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NEW YORK - Whether you work on Wall Street or Main Street, there is sometimes a fine line between the routine and the illegal. And that line may be the difference in determining whether style guru Martha Stewart committed one of the more widely known white-collar crimes -- insider trading -- when she sold her ImClone Systems Inc. stock last year.
As a congressional committee prepares to question ImClone chief executive Harlan Waksal tomorrow about the company's once-highly touted anti-cancer drug, Erbitux, federal investigators are continuing their pursuit of possible insider trading charges against Stewart.
It may be a tough case to prove. With gray areas, loopholes and circumstantial evidence, insider trading cases are often open to much debate and interpretation -- especially since there is still no statute that directly defines the crime.
For Stewart, that may be good news. Without an open-and-shut case, however, prosecutors may explore other options, such as obstruction of justice - charging that she lied or withheld information from them - or wire fraud, which is far simpler to prove.
"So much depends on what she was told by her broker and his assistant," said Robert Heim, a former Securities and Exchange Commission officer and partner in the Manhattan law firm Meyers & Heim.
Stewart, the chief executive of Manhattan-based Martha Stewart Living Omnimedia Inc., has denied any wrongdoing in her sale of 4,000 shares of ImClone stock in December. Other versions, including one from Merrill Lynch broker assistant Douglas Faneuil, have painted her as a "tippee" who received insider information and traded stock based on it.
At the heart of insider trading is a fundamental concept: Investors cannot trade based on "material, non-public information," and insiders cannot reveal such information, which could affect the value of the stock. The most basic version of this crime is when company executives buy or sell their stock based on information they have learned.
Insider trading becomes more complicated when one person tips off another. Some important elements to consider:
Is the information material and not public? If Stewart or her Merrill Lynch broker Peter Bacanovic had learned of the FDA's decision to reject Erbitux in advance, that would certainly be material evidence. Most securities attorneys agreed that even knowledge of the Waksals' sales was material. Jacob Frenkel, counsel with Smith, Gambrell & Russell in Washington, D.C., said the news might not be considered "non-public" if Internet chat rooms were already buzzing about the insider sales.
Who is the tipper? If the tipper is the chief executive or another top officer, the assumption that he has inside information is more viable.
In the Stewart case, if Bacanovic simply told his client Stewart, "It's time to sell ImClone," then Stewart, without any other information, is probably safe. If Bacanovic directly or indirectly provided material, non-public information about the company, they both could be liable.
What is the tipper's "duty"? Insider trading often involves a breach of duty to shareholders or clients. Tippers in these scenarios are "misappropriating" information from their companies and potentially guilty of insider trading. Former ImClone chief executive Samuel Waksal, Harlan's brother, had a duty to shareholders to divulge confidential information. He has been indicted for allegedly telling family members to dump ImClone stock just before the Food and Drug Administration announced it would not approve the Erbitux application.
What does the tippee know? The tippee must be in a position to know that certain information is material and non-public, or to know that the tipper should not be passing it along.
"It's a lot easier for the government to make a case against the tipper than against the tippee," said Kenneth A. Caruso, a former federal prosecutor and now-securities lawyer and partner at Chadbourne & Parke in Manhattan.
As a former stock broker and chief executive of a public company, prosecutors might argue, Stewart was in a position to know what was insider information.
Experts note that even the most straightforward of cases are often difficult to prove because they lack a key witness or piece of evidence. Attorney Heim said that in Stewart's case, jurors might question why someone like multimillionaire Stewart would risk everything to prevent a relatively small loss, $46,000, which is what she saved by selling her ImClone shares before the FDA announcement. By contrast, in perhaps the most notorious insider-trading case of the 1980s, former junk bond king Michael Milken was charged with gaining $600 million in illegal profits.
Stewart's celebrity may push prosecutors to go after more significant charges.
"If I'm the prosecutor in this case, which is a hat I've worn, I want to go with this case in all it's glory," said Frenkel, a former federal prosecutor and former SEC enforcement lawyer. "The image that she successfully created for herself of all that's right and perfect is now superimposed by violations of federal securities laws and misleading the U.S. Congress."
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