he Securities and Exchange Commission's investigation into Martha Stewart's sale of ImClone shares last December is centering on what her stockbroker may have told her just before the stock was sold, a lawyer involved in the investigation said yesterday.
Ms. Stewart's lawyers have told Congressional investigators that she spoke to her broker by telephone on Dec. 27 from an airport in San Antonio where her jet had stopped to refuel en route to Mexico. After the conversation, Merrill Lynch sold 3,928 shares of ImClone stock for Ms. Stewart, for a total of $227,000.
Douglas Faneuil handled the trades in the absence of Ms. Stewart's regular broker at Merrill, Peter Bacanovic. One person close to the investigations said Mr. Bacanovic was not in the office that day. Both men were suspended with pay last week by Merrill, after an internal investigation that raised doubts about earlier statements that Ms. Stewart and Mr. Bacanovic had previously agreed to sell her stock in Imclone if it fell below $60.
A central issue is whether Ms. Stewart received any information that could be considered insider information and whether she was aware of it and used it in making a decision to sell.
But if Mr. Bacanovic and Ms. Stewart tell different stories, it may be difficult to prove what was said and what was not. A spokesman for Merrill said such conversations were not recorded, though conversations in trading rooms were taped, as were some calls to help centers from clients.
A person who receives important nonpublic information about a company and acts on it has broken the law if he or she knew, or should have known, that the person providing that information acted improperly. A broker who simply notes a stampede of buyers or sellers, for example, has not acted improperly. But one who cites specific sales by individuals, which are supposed to be confidential, and then advises a client to sell, too, would have broken the law, one legal expert said.
Mr. Bacanovic has come under scrutiny because he is a former ImClone employee and the stockbroker of record for Samuel D. Waksal, the founder and former chief executive of Imclone, who has been charged with insider trading. Moreover, he was also the stockbroker for Dr. Waksal's daughter, Alisa Waksal, who sold shares in Imclone on Dec. 27 as well. If Mr. Bacanovic told Ms. Stewart that Dr. Waksal's daughter and other family members were selling shares, that could make them both vulnerable to charges that they broke the law.
Investigators are examining Mr. Bacanovic's client list as well as the ImClone trades made through his office in late December.
Ms. Stewart is a friend of Dr. Waksal's, and has said that she telephoned his office on Dec. 27 after speaking to her broker. She did not reach him, she said, and he did not call her back.
Ms. Stewart has said that her sale was triggered not by any conversation, but by an existing sell order that she and her broker had agreed on several weeks earlier. If the share price fell below $60, he was to sell the stock. The sale went through at $58 a share after closing below $60 on Dec. 27 for the first time since Nov. 9.
Congressional investigators are poring over documents provided by Merrill yesterday to try to determine whether there was such a sell order. Mr. Faneuil is reported to have told investigators initially that one existed, then changed his story. No interviews have been scheduled for either him or Mr. Bacanovic with the committee, which will be on a break all next week and reconvene July 8. Lawyers for Mr. Bacanovic and Mr. Faneuil would not comment. A spokesman for Ms. Stewart would not comment on the investigation; Ms. Stewart's lawyer did not return a telephone call.
Meanwhile, the House Energy and Commerce committee, which is looking into the Stewart trade and other activities involving ImClone, has scheduled interviews with five current and former ImClone board members. The directors — Robert F. Goldhammer, John Mendelsohn, Paul B. Kopperl, Vincent T. Devita Jr. and David M. Kies — are expected to meet with the committee's investigators in mid-July, a Congressional aide said.
"Certainly, one of the issues that Congress needs to consider as it looks at all these corporate scandals is how did the board of directors allow these activities," said Representative James C. Greenwood, a Republican from Pennsylvania. "Were they disengaged? Were they uninterested? Were they conflicted?"
Congressional investigators are poring over documents delivered to them by Merrill on Thursday. The documents, which cover trades made in ImClone stock by two Merrill employees between Dec. 26 and Dec. 28, are expected to yield answers to certain questions about the selling of ImClone shares that took place before the company announced that its bid for government approval of a new cancer drug had been rejected. That announcement, made after the market closed on Dec. 28, sent ImClone's share price tumbling in the next day of trading.
Yesterday, the House Energy and Commerce Committee also urged the Food and Drug Administration to be more consistent in the way it approves drugs and communicates with drug companies.
In a letter signed by the committee chairman, Representative Billy Tauzin of Louisiana, and five other members, the committee said that the F.D.A. division that regulates chemical drugs seemed to have better procedures than the division that regulates biological products, such as ImClone's cancer drug, Erbitux.
It suggested that the biological products division agree in advance with drug companies on the protocols for final clinical trials to help assure that drugs for life-threatening diseases go through the regulatory process smoothly.
A spokesman for the F.D.A. said the agency would respond to the letter and that the agency strove for "transparency and consistency."