Criminal Probe of Stewart Sought

WASHINGTON —  House leaders on Tuesday asked the Justice Department to launch a criminal probe of homemaking celebrity Martha Stewart, saying she may have misled investigators about her sale of a biotech stock.

The House Energy and Commerce Committee has been investigating whether Stewart, a former stockbroker who is now chief executive of Martha Stewart Living Omnimedia Inc., relied on inside information when she sold nearly 4,000 shares of ImClone Systems Inc. a day before the company disclosed that its cancer drug, Erbitux, had been rejected by the Food and Drug Administration.

House Commerce Committee Chairman W.J. “Billy” Tauzin (R-La.) said Stewart’s phone records and other information obtained by committee investigators indicate she may have given the committee false details about the Dec. 27 stock transaction, which netted her $229,522.

In an eight-page letter to Atty. Gen. John Ashcroft, Tauzin and Rep. James C. Greenwood (R-Pa.), chairman of the House investigations subcommittee, urged the Justice Department to determine whether Stewart provided false details to Congress, which would be a federal crime.

The letter, also signed by the ranking Democrats on Tauzin’s and Greenwood’s committees, cited the federal False Statements Act, which makes it a felony for anyone to “knowingly and willfully make any material false statement” in an investigation by Congress. Violators can be fined and imprisoned for up to five years.

Stewart’s Washington lawyer, James F. Fitzpatrick, declined to comment. But another Stewart lawyer, Robert Morvillo, said in a prepared statement he is glad the probe will be handled by Justice Department officials. He praised them as “professional law-enforcement authorities who are trained to conduct a responsible and thorough investigation. I’m glad that the political aspects of this matter will now terminate and am confident that the investigation will lead to Ms. Stewart’s exoneration.”

Stewart has not been charged with a crime and has said she did not engage in any illegal activity.

The House committee had considered issuing a subpoena to force Stewart to testify, but backed down after her attorneys insisted that she would invoke her constitutional right not to testify.

News that the House committee would refer the matter to the Justice Department--and not subject Stewart to a potentially embarrassing appearance before Congress--sent shares of Martha Stewart Living Omnimedia up $1.30 to $9.05 on the New York Stock Exchange.

“Any time people are waiting for news and you get the news, it tends to be a release of anxiety,” said Jeffrey Klinefelter, an analyst with U.S. Bancorp Piper Jaffray in Minneapolis. “That seems to be what’s going on now.”

Although up from last month’s 52-week low of $6.29, the stock’s closing price was still well off a March high of $20.93.

Negotiations to secure Stewart’s appearance before the House panel continued right up to shortly before Tauzin and Greenwood’s news conference. But in the end, Stewart declined to cooperate, although her lawyers have turned over more than 1,000 pages of documents.

“Martha Stewart would not either voluntarily be interviewed nor would she testify before this committee.... We’re at the end of the road,” Tauzin said. “Faced with the inconsistencies ... it’s a matter for the Justice Department.”

Tauzin released records Tuesday that appear to contradict earlier statements from Stewart’s lawyers that her ImClone shares were to be sold automatically if they fell below $60 a share.

According to phone records, Stewart’s broker, Douglas Faneuil, called Stewart or her employee at least once on the morning of Dec. 27, while ImClone’s shares were still trading above $60 a share, Tauzin said. At least one call from a Stewart phone was placed to Faneuil before he entered a sell order for 3,928 shares at 1:43 p.m., according to records released by the committee.

Tauzin also released an e-mail from Stewart to her stockbroker that same day suggesting that she anticipated significant developments about ImClone on Dec. 27.

“Has news come out yet? Let me know,” Stewart wrote in an e-mail sent at 1:18 p.m. on Dec. 27.

The rare but not unprecedented request to the Justice Department reflects Congress’ increasing frustration in securing the testimony or cooperation of witnesses amid a growing wave of corporate financial scandals. Since the beginning of this year, lawmakers have sought the testimony of corporate executives from Fortune 500 companies, including those from Enron Corp., WorldCom Inc. and Global Crossing Ltd., only to have many of them refuse to testify or cooperate in the investigations.

“Formal committee referrals of possible false statement charges are quite infrequent and the Justice Department investigates them very seriously,” said Charles Tiefer, a University of Baltimore law professor who is former deputy general counsel of the House of Representatives.

“The committee referral reflects the double frustration that Congress can’t seem to get the full story from the corporate officials in the current scandals and that Martha Stewart went so far as to provide the committee an account which they consider likely untrue,” Tiefer added.

Since the committee began its probe of the trading of ImClone shares as its cancer treatment drug was facing FDA review, Stewart has found herself at the center of the biggest insider-trading scandal since the takeover frenzy of the 1980s, led by disgraced Wall Street trader Ivan Boesky

Subcommittee Chairman Greenwood said Justice Department officials have indicated they will seriously examine the evidence forwarded by panel investigators.

The lawmakers said they have been prevented from reconciling “discrepancies, ambiguities and suspicious communications” surrounding the stock sale because Stewart has repeatedly refused to be interviewed by committee staff.

In addition to phone records and e-mails between Stewart and stockbroker Faneuil, the committee released the message log of ImClone founder Samuel D. Waksal, who is a friend of Stewart’s and was indicted by a federal grand jury last month on charges of insider trading, obstruction of justice and perjury. The log shows a notation of Stewart’s phone number in Mexico from Dec. 27 to Jan. 2.

Some business experts speculate that Stewart and her company are likely to get some reprieve in the coming weeks, although it is unclear how the public and Wall Street will react over the long term. While the Justice Department weighs the lawmakers’ request for a probe of Stewart’s allegedly false statements, the Securities and Exchange Commission continues its investigation of possible insider trading.

Still, the committee’s action prolongs the examination of Stewart’s conduct at a time when the public is taking a critical view of those who are alleged to have engaged in corporate wrongdoing.

“It is a continual drain on her image because it is not resolved in any positive way,” said Michael Kamins, an associate professor of marketing at USC’s business school and an expert in celebrity marketing. “So it sits there and consumers continue to think about and link her to this issue of wrongdoing. She is not cleared and the perception is that if she was honest, she would have been cleared.”

But for most consumers, the corporate figurehead’s travails are irrelevant at the checkout counter, said Kurt Barnard, president of Barnard’s Retail Consulting Group.

“Wall Street is predisposed to be very worried and I don’t blame them,” Barnard said. “But that has very little to do with the sale of a pink pillowcase at Kmart or a gallon of paint at Sears.”

Goldman reported from Los Angeles.