Stewart may be indicted

Erin McClam

Tuesday, June 3, 2003 | 11:18 a.m.

NEW YORK -- Martha Stewart faces possible criminal charges, her company said today, in an insider trading scandal that has tainted her image as symbol of tasteful living.

Her chief lawyer later said Stewart will plead innocent and go to trial if indicted.

Stewart's lawyers have told the company that she is the target of a criminal investigation by the U.S. attorney in Manhattan, which "intends to request the grand jury to return an indictment against her in the near future."

The statement, issued by Martha Stewart Living Omnimedia Inc., did not elaborate on the possible charges. Analysts have said charges could range from insider trading to obstruction of justice.

But her chief attorney, Robert Morvillo, later issued a brief statement saying: "If Martha Stewart is indicted, she intends to declare her innocence and proceed to trial."

A civil complaint by the Securities and Exchange Commission also is expected, according to the company's statement. The SEC had notified Stewart in October of its intent to file a civil complaint that could cost Stewart heavy fines and her job as CEO of her company.

SEC spokesman John Nester declined comment today.

Stewart has been under investigation for selling shares of biotechnology company ImClone Systems Inc. in December 2001 -- just before disappointing news surfaced about a key ImClone-produced drug.

Stewart, 61, has denied any wrongdoing in the ImClone sale. She claimed to have had an arrangement with her broker for the automatic sale of the stock when it dropped to a certain price.

Shares of Martha Stewart Living Omnimedia fell $1.95, or 17.4 percent, to $9.25 in early afternoon trading today on the New York Stock Exchange.

MSO shares have plunged from just over $19 a share in June 2002 after news broke of her sale of ImClone shares, reaching a low of $5.26 a share in early October shortly after Stewart resigned from the New York Stock Exchange's board of directors and after an assistant to her stockbroker agreed to help prosecutors investigating Stewart's sale of ImClone stock.

Marvin Smilon, a spokesman for Manhattan U.S. Attorney James Comey, declined comment.

In its statement, Martha Stewart Living said its directors "have been planning for a number of possible contingencies, are evaluating the current situation and will take action as appropriate."

Stewart is the company's chairwoman and chief executive. Through television shows and public appearances, she is also the embodiment of its brand, with almost all products bearing her name. In an apparent effort to a reduce that dependency, the company recently launched a magazine, Everyday Food, that did not carry her name.

The scandals had affected earnings at the company, which have been slumping. Revenue in the first quarter of the year dropped 15 percent from the same period a year earlier.

Stewart told the New Yorker for an article published in January that she estimates she has lost $400 million due to the decline in value of her more than 30 million shares in her multimedia company, along with legal fees and lost business opportunities.

ImClone founder Samuel Waksal, a friend of Stewart, is to be sentenced next week after pleading guilty in the ImClone insider-trading scandal. He could be sentenced to six to seven years in prison, plus fines -- though his defense team is seeking a lighter term.

Waksal has admitted he tipped off his daughter Aliza Waksal to sell ImClone stock before it plummeted on the bad news. But he has not implicated Stewart, and his plea was not part of an agreement to cooperate with prosecutors.

Stewart sold nearly 4,000 shares of ImClone on Dec. 27, 2001 -- one day before the Food and Drug Administration announced it would not review ImClone's application for approval of Erbitux, which the company had touted as a promising cancer drug. ImClone's stock subsequently plunged.

Federal authorities want to know whether Stewart sold ImClone shares because she had insider knowledge of the impending FDA decision.

Stewart has denied any insider dealing. She has maintained that she had a standing order with her Merrill Lynch broker, Peter Bacanovic, to sell the shares if the stock fell below $60.

Just this week, doctors concluded Erbitux, the ImClone cancer drug, worked just as well as an earlier company-sponsored study said it did. ImClone stock rose sharply on the news.