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Stewart, broker sentenced today

Professors include the trial in their lessons, and brokers admit to added caution in their dealings since the maven fell.

By HELEN HUNTLEY
Published July 16, 2004

The drama that began with a hot tip from a trusted broker to his celebrity client is expected to produce prison sentences for both of them today in a New York courtroom.

Martha Stewart, the media diva of domesticity, and Peter Bacanovic, her former Merrill Lynch broker, are scheduled for sentencing on their convictions for obstruction of justice and lying to the government.

Based on federal sentencing guidelines, they are likely to get 10 to 16 months of prison time. Their lawyers are expected to ask the judge to allow the two to remain free while their convictions are appealed.

But long after the judicial process has ended, the lessons of the case will live on. Stewart taught the nation that trading stocks based on inside information is perilous and lying to investigators is even riskier.

Her stock sale just before the drug company ImClone Systems announced bad news about a new drug saved Stewart from a $45,673 loss, but it cost her millions.

In a bitter twist, ImClone's new drug was later approved and the company's stock is worth more today than it was when she sold it. On the other hand, the shares of the company she once headed, Martha Stewart Living Omnimedia, have lost nearly 40 percent of their value since her conviction in March. Stewart owns about 30-million shares.

"If she had held her (ImClone) shares, she would not have gone through this destruction of her name and reputation and the company she built," said David Walker, who directs the Social Responsibility and Corporate Reporting program at the University of South Florida. "It's a great lesson and a great example, one we undoubtedly will use for years."

Walker said he already has made Stewart's case a teaching tool in classes on auditing and white-collar crime.

He said he also expects it to be featured in a course on fraud examinations that will be part of a new master's of business administration concentration in forensic accounting available at the school this fall.

"It won't be so long, if it hasn't already happened, before our students will be exposed to a tip from a friend based on some insider information, and they need to think back and consider what kind of action they want to take," he said. "Hopefully we'll have them at least aware of the real risks that are involved."

But others are uncertain how much of a deterrent Stewart's case will be.

"We live in an age of greed, especially among people who measure their success in terms of what they own and what they have," said Robert McMurrian, director of the Center for Business Ethics at the University of Tampa. "Maybe it makes them think, but to some degree, maybe it makes them spend more time thinking how to get around the law . . . There's a risk-reward situation here."

Stewart got into trouble when she sold shares of ImClone stock in December 2001 after Bacanovic tipped her off that chief executive Samuel Waksal and his daughter had just placed orders to sell all the ImClone stock they had at Merrill Lynch.

Waksal knew the FDA was going to reject a drug application the company had pending. When the information came out the next trading day, ImClone stock fell 16 percent.

In their defense, Stewart and Bacanovic claimed they had an agreement to sell her 3,928 shares if the price dropped below $60.

Stewart and Bacanovic faced civil charges of securities fraud for trading on inside information, but they were never charged criminally for the trade. Instead, their convictions are for lying to investigators who questioned them about the trading.

Under federal securities law, it is illegal to buy or sell stock based on material information that's known to corporate insiders but not to the public.

Information is considered material if it would be likely to affect the stock price. Waksal's knowledge of the pending drug rejection was clearly inside information; he was sentenced to seven years in prison for his trades. The Securities and Exchange Commission says the fact that Waksal was selling his shares was also inside information since it was confidential under Merrill Lynch policy. If it had been known publicly, it would have signaled insider pessimism about the company, the SEC said.

The media spotlight on Stewart's case has made some corporate insiders and brokers more careful about avoiding even the appearance of insider trading.

"If I hear the phrase "inside information,' the conversation ends. I don't want to encourage people to go down that road," said Rick Metzger, a broker with A.G. Edwards in Tampa. He said most of what people think is inside information is nothing but rumors, but "there's an enormous gray area."

The case's most important lesson for brokers has nothing to do with insider trading, according to a recent article in Registered Rep magazine, an industry publication.

"The case is about lying," said author David Feldman, a New York lawyer. He said brokers interviewed by government officials should consider their statements on the record even if they are not the target of an investigation.

Peter Vosotas, chief executive of Nicholas Financial Inc. in Clearwater, said the Stewart case has made officials at public companies, including him, more vigilant about following SEC rules.

"It has created a much stronger awareness," he said. Vosotas said his son wanted to exercise some options on Nicholas stock to raise money for a down payment on a house, but Vosotas told him not to because the company was preparing for a secondary stock offering.

"He's not really an insider, but he has my last name, so why take the chance?" Vosotas said. "I said "If you need the money, I'll lend it to you.' "

Vosotas said Stewart, a former broker and chief executive of a public company herself, had to have known the rules.

"She just flaunted it," he said. "What she did was absolutely despicable."

Investors who don't have access to inside information are curious about the case but generally don't see it having a big impact on them or on the market.

"It's just a topic of conversation with clients that read the papers and watch the media," said Bill Hoyt, an assistant branch manager for Raymond James & Associates in St. Petersburg.

Belleair investor Wayne Proctor, a semiretired marketing executive, said he is glad regulators are being vigilant.

"They've got to protect the little investor, but to me Enron is much more worrisome than Martha Stewart," he said.

Trinity investor Michael Beckett, who sells computer software, said he doubts the Stewart case will have any lasting impact.

"If they're crooked, they're going to be crooked," he said.

"What's going to drive the market is topline revenue growth, earnings and overall macroeconomic indicators such as inflation."

- Staff writer Helen Huntley can be reached at huntley@sptimes.com or 727 893-8230.

[Last modified July 16, 2004, 01:20:28]