SEC still plans to pursue charges
By Andrew Caffrey, Globe Staff

Martha Stewart's troubles aren't over.

Even though Stewart faces jail for her conviction on federal criminal charges that she lied and obstructed justice, the home fashion executive also faces another prosecution on the core action that got her into so much trouble -- the December 2001 sale of ImClone Systems Inc. stock, which federal regulators said violated civil insider trading laws.

The US Securities and Exchanges Commission says Stewart, a former stockbroker herself, knew, or should have known, the hot tip about ImClone chief executive Samuel Waksal's stock sales that broker and fellow defendant Peter Bacanovic allegedly passed along to her was illegal inside information.

Stewart and Bacanovic weren't charged with illegal insider trading in the criminal trial because, many legal specialists have speculated, that aspect of the case was weakest. But the SEC's civil proceedings have a lower threshold of evidence than in a criminal proceeding, which these specialists said should make it easier for the government to prove those charges, especially since her defense already failed once before the jury in New York.

Currently the SEC case has been stayed pending the outcome of the criminal trial, but yesterday the securities agency left no doubt it intends to pursue Stewart and Bacanovic once the stay is lifted by the federal court.

"Obstructing SEC investigations and lying to the government are serious crimes with serious consequences," SEC spokesman Herb Perone said yesterday.

Legal specialists were divided over the implications of a successful SEC illegal insider trading prosecution. Some said the circumstances are so particular to Stewart that it won't have much wider effect. Others contend a successful prosecution of Stewart and Bacanovic on illegal insider trading would send a chill through Wall Street's broker community and the high-rollers who hire them for hot stock tips.

"It's a huge deal, because brokers call up clients all the time, and say, 'There is lot of trading activity in company X, and we think you ought to act,' " said Stephen Bainbridge, a UCLA law professor who has written on insider trading issues.

If the SEC is successful, Bainbridge said, "it would have a fairly significant chilling effect on the kind of information brokers provide to clients, particularly the brokers with high-profile clients."

The heart of the illegal insider trading case revolves around Stewart's role as the recipient of a tip -- that is, as the receiver of information -- and what the government said was her obligation to evaluate whether the tipper -- Bacanovic -- breached a trust with his employer, Merrill Lynch. The brokerage firm's policies prohibit disclosure of confidential information about one client to another client.

So, the SEC argues, Bacanovic essentially stole information that wasn't his when he allegedly passed along to Stewart the tip that Waksal and his family members were hurriedly unloading their stock at a time when the market was anticipating a decision by federal drug regulators ImClone's cancer medication.

Market anticipation about the drug, Erbitux, was so high at that moment that the SEC argues that news about Waksal's stock sales would have influenced other shareholders' views of ImClone, and so was material information.

Stewart, the government further argues, was in a position to know that Bacanovic wasn't supposed to be telling her about Waksal.

"Stewart knew or acted in reckless disregard of the fact that information about the Waksals' efforts to sell their ImClone stock was nonpublic and that Bacanovic had communicated that information to her in breach of Bacanovic's duty of confidentiality to Merrill Lynch," the SEC said in its complaint against the two.

Stewart had argued that she had no recollection of being told the Waksals were selling, and that she and Bacanovic had an agreement to sell her 3,928 shares when ImClone's stock price fell below $60, as it did that day, Dec. 27, 2001. That defense, however, didn't work in the criminal trial, where she was convicted of four counts of perjury, making false statements, and conspiring to obstruct justice. Bacanovic was convicted of four of five counts.

Both federal prosecutors and the SEC have said that Stewart and Bacanovic cooked up the story about the $60 sale trigger. And if the SEC prevails in its case, "it would be a substantial expansion of the doctrine of insider trading," said Jeanne L. Schroeder, a professor at the Cardozo School of Law at Yeshiva University in New York.

Schroeder and others said the onus would then be on the receiver of a hot tip to evaluate the propriety of that information, as well as judge whether the tipper should have been passing it along in the first place. Clients of brokers, for example, "would want to think twice and specifically what they'd want to ask is, 'Do I think this person who gave me this information had a duty of trust and confidence that he breached in giving me this information?' " said Joan MacLeod Heminway, a law professor at the University of Tennessee, who has written about the Stewart case.

Andrew Caffrey can be reached at caffrey@globe.com.