Martha Stewart Inquiry Broadens to Securities Fraud

11 October 2002

America’s homemaking queen Martha Stewart faces fresh investigations into her activities connected with the ImClone scandal.

Although yet to be charged with an offence, Stewart is under investigation for insider dealing. It is alleged she sold nearly 4000 shares in biotech firm ImClone after receiving a tip-off that one of its drugs would be rejected by federal authorities the following day [WAMN: 27-Jun-02].

Now she is under scrutiny for a number of statements she made to refute these charges. Federal prosecutors are investigating whether she made these declarations to prop up the share price of her company, Martha Stewart Living Omnimedia. If her denials turn out to be false, they could constitute securities fraud.

The statements in question were made on June 12 and June 18, when she claimed that the sale of the ImClone stock resulted from an agreement with her broker to sell if the price fell below $60 (€60.79; £38.38) a share. However, the existence of such an arrangement was denied last week by the broker’s assistant [WAMN: 04-Oct-02].

The performance of MSLO is closely tied to Stewart’s reputation – its share price has plunged 70% since June. As such, if Stewart did lie about the circumstances surrounding the sale, it could be construed that she knowingly issued a false public statement which could have affected an investor’s decision to buy or sell MSLO stock, breaking federal securities law.

Potentially crucial to the case is whether the statements had any impact on the firm’s share price. Although the June 12 release had no discernible effect, MSLO’s stock rose 4.2% on the day after the June 18 claims, compared with a 1.5% decline in the Dow Jones Industrial Average.

One thing the new investigation does suggest is that federal authorities are determined to get their woman.

Data sourced from: The Wall Street Journal Online; additional content by WARC staff