Martha Stewart: Prosecutors Turn to Fraud Charges

20 February 2004

Prosecutors in the Martha Stewart trial this week turned their attention to their most serious charge against the domestic diva: securities fraud.

The government is hoping to show that she issued a series of false statements to investors designed to prop up the sinking stock value of her media and merchandise company, Martha Stewart Living Omnimedia.

The accusations originate with Stewart's disposal of shares in biotech firm ImClone one day before their value slumped. The government alleges her sale was prompted by inside information that ImClone boss Sam Waksal was dumping his stock. It claims Stewart then tried to cover her tracks by claiming she had a pre-existing arrangement with Merrill Lynch broker Peter Bacanovic to sell the shares when the price fell below $60 (€47; £32).

The first week of the trial focused on the circumstances surrounding the stock sale in December 2001 and the alleged conspiracy by Stewart and Bacanovic [WAMN: 10-Feb-04].

But the securities fraud charge relates to a series of statements made by Stewart in June 2002 in which she repeated the $60-trigger claim. It is alleged these had a 'material' impact on investors, raising MSLO's share price after it had slumped on news the lifestyle guru was being investigated. Since prosecutors believe the $60 story is fabricated, they argue these statements misled investors.

However, their case was undermined last week when Judge Miriam Goldman Cedarbaum ruled that they could not call expert witnesses to prove the statements had a 'material' effect. This means the government can only demonstrate the close relationship between Stewart's personal fortunes and the performance of her company, leaving jurors to decide whether the statements were significant to investors.

Giving testimony earlier this week, MSLO's former general counsel Gregory Blatt said he had urged Stewart to issue a statement in June 2002 following news articles about her stock sale, fearing they could hurt advertising at the company's magazines. When asked if an ad decline would affect the stock price, he replied: "Certainly."

Then Peter Melley, an investigator for the National Association of Securities Dealers, showed how MSLO's stock price fluctuated during June 2002. He highlighted how one of the contested statements was released after the market closed on June 18; on June 19, the share price rose from $14.40 to $16.45. Prosecutors claim that without Stewart's statements, the stock price would have fallen over the period.

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