds said Mrs. Stewart was joined by hundreds of other investors who sold ImClone stock on the same day out of worry that the company’s drug application might be nixed under a Dec. 31 deadline.

“Why pick on Stewart?” he asked, contending that the government’s case against her appears to be mostly “sensational fabrication.”

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