Securities and Exchange Commission
Litigation Release No. 18169 / June 4 2003
Securities and Exchange Commission v. Martha Stewart and Peter Bacanovic, 03-CIV-4070 (NRB)(S.D.N.Y.)
On June 4, 2003, the Securities and Exchange Commission filed charges against Martha Stewart, Chairman and CEO of Martha Stewart Living Omnimedia, Inc., and Peter Bacanovic, a former registered representative associated with Merrill Lynch, Pierce, Fenner, and Smith Incorporated, for illegal insider trading. The Commission's Complaint, filed in the United States District Court for the Southern District of New York, alleges that Stewart sold stock in a biopharmaceutical company, ImClone Systems, Inc., on December 27, 2001, after learning material, nonpublic information communicated from Bacanovic, who was Stewart's stockbroker at the time. Bacanovic's tip was that then-ImClone CEO Samuel Waksal and his daughter had instructed Merrill Lynch to sell all of their ImClone stock held at Merrill Lynch. At the time, according to the Complaint, ImClone and the market were awaiting an imminent decision from the U.S. Food and Drug Administration on one of ImClone's key products, a cancer treatment called "Erbitux." The Commission alleges that information about the Waksals' efforts to sell signaled insider pessimism about the FDA decision, the prospects for Erbitux, and the future of ImClone. The Commission alleges that, based on this conduct, Stewart and Bacanovic violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
Specifically, the Commission's complaint alleges as follows:
- On December 26, 2001, Waksal privately learned that the FDA had decided to refuse to file ImClone's biologics license application for Erbitux. On December 28, 2001, the FDA sent ImClone a Refusal to File ("RTF") letter. After the market closed on December 28, 2001, ImClone issued a press release, which disclosed that the FDA had issued an RTF letter. By the close of the next trading day, Monday, December 31, the price of ImClone stock dropped 16% to $46 per share.
- Early in the morning on December 27, 2001, the day before ImClone publicly disclosed the FDA decision, Waksal and his daughter placed orders with Douglas Faneuil (Bacanovic's assistant) to sell all of their ImClone shares at Merrill Lynch. Faneuil spent that morning talking to Bacanovic by telephone (Bacanovic was vacationing in Florida) and others at Merrill Lynch about Waksal's and his daughter's instructions to sell and whether Waksal could sell his shares, either directly or through his daughter's account.
- Also on December 27, 2001, in response to hearing from Faneuil that Waksal and his daughter had placed orders to sell all of their ImClone stock at Merrill Lynch, Bacanovic instructed Faneuil to tell Stewart that Waksal and his daughter had placed orders to sell all of their ImClone stock held in their Merrill Lynch accounts. Bacanovic's instructions to Faneuil violated Merrill Lynch policies prohibiting employees from sharing confidential client information with other clients and from effecting securities trades based on transactions of other clients.
- Later on December 27, Faneuil told Stewart that the Waksals were selling or attempting to sell all of the ImClone stock they held at Merrill Lynch. Promptly upon hearing that information, Stewart instructed Faneuil to sell all 3,928 shares of her ImClone stock. By selling one day before ImClone announced that the FDA had issued an RTF letter, Stewart avoided losses of $45,673.
- On several subsequent occasions, Stewart and Bacanovic lied to the Commission, the U.S. Attorney's Office for the Southern District of New York, and the Federal Bureau of Investigation about the events of December 27, 2001 and the facts surrounding Stewart's sale of ImClone stock. For example, the Defendants fabricated a false alibi for Stewart's trades, stating that she sold her ImClone stock because she and Bacanovic had decided earlier that she would sell if ImClone's stock price fell below $60 per share. In addition, Stewart told the government that she did not recall anyone telling her that day that any of the Waksals were selling their ImClone stock.
In its lawsuit, the Commission seeks an order requiring that Stewart and Bacanovic, jointly and severally, disgorge $45,673, representing the losses avoided by Stewart's sale of ImClone securities, and that they pay civil penalties and prejudgment interest. The Commission also seeks an order permanently enjoining Stewart and Bacanovic from violating the securities laws, and barring Stewart from acting as a director of, and limiting her activities as an officer of, a public company.
The Commission acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation in the investigation of this matter.
SEC Complaint in this matter