Wall Street Crime And Punishment: Martha Stewart's Perfectly Ridiculous Stock Scandal

Does crime pay?

Wall Street Crime and Punishment is a weekly series by Benzinga's Phil Hall chronicling the bankers, brokers and financial ne’er-do-wells whose ambition and greed take them in the wrong direction.

“I’m a maniacal perfectionist,” said Martha Stewart in an interview with Oprah Winfrey. “I have proven that being a perfectionist can be profitable and admirable.”

Indeed, Stewart gained a following and a fortune for her pursuit of perfection in the domestic arts. Whether it involves setting a dinner party table, frosting a cake or cultivating an herb garden, Stewart’s consumer-facing universe is a sphere of perfection, with nary an off-center fork or chipped plate in view.

In the course of stardom, Stewart did allow one rather glaring imperfection of judgment to take root, and it tripped her up in a scandal that nearly derailed her carefully constructed business empire. And even more incredibly, she seemed to emerge from this wreckage of her own making into an even more popular and profit-generating phenomenon.

Mistress Of Reinvention: While the Martha Stewart brand gives the impression of an upscale-suburban, decidedly non-ethnic personality, its creator came into the world via the considerably urban Jersey City, New Jersey, in 1941 as Martha Helen Kostyra, the second of six children born to the first-generation Polish-Americans Edward and Martha Kostyra.

The future domesticity doyenne initially planned to major in chemistry when she enrolled in New York’s Barnard College but would graduate with a double major in history and architectural history. She gained work as a fashion model to help cover her tuition costs and caught the eye of Andrew Stewart, a graduate of Yale Law School. The couple married in July 1961.

Despite her shifting educational goals and her success in modeling, Stewart wound up working as a stockbroker while her husband went into the publishing industry. The couple would relocate to Westport, Connecticut, where Stewart began a career as an independent caterer. Stewart catered a party for two of her husband’s authors and came away with her own book contract from Alan Mirken, president of Crown Publishing Group.

During the 1980s, Stewart affixed her name to a series of cookbooks and began making television appearances that highlighted her culinary and decorating talents. She divorced her husband in 1990, the same year she launched her magazine Martha Stewart Living, which later expanded into a television series.

Stewart’s experience on Wall Street was on display in 1987 when she combined her various broadcast, writing and merchandising ventures under a corporate banner dubbed Martha Stewart Living Omnimedia. The company went public in October 1999, with an $18 per share initial public offering that ballooned to $38 per share by the end of its first day of trading, elevating Stewart to the status of being the first self-made female billionaire in U.S. history.

With the dawning of the 21st century, Stewart was one of the most prominent fixtures in the business world and in popular culture. It seemed that she could do nothing wrong — until she did.

A Little Debacle: Unlike the Martha Stewart brand name, most Americans never heard of ImClone Systems, an oncology-focused biopharmaceutical company started in 1984. ImClone’s chief pursuit was the drug Erbitux, which was developed to combat colorectal cancer.

ImClone was banking on receiving approval from the U.S. Food and Drug Administration (FDA). The initial buzz within the biopharmaceutical industry over Erbitux was positive, and in September 2001 Bristol-Myers Squibb Co BMY signed a $2 billion deal for the marketing rights to the drug once it received FDA approval.

By late December 2001, the agency informed ImClone that approval would not be forthcoming. The company needed to release a press announcement detailing the FDA’s decision, and ImClone’s founder and CEO Samuel D. Waksal realized the agency’s ruling would damage its stock.

Waksal was barred by federal securities law from selling his ImClone shares, but he nonetheless alerted family members, executives in his company and friends that the bad news from the FDA would be released after the close of trading on Dec. 28, 2001. Among those he alerted was Peter Bacanovic, his broker at Merrill Lynch. Stewart was one of Bacanovic’s clients, and he instructed his assistant Doug Faneuil to alert Stewart of Waksal’s warning. Stewart held 3,928 shares of ImClone worth $230,000, which she sold on Dec. 27, 2001, the day before the FDA news was to be released.

The day after, the FDA rejection of Erbitux became public knowledge and ImClone’s shares fell from $60 per share to $48. The U.S. Securities and Exchange Commission would later estimate that Stewart avoided losses of $45,673 through her action.

Although Stewart knew Waksal, she had no involvement with ImClone outside of being a shareholder. Her stock sale would probably have never raised a blip of concern had it not been for Faneuil mentioning his conversation with her to the securities investigators probing the sudden sell-off of ImClone shares ahead of the FDA decision being announced.

And while investigators had no shortage of individuals to pursue in relation to this matter, the sudden presence of a nationally recognized celebrity in a tawdry little insider trading scandal changed the story.

Investigation Of A Celebrity Under Suspicion: On Jan. 7, 2002, Bacanovic was interviewed by SEC attorneys and was asked about Stewart’s stock sale. He stated Stewart had a pre-arranged stop-loss agreement with Bacanovic wherein she would sell her ImClone stock if it dipped under $60.

On Feb. 4, 2002, Stewart was interviewed by the SEC, the FBI and federal prosecutors about the stock sale. She affirmed Bacanovic’s statements on a stop-loss agreement and said she was alerted to ImClone’s stock price decline as she was boarding her private jet for a Mexican vacation with friends. Stewart added that she tried to contact Waksal to determine what was happening with the stock but he never returned her call.

Four months after she was interviewed by investigators, Waksal was arrested and charged with insider trading. Word leaked to the media about Stewart’s stock sale in connection to Waksal’s arrest, and she issued a statement repeating her stop-loss story. But further research by investigators found no written record of a stop-loss agreement between Bacanovic and Stewart, which created greater doubt on her claims.

Stewart initially tried to public ignore the attention the story was gaining, but this proved impossible. At the time, Stewart had a weekly cooking segment on CBS’ “The Early Show” but was warned by the network’s brass that she would need to address the story if she wanted to remain on the air. Rather than agree for an interview, Stewart said she would answer questions as part of her kitchen segment scheduled for June 25, 2002.

The resulting compromise was one of Stewart’s most peculiar television appearances, with anchor Jane Clayson trying to conduct a serious interview on the ImClone story while Stewart chopped an oversized cabbage.

“This will all be resolved in the very near future and I will be exonerated of any ridiculousness,” Stewart said, adding, “I want to focus on my salad.”

While Stewart stuck to her story, Faneuil changed his, admitting to investigators he was pressured and bribed by Bacanovic to offer the stop-loss story. He pleaded guilty to a misdemeanor charge that spared him jail time but enacted a $2,000 fine. Faneuil was also fired by Merrill Lynch, which then terminated Bacanovic’s employment.

After Faneuil’s guilty plea, Stewart resigned her board membership from the New York Stock Exchange. The growing scandal resulted in her company’s stock losing 70% of its value while her net worth was estimated to have diminished by more than one-quarter.

Courtroom Drama: On June 4, 2003, Stewart was indicted on conspiracy to obstruct justice, obstruction of justice, securities fraud and two counts of making false statements. Bacanovic was also indicted that day on conspiracy to obstruct justice, obstruction of justice, making false statements, making and using false documents, and perjury. Stewart resigned as chairwoman and CEO of her company but retained the title of chief creative officer and stayed on its board of directors.

Prosecutors brought Faneuil to testify against Stewart and Bacanovic, as well as Stewart’s friend Mariana Pasternak, who stated Stewart acknowledged she knew Waksal was trying to sell his ImClone shares. Stewart’s personal assistant Ann Armstrong testified that her employer altered a phone log related to a message left by Bacanovic, but then ordered it changed back.

Stewart did not testify during her trial and her defense team mostly argued prosecutors failed to produce evidence of a crime and were targeting her strictly for her celebrity status.

The six-week trial kept the tabloid media busy, and the drama ended on March 5, 2004, when Stewart and Bacanovic were found guilty by a jury of eight women and four men. Stewart resigned from the board of Martha Stewart Living Omnimedia, but kept the title of founding editorial director, while her “Martha Stewart Living” television program went on an indefinite suspension.

An attempt by Stewart’s defense team to void the verdict and order a new trial by alleging a Secret Service ink expert called by prosecutors committed perjury was rejected by the judge, and on July 16 Stewart and Bacanovic were each sentenced to five months in prison followed by five months of home confinement, followed by a two-year supervised release.

Martha Stewart 2.0 Although Stewart had a stay on her sentence to enable an appeal, she took a curious strategy that caught many people off-guard: she asked the judge to start her prison sentence “as soon as possible” in order to “put this nightmare behind me.” She reported to Alderson Federal Prison Camp in rural West Virginia on Oct. 8, 2004, as federal inmate No. 55170-054.

One might imagine that this remarkable fall from grace would have been the end of Stewart’s career, but something strange happened. While some television comedians made jokes about her incarceration, Stewart’s fan base did not abandon her — nor did she abandon them, relaying messages on her life in prison that were posted on her personal website.

In December 2004, Martha Stewart Living Omnimedia made the unexpected announcement that Stewart planned to revive her television program once she was out of prison. In February 2005, Stewart was still behind bars when NBC announced it was planning a spinoff of the Donald Trump show “The Apprentice” starring Stewart.

Prison officials might have been wary of Stewart being the center of a media lovefest upon her release, which could explain why her departure from Alderson took place at 12:30 a.m. on March 4, 2005.

Stewart seemed to pick up from where she left off, with new books, television appearances and merchandising deals — the ImClone scandal and her incarceration did not scratch her image.

While barred by the SEC from holding an executive officer’s position in a publicly-traded company, she rejoined the board of Martha Stewart Living Omnimedia in 2011 and was named chairwoman in 2012. The company was acquired by Sequential Brands Group in 2015 and was taken private; Marquee Brands purchased it for $175 million in 2019.

The Last Laugh: The players in this strange story each moved beyond the scandal in interesting ways.

The FDA approved ImClone’s colorectal cancer drug Erbitux in February 2004. The company was acquired in October 2006 by a group led by activist investor Carl Icahn, who later sold it to Eli Lilly and Co LLY two years later for $6.5 billion.

Bacanovic was barred from the securities world but snagged the role of CEO at the jewelry company Fred Leighton Holding Inc., but was fired in January 2009 after one year on the job. In April 2012, he was in the headlines again for the sale of his townhouse on 169 East 71st Street in Manhattan — the property is known to movie lovers as the setting for the 1961 classic “Breakfast at Tiffany’s.” Bacanovic has since worked as a management consultant and shares his photographs of New York City’s social elite on Instagram.

Faneuil is a self-employed FileMaker developer based in New York City, with clients in manufacturing, real estate, fine arts, education and medicine.

Waksal was sentenced in June 2003 to seven years and three months in prison and ordered to pay more than $4 million in fines and back taxes. He was released from prison in February 2009 and launched Kadmon Holdings Inc KDMN. But he was forced to abdicate the CEO role when the company planned to go public because his conviction banned him from serving as an officer of a publicly-traded company. He became chief of innovation while his brother Harlan took the chief executive role, but he left the company in February 2016.

Stewart would occasionally speak publicly about her prison experience after being released, preferring not to dwell on that part of her life. But in a March 2015 Comedy Central roast of Justin Bieber, Stewart stole the show with a ribald monologue imagining the pop star in prison while spoofing her image of a domestic goddess in the slammer.

“I've been in lockup — Justin, you would not last a week, so pay attention,” she quipped to the clearly startled Bieber, who didn't seem to expect Stewart to travel that section of memory lane. “The first thing you'll need is a shank. I made mine from a pintail comb and a pack of gum. I'll show you how later. It's so simple. I found Bubblicious works best and it's so much fun to say."

Both the celebrities on the roast stage and the audience were convulsed as Stewart steamrolled her way through the monologue, unaware of the R-rated surprise she was about to unleash on them.

Indeed, Stewart is the rare member of the Wall Street elite who could emerge from a prison sentence as a wealthier and funnier tycoon.

Photo: Martha Stewart by Gage Skidmore / Flickr Creative Commons.