Martha Stewart’s ImClone Trade
–A Banconovic Misappropriation Case?
By Jon Parker
Despite many published reports by the news media, Martha Stewart’s ImClone trade of 3,928 shares on Dec 27,2001 is in reality not a case of insider trading. A careful reading of Merrill Lynch assistant Douglas Faneuils plea indicates that the government is attempting to make the case that Martha’s broker Peter Banconovic misappropriated Merrill Lynch trade data. I believe that according to established law that he did not. Without proof of Bacanovic’s misappropriation, there can be no insider trading case against Martha Stewart
Although Congress originally investigated Ms Stewart for receiving a tip from Sam Waksal about the upcoming FDA decision, or receiving ImClone non public information, its clear in the Rep. Billy Tauzin letter to Attorney General Ashcroft asking the Department of Justice to investigate that the following took place:
1. Aliza Waksal calls Douglas Faneuil and sells 39,472 shares of ImClone at 9:49 AM.
2. Douglas Faneuil calls Peter Banconovic that Aliza Waksal sold her shares.
3. Peter Banconovic leaves a message with Martha Stewart’s secretary that " Peter Banconovic thinks ImClone is going to start trading downward" at approximately 10:00 AM.
4. Martha Stewart calls the secretary (1:31 PM) and is patched through to Banconovic’s Office.
5. Douglas Faneuil takes the call and sells 3,928 of Martha Stewart’s ImClone shares at 1:41 PM.
6. Martha Stewart calls Sam Waksal, does not reach him, and leaves a message questioning what is going on at ImClone.
In the letter to Attorney General John Ashcroft, Representative Tauzin still had doubts about a direct tip from Sam Waksal to Martha Stewart, and makes a huge issue about the "$60 verbal stop loss". It seems clear after the recent flood of Waksal guilty pleas that there is no evidence of any direct tip from Sam Waksal to Martha Stewart, or that the Merrill Lynch brokers were even informed of the FDA decision. This "$60 verbal stop loss" is not even referred to as a stop loss by Ms Stewart in her letters to Congress. In actuality, the verbal agreement is not the lynchpin to Ms Stewart’s defense, and its existence is not critical in determining whether trading laws were broken or not.
The case boils down to whether Peter Banconovic breached his fiduciary duty to Merrill Lynch. The message " Peter Banconovic thinks ImClone is going to start trading downward" is the only known contact between Ms Stewart and Mr. Bacanovic, as she was on a jet travelling to Mexico, and he on vacation in Miami. One could argue that the message does not convey the misappropriated Merrill Lynch data, so it can’t be a breach of duty. In the Faneuil plea, the District Attorney states that the Financial Advisor (Banconovic) directly and indirectly tipped tippee A, which can be interpreted that Douglas Faneuil may have told Ms Stewart some trade data, but they are going to try and hold Mr. Banconovic responsible for his assistant's actions. But even so, the case lacks the fundamental basis for misappropriation, as defined in the 1997 O’Hagan Supreme Court Case about misappropriation:deception.
"Because the deception essential to the misappropriation theory involves feigning fidelity to the source of information, if the fiduciary discloses to the source that he plans to trade on the nonpublic information, there is no "deceptive device" and thus no § 10(b) violation.."
Past misappropriation cases have dealt with people secretly trading after acquiring confidential material. In this case, there is no deception on the part of the brokers to hide the trade from Merrill Lynch. Neither Mr. Banconovic nor Mr. Faneuil could have misappropriated Merrill Lynch trade data without informing Merrill Lynch of the executed trades as they were placed through Merrill Lynch. If Peter Banconovic did not commit a breach of fiduciary duty or commit a deceptive device, then Martha Stewart did not receive an illegal tip. The available evidence and interpretation of the misappropriation theory indicates he did not misappropriate Merrill Lynch trade data.
