3 Versions of Stewart Stock Dump

New York Daily News ^ | 6/26/02 | TIMOTHY J. BURGER in Washington and GREG B. SMITH in New York

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An internal Merrill Lynch investigation of Martha Stewart's broker found three versions of why she dumped her ImClone stock, the Daily News has learned.

The brokerage house discovered inconsistencies among the accounts given by Stewart, by broker Peter Bacanovic and by his assistant, Douglas Faneuil, two sources familiar with the investigation said.

Merrill Lynch suspended Bacanovic and Faneuil on Friday.

At issue is whether Stewart and her broker cooked up a story about a "prior agreement" to sell her ImClone stock if it dipped below $60 per share as a ruse to cover up possible insider trading, one source said.

Though Stewart and Bacanovic said they had such an agreement, investigators said they found no evidence that there was an agreement.

Stewart and Bacanovic differed on the timing of an agreement, the source said.

Stewart has said they made the arrangement in November 2001, but Bacanovic reportedly said it was in December.

Further complicating matters, Faneuil gave yet a third version of events, saying the trade had nothing to do with any prior agreement, the source said.

It is believed that Faneuil processed Stewart's Dec. 27 trade.

Federal prosecutors, securities regulators and Congress are investigating why Stewart sold 3,900 shares in close pal Sam Waksal's company just before the stock collapsed because of a government ruling against its experimental cancer drug.

Waksal was arrested on insider-trading charges June 12.

'Unusual Aspects'

"The question that's swirling around Ms. Stewart is: Did she have inside information or did she not?" said Rep. Jim Greenwood (R-Pa.), chairman of the oversight and investigations subcommittee probing ImClone.

"There's a lot of unusual aspects to this case," Greenwood said. "We give Ms. Stewart the benefit of the doubt. She's entitled to the theory of 'innocent until and unless proven guilty.' ... I hope she is innocent and this thing goes away. But we'll follow the leads down."

New information surfaced yesterday about a crucial e-mail warning of trouble for ImClone stock.

On Dec. 24, an official at ImClone's partner, Bristol-Myers Squibb, got an e-mail saying that within days, the Food and Drug Administration would reject ImClone's application for the anti-cancer drug Erbitux.

"I have info ..." a Washington lawyer wrote in an e-mail at 12:42 p.m. on Christmas Eve, according to The Washington Post. "Bottom line is that we will get an RTF [a rejection notice from the government on the cancer drug] on Friday. I have more detail. ..."

That information got to Harlan Waksal, Sam's brother and also an ImClone official, on Dec. 25, according to The Post.

Sam Waksal reportedly got the information Dec. 26. The next day, his friend Stewart and several of his family members sold their ImClone stock.

Rules of the Broker's Game

To avoid trouble over insider trading, stockbrokers who have information that can affect a stock's price must be careful in dealing with clients.

What stockbrokers can't do:

• If brokers know that such information has been supplied by someone who is an insider, the brokers can't trade.
• If they have inside information from an officer of the company issuing the stock, clients can't be advised to trade.
• Even if brokers lack inside information, if they know a company insider is trading and the public doesn't have that information, clients can't be advised to trade.

What stockbrokers can do:

• Without inside information, if brokers see large volumes of shares trading, clients can be advised to buy or sell.
• If brokers see heavy, publicly disclosed trades by company insiders, clients can be advised to trade.
• Whatever else may be going on, if the brokers' computer models suggest it's time to buy or sell, clients can be advised to do so.
• Even if brokers have inside information, they can trade if an agreement has been made with clients to buy or sell a stock at a given price — if the order is unrelated to that inside information.
• If brokers hear market rumors and suspect something is going on, but don't know for sure, they can trade.