Stewart Troubles Worry Wall Street

N E W  Y O R K, June 24, 2002 -- Martha Stewart and her stockbroker apparently exchanged phone calls — amid the broker's expectations ImClone was "going to start trading downwards" — immediately before Stewart's controversial sale of the stock, a congressional investigator said.

That is leading investigators to wonder: What did Martha Stewart know when she told stockbroker Peter Bacanovic to sell a quarter million dollars of ImClone stock? Did she know that the next day ImClone would announce problems that would further weaken the stock?

Broker Contact With Stewart

Shortly before he made the sale for Stewart, Bacanovic had reportedly sold a lot of ImClone stock for the daughter of Sam Waksal, the indicted CEO of ImClone. Bacanovic then tried to reach Stewart, who is Waksal's friend.

A memo from Stewart's secretary reports, amid notes about plum puddings and lampshades, that, "Bacanovic thinks ImClone is going to start trading downward."

"He didn't say he watched it go down on the market," said Rep. James Greenwood, R-Pa., whose committee is investigating ImClone. "He said he thinks it's going to, which leads one to believe that that was inside information that he had, that he then passed on to Mrs. Stewart."

Greenwood says Stewart called back Bacanovic — and stayed on the phone with him for 11 minutes, phone records reportedly show — before he made the sale for her.

Greenwood's committee hopes to interview the stockbroker, and has subpoenaed Bacanovic's list of clients.

"We'll certainly ask him questions about his conversation with Ms. Stewart, and we'll see where that leads us," Greenwood said.

Nervousness on Wall Street

The fact that Martha Stewart is under investigation for insider trading is causing nervousness not only in the world of glue guns and fancy cakes, but on Wall Street as well. Shares in her own company, Martha Stewart Living Omnimedia, have also suffered amid the revelations.

That's especially true because Stewart was recently made a member of the New York Stock Exchange's Board of Directors, which has only 27 members.

"She's in charge of voting what rules — and actually overseeing the conduct — of the New York Stock Exchange members, such as Merrill Lynch and these brokers," said Jacob Zamansky, a securities lawyer.

"Recent history: There are no members of the New York Stock Exchange Board who have ever been involved in insider trading," Zamansky added. "This is a groundbreaking case, and it must be pursued very vigorously by the government.

To be guilty, Stewart would have to have known she was acting on insider information, often hard to prove.

"The whole case now hinges on what he said to her, when she called him the day before the FDA released information that they were not going to back ImClone's key cancer drug," Newsweek reporter Marc Peyser told ABC's Good Morning America today.

"If he said to her, 'I think we should sell the stock, something doesn't look so great,' that is probably not insider trading as far as Martha is concerned. If he says, 'I know the FDA is going to make an announcement that will be damaging to the company and we have to get out' — that is more dangerous for her," said Peyser.

In the meantime, the tabloids are pursuing the story vigorously because Bacanovic, Stewart and Waksal all move in the same social circles — New York's rich and powerful. Waksal even once dated Stewart's daughter, Alexis.

Broker Suspended

Merrill Lynch already has suspended Bacanovic for possible violations in his stock sale for Stewart. The company says Bacanovic was suspended because their own investigation turned up "factual issues regarding a client transaction." They've turned their information over to federal authorities. Sources tell ABCNEWS the client was Martha Stewart.

Stewart and Bacanovic say the reason she sold the ImClone stock six months ago, the day before it began to plummet, was because they had an oral agreement to sell if it fell below $60 a share.

"These are the essential facts," Stewart says in a statement on her Web site. "I am confident that time will bear them out."

But a report in today's Wall Street Journal cast some doubt on Stewart and Bocanovic's agreement. The story says Douglas Faneuil, Bocanovic's sales assistant who placed the trade, told Merrill officials that he was unaware of any agreement when he placed the order to sell Stewart's shares.

Merrill legal officials believe he would have known any such agreement, known as a stop-loss order, if one had existed, according to the article. Faneuil was also placed on administrative leave with Bocanovic, the company said on Friday.

Waksal was indicted for insider trading after he tried to sell millions of dollars of ImClone stock the same day Stewart did — the day before his company announced problems with federal approval for its leading cancer drug.

"It fits the classic insider trading scheme," Zamansky said.