Martha Stewart’s Crime: Obstruction, Not Insider Trading

Martha Stewart was convicted in March 2004 of four federal crimes: conspiracy, obstruction of an agency proceeding, and two counts of making false statements to federal investigators. She was not convicted of insider trading. Every count grew out of what she told the FBI and SEC about a December 2001 stock sale, not the sale itself.

The Four Counts She Was Convicted Of

The jury found Stewart guilty on all four counts the government took to trial.¹

Count One: conspiracy to obstruct justice and make false statements, under 18 U.S.C. § 371.
Counts Three and Four: making false statements to federal investigators, under 18 U.S.C. § 1001.
Count Eight: obstructing an SEC proceeding, under 18 U.S.C. § 1505.

Each false-statement count carries a maximum of five years in prison,² and the obstruction count carries the same maximum.³ Her actual sentence came in far below those ceilings.

Why Insider Trading Was Not a Criminal Charge

This is the part most people get wrong. Federal prosecutors never charged Stewart criminally with insider trading. The superseding indictment made that explicit.¹

There was one securities fraud count in the criminal case, Count Nine, but it had nothing to do with the ImClone trade itself. It accused Stewart of making false public statements in June 2002 to prop up the share price of her own company, Martha Stewart Living Omnimedia. The trial judge dismissed that count before it reached the jury, concluding that no reasonable juror could find beyond a reasonable doubt that Stewart intended to manipulate MSLO’s stock.¹

Insider trading allegations were handled on the civil side, through a separate SEC lawsuit that Stewart settled in 2006.

The Trade and the Cover Story That Led to Charges

On December 27, 2001, Stewart sold all 3,928 shares of ImClone Systems she held in her Merrill Lynch account.⁴ The next day, ImClone announced that the FDA had refused to file its application for the cancer drug Erbitux, and the stock fell 16 percent. Stewart’s broker, Peter Bacanovic, had tipped her that ImClone CEO Sam Waksal and his daughter were dumping their own shares. Her sale avoided roughly $45,673 in losses.⁵

Once federal investigators started asking questions, Stewart and Bacanovic told them the sale was triggered by a pre-existing agreement to sell if ImClone fell below $60 per share. The government’s case was that this agreement was invented after the fact to disguise why Stewart really sold. The jury actually acquitted both defendants on the specific allegations tied to fabricating the $60 story, but still convicted them of lying about other aspects of the trade and conspiring to mislead the investigation more broadly.¹

Prison Sentence and Fine

On July 16, 2004, the court sentenced Stewart to five months in federal prison, five months of home confinement, and two years of supervised release. She was fined $30,000 and ordered to pay a $400 special assessment.¹

She reported to the Federal Prison Camp in Alderson, West Virginia, a minimum-security women’s facility, in October 2004, and was released on March 4, 2005. Home confinement followed, with electronic monitoring that confined her to her residence outside of approved activities like work and medical appointments. Supervised release carried the standard federal conditions: regular check-ins with a probation officer, truthful answers to that officer, limits on leaving the judicial district, and notice of any change in residence or employment.⁶

The Separate SEC Civil Settlement

In 2006, Stewart settled the SEC’s civil insider trading case without admitting or denying the allegations. The payment totaled about $195,000:

Disgorgement of $45,673, representing the losses she avoided by selling before the Erbitux announcement.
Prejudgment interest of $12,389.
A civil penalty of $137,019, calculated at three times the losses avoided, which was the maximum the SEC could impose.

The settlement also barred Stewart for five years from serving as a director of any public company and restricted her role as an officer or employee of a public company during the same period, specifically prohibiting her from participating in financial reporting, internal controls, audits, and SEC filings. She stepped down as chairwoman and CEO of Martha Stewart Living Omnimedia and took the title of “founding editorial director” to stay creatively involved without violating the restrictions.⁷

Why the Cover-Up Cost More Than the Trade

The original ImClone sale saved Stewart less than $46,000. The convictions that followed were not for making that sale. They were for what she told federal investigators about it. Between criminal fines and the SEC settlement, Stewart paid roughly $225,000, served five months in prison and five months under home confinement, lost the ability to run her own public company for five years, and watched MSLO’s stock lose more than 70 percent of its value after the indictment.

The statute at the center of her convictions, 18 U.S.C. § 1001, makes any materially false statement to a federal agent punishable by up to five years in prison, whether or not the underlying conduct the agent is asking about turns out to be a crime.² That is the charge that put Stewart in Alderson.

1
Justia. United States of America v Martha Stewart and Peter Bacanovic
2
Office of the Law Revision Counsel. 18 US Code 1001 – Statements or Entries Generally
3
Office of the Law Revision Counsel. 18 USC 1505 – Obstruction of Proceedings Before Departments, Agencies, and Committees
4
Securities and Exchange Commission. Martha Stewart and Peter Bacanovic – SEC Complaint
5
Securities and Exchange Commission. Martha Stewart and Peter Bacanovic
6
United States Courts. Overview of Probation and Supervised Release Conditions
7
U.S. Securities and Exchange Commission. Martha Stewart and Peter Bacanovic Settle SECs Insider Trading Charges