September 10, 2002

 The Honorable John Ashcroft
Attorney General
U.S. Department of Justice
10th Street and Constitution Avenue,  N.W.
Washington, D.C. 20530 

Dear Attorney General Ashcroft: 

We are writing to request that the Department of Justice investigate whether Ms. Martha Stewart, chief executive officer of Martha Stewart Living Omnimedia, knowingly caused materially false representations to be made to the U.S. House of Representatives Committee on Energy and Commerce (Committee) in violation of 18 U.S.C. '1001, in connection with the Committee's investigation into the matter of ImClone Systems and its Food and Drug Administration (FDA) application for a drug called Erbitux. The relevant facts are explained below, and we have attached the documentation supporting our concerns for your review and consideration. 

As you know, under 18 U.S.C. '1001, it is a Federal felony for anyone to knowingly and willfully make any materially false statement, or to falsify or conceal a material fact, in connection with "any investigation or review, conducted pursuant to the authority of any committee, subcommittee, commission or office of the Congress." At the outset, we want to emphasize that the Committee has not reached any formal conclusion as to whether Ms. Stewart's actions constitute a crime under Federal law.  It is not our Constitutional role to do so.  But as Members of Congress, we believe it is our obligation to forward specific and credible information in our possession that could suggest a Federal crime has been committed. 

Because Ms. Stewart repeatedly has refused to be interviewed by Committee staff -- and her attorneys have stated that she would invoke her Fifth Amendment right not to testify if subpoenaed to a Committee hearing -- the Committee has been prevented from attempting to resolve many of the discrepancies, ambiguities, and suspicious communications outlined in this letter. These unresolved issues implicate serious policy issues concerning the integrity of the financial markets and whether the FDA drug review process lends itself to misbehavior by corporate insiders or other "favored" persons. These issues also concern a prominent public figure, who is a chief executive officer of a publicly-traded corporation and a member of the Board of Directors of the New York Stock Exchange.  Given the seriousness of our concerns and our inability to resolve them, we are requesting that the Department investigate whether Ms. Stewart knowingly caused materially false representations to be made to the Committee.    

Pursuant to and under the authority of Rules X and XI of the U.S. House of Representatives, the Committee launched an investigation on January 18, 2002, into the surprise rejection by the FDA of ImClone's application for its highly touted anti-cancer drug Erbitux. (See letters to FDA, ImClone, and Bristol Myers-Squibb attached hereto as Appendix A.)  As part of this inquiry, the Committee learned that on or around December 27, 2001 -- just one day before the negative FDA action became public but shortly after ImClone's founder and Chief Executive Officer (CEO) Samuel Waksal and other ImClone officers had learned of the pending rejection -- several of Samuel Waksal's family members and close friends, such as Ms. Stewart, sold their shares of ImClone stock, avoiding millions of dollars in losses when the stock price subsequently tumbled.  After learning this fact, Committee staff contacted Ms. Stewart's attorneys in the days leading up to a June 13th hearing held by the Committee's Subcommittee on Oversight and Investigations, in an effort to obtain some explanation for her trading activity on December 27th, and whether she had received any "tips" from Samuel Waksal (or his agents/representatives) or others knowledgeable about the pending FDA action.  

In response, Ms. Stewart's attorneys wrote to us on June 12, 2002, setting forth Ms. Stewart's version of this trading activity and her motivation in selling her ImClone shares.  The entire June 12, 2002 letter is attached hereto as Appendix B.  In relevant part, Ms. Stewart, through her attorneys, represented that: 

"This sale was the result of implementing an understanding reached about a month earlier with her broker that if ImClone shares were ever to sell below $60 per share, she would sell. . . . 

"On the 27th Ms. Stewart's broker called her.  They had a brief conversation that ended at 1:41 p.m.  The broker told Ms. Stewart that the shares had gone below $60, and they agreed to sell the shares.  .  . . 

"The sale noted above was prompted solely by a call from her broker based upon her preexisting understanding with him, and was not based upon any nonpublic knowledge or information about the FDA announcement or an FDA action in respect of ImClone.  .  . ." (emphases added) 

Upon further inquiry to Ms. Stewart's lawyers, the Committee received a second letter from them on June 18, 2002, explaining in greater detail Ms. Stewart's recollection of events on December 27th, including for the first time identifying Mr. Peter Bacanovic by name as her broker.  Mr. Bacanovic is a former ImClone employee who also was the broker of record for Samuel Waksal and both of Mr. Waksal's daughters, Elana and Aliza. The entire June 18, 2002 letter is attached hereto as Appendix C.  In relevant part, Ms. Stewart, through her attorneys, represented that: 

"After discussion of other business-related matters with her office, Ms. Stewart was informed that Mr. Peter Bacanovic, her broker at Merrill Lynch, had called and she was connected by her assistant through to Mr. Bacanovic during that same call.  While on the phone with Mr. Bacanovic, she was informed that ImClone had traded down below the price of $60 that she and Mr. Bacanovic had previously agreed would be a trigger to sell her remaining position . . . . 

 "As we said in our June 12 letter and as Ms. Stewart has stated publicly, Ms. Stewart did not receive any nonpublic information regarding ImClone prior to her sale . . . ." 

In essence, Ms. Stewart represented to the Committee that (1) she and Mr. Bacanovic had a pre-existing understanding that she would sell her ImClone shares if the stock dropped below $60; (2) that shortly before 1:41 p.m. on December 27th, which was clearly after the stock was trading consistently below $60 per share, she spoke with Mr. Bacanovic and agreed to sell her shares; and (3) this pre-existing understanding was the sole basis for her decision to sell on that day, and that she did not receive any non-public information regarding ImClone prior to her sale. 

Subsequently, the Committee learned, through documentation obtained by the Committee from various sources and some media reports, additional facts about the circumstances around Ms. Stewart's December 27th ImClone trade. These additional facts, described in detail below, cause us to be deeply skeptical of Ms. Stewart's accounts, and raise a serious question as to whether those accounts were false, misleading, and designed to conceal material facts.   

First, according to an affidavit the Committee obtained from Ms. Stewart's assistant Ann E. Armstrong (attached hereto as Appendix D), Mr. Bacanovic called Ms. Stewart's New York office between 10:00 and 11:00 a.m. on December 27, 2002.  Ms. Armstrong also stated that Mr. Bacanovic was unable to reach Ms. Stewart at that time, and that he left a message, recorded by Ms. Armstrong, as: "Peter Bacanovic thinks ImClone is going to start trading downward."  (See December 27th message log attached hereto as Appendix E.)[1]  Notably, Ms. Stewart's initial letter to the Committee makes no reference to this earlier call, only referring to a call initiated by her broker ending at 1:41 p.m.[2] This omission is material, because the earlier call by Mr. Bacanovic occurred when ImClone's shares were trading clearly at or above the $60 limit at which she and Mr. Bacanovic allegedly had agreed previously to sell.[3]  The Bacanovic message also suggests that he had some particular reason to believe at that point in time that ImClone "was going to start trading downward," given that ImClone's stock price had been trading downward every day since December 6, 2001.  (See ImClone trading charts, attached hereto as Appendix F.)  In fact, Ms. Armstrong's recollection would place this call shortly after Mr. Bacanovic's office had sold all the ImClone stock held by his client Aliza Waksal, the daughter of Samuel Waksal, which occurred at 9:49 a.m. that same day.  (See record of A. Waksal trade, attached hereto as Appendix G.)  In addition, according to an account in the August 13, 2002 Financial Times (attached hereto as Appendix H), Samuel Waksal's accountant called Mr. Bacanovic before the stock market opened at 9:30 a.m. on December 27th, seeking to transfer nearly 80,000 ImClone shares held by Mr. Waksal to his daughter Aliza, for subsequent sale that same day.[4] 

Thus, this chronology suggests that Mr. Bacanovic may have been calling Ms. Stewart between 10:00 a.m. and 11:00 a.m. to alert her to the Aliza Waksal sale and the attempts by Mr. Waksal to transfer and sell his shares, or to information he (or his assistant, Mr. Douglas Faneuil) may have received from Ms. Waksal about why she was dumping all of her stock at that time -- rather than solely because of an alleged pre-existing understanding to sell at $60 per share.  

Second, it does not appear that Ms. Stewart's representations that she spoke directly with Mr. Bacanovic on December 27th about her sale are accurate.  Mr. Bacanovic's cell phone records for December 27th, as well as various e-mail exchanges between Mr. Bacanovic and his assistant Douglas Faneuil and press accounts such as the August 13, 2002 Financial Times article, confirm that he was out of the New York City Merrill Lynch office on that day. (See Merrill Lynch e-mails attached hereto as Appendix I.)  The telephone records and other documentation produced to the Committee do not show any evidence of any calls between Ms. Stewart's and Mr. Bacanovic's telephone numbers that day, except for the call disclosed in Ms. Armstrong's affidavit.  Moreover, the August 13, 2002 Financial Times -- citing sources close to Bacanovic -- states that it was Mr. Faneuil who talked to Ms. Stewart shortly before 1:41 p.m. and placed the sell order for her.  Mr. Faneuil's e-mail to Ms. Stewart on the 27th confirming her ImClone trade appears to confirm this direct contact.  (See Appendix J, attached hereto.)  Yet in her June 18th letter, Ms. Stewart makes four specific references to the fact that her conversations with her broker that day were with Mr. Bacanovic specifically.  Given the reportedly close and long-term relationship between Ms. Stewart and Mr. Bacanovic, it appears unlikely that Ms. Stewart simply could have mistaken Mr. Faneuil for Mr. Bacanvoic. 

By omitting any reference to Mr. Faneuil and by stating instead that she spoke directly with Mr. Bacanovic, Ms. Stewart may have been attempting to steer the Committee's investigation away from Mr. Faneuil -- who, according to press accounts such as the August 13, 2002 Financial Times article, has told Federal prosecutors that he informed Ms. Stewart in that 1:41 p.m. call about the Waksal family sales earlier that same day.  Mr. Bacanovic reportedly denies that he instructed Mr. Faneuil to inform Ms. Stewart about the Waksals' sales, but nonetheless confirms that the discussion regarding Ms. Stewart's sales was between Mr. Faneuil and Ms. Stewart, and did not include him.  Notably, Ms. Stewart's attorneys have since refused to confirm whether she ever spoke with Mr. Bacanovic that day, despite her earlier representation to the Committee to that effect.   

Third, there is substantial reason to doubt Ms. Stewart's statements that (1) she had a pre-existing understanding with Mr. Bacanovic to sell her ImClone shares if the price fell below $60 per share, (2) this pre-existing understanding was the sole basis for her decision to sell on December 27th, and (3) she did not have any non-public information about ImClone at that time.  Besides the press report noted above regarding Mr. Faneuil's admission that he told Ms. Stewart about the Waksal family sales on the 27th prior to her selling her ImClone shares, there is other evidence warranting investigation into whether Ms. Stewart and her brokers may have received or been anticipating "news" of some kind regarding ImClone around this time.  In the afternoon of Thursday, December 20, 2001 -- several hours after ImClone learned from the FDA that a decision had been reached on its application and would be issued on December 28th, and that ImClone should not contact the agency any further until after that time -- there is a call lasting two minutes from an unassigned ImClone telephone number to the direct dial number for Ms. Stewart's executive assistant at Ms. Stewart's Connecticut studio.  (See phone record, attached hereto as Appendix K.)[5]  The next day, December 21st, phone records and message logs show four calls between Mr. Waksal and Ms. Stewart  (or their assistants), including one in which Ms. Stewart leaves Mr. Waksal information about where she can be contacted in Mexico "from Dec 27- Jan 2."  (See records attached hereto as Appendix L.)  The next day, Saturday, December 22nd, phone records show a phone call from Ms. Stewart's primary residence to the ImClone main number in the morning, and an afternoon call from someone at ImClone to a telephone number associated with Martha Stewart's business phone account, in the name of Ms. Stewart's driver. (See records attached hereto as Appendix M.)  On Sunday December 23rd, at a time when ImClone security records do not appear to show any ImClone employee present at ImClone's New York office, there is a 5:28 p.m. phone call (about 48 seconds in length) from an ImClone New York employee number to Ms. Stewart's personal home answering machine.  (See records attached hereto as Appendix N.) [6] 

Moreover, phone records on December 27th show that, shortly after Mr. Faneuil placed the sell orders for Ms. Aliza Waksal's trades and Merrill Lynch executed them, Mr. Faneuil called ImClone's main number at 10:16 a.m. (the call was 1.7 minutes in duration), followed by several calls over the next 20 minutes between Mr. Faneuil and Mr. Bacanovic and between Mr. Bacanovic's cell phone and his office number, presumably to talk to Mr. Faneuil.  (See phone records attached hereto as Appendix O.)  Interestingly, it is during this time frame that Ms. Armstrong states that Mr. Bacanovic called Ms. Stewart with the message that he believed ImClone would "start trading downward."  Later that day, at approximately 1:18 p.m., Mr. Bacanovic sent an e-mail to Mr. Faneuil stating: "Subject: IMCL/ Has news come out yet?  Let me know."  Three minutes later, Mr. Faneuil responded: "Noting [sic] yet.  I'll let you know.  No call from Martha either."  (See Appendix I.)   

Ten minutes later, at 1:31 p.m., Ms. Stewart calls her executive assistant (see phone record, attached hereto as Appendix P), and is, according to her June 18th letter to the Committee, patched through to the New York City Merrill Lynch office, in a call that ends around 1:41 p.m.  Immediately after that call -- which Ms. Stewart says is the call during which she agreed with her broker to sell her ImClone shares -- Ms. Stewart called Sam Waksal at ImClone and, unable to reach him, left a message stating: "Something is going on with ImClone and she wants to know what.  She is on her way to Mexico she is staying at.."  (See message log attached hereto as Appendix Q.)    

The e-mails between Mr. Bacanovic and Mr. Faneuil, as well as Ms. Stewart's own message for Mr. Waksal, all suggest that Ms. Stewart and her brokers may have been tracking some news about ImClone beyond the share price on December 27th, and that these concerns and interests existed at the time Ms. Stewart placed her ImClone trade on that day.  This casts significant doubt on Ms. Stewart's assertion that her decision to sell was based solely on some pre-existing agreement with Mr. Bacanovic. This chronology of activity also appears to contradict Ms. Stewart's assertions that there was an agreed understanding to sell ImClone shares when the share price fell below $60.  Indeed, if there had been such an agreed understanding between Ms. Stewart and her broker, one would have expected that Ms. Stewart -- a former stock broker, New York Stock Exchange board member, and sophisticated businesswoman -- would have executed a stop-loss order, obviating any need for her broker to contact her, especially as she was heading to Mexico on vacation.  A stop-loss order also potentially would have saved Ms. Stewart thousands of dollars, since the back and forth phone calls and messages on the 27th caused a delay in the execution of her trades until ImClone's stock had fallen to $58 per share. Further, Mr. Bacanovic's phone message for Ms. Stewart on December 27th makes no reference to any agreed understanding, just that he believed ImClone was going to start trading lower.   

While Ms. Stewart contends that she reached this understanding with her broker about a month before the December 27th sale, the Committee has not been provided any documentary evidence to support this claim.  In fact, the only reference to a $60 share price contained in the documents produced to the Committee is on a copy of Ms. Stewart's Merrill Lynch account statement apparently generated on December 21, 2001.  (See account statement attached hereto as Appendix R.)  The account statement includes a "60" handwritten next to the ImClone symbol.  According to the August 13, 2002 Financial Times, Mr. Bacanovic reportedly states that it was during a conversation on December 21st -- not in November, as Ms. Stewart asserts -- that he was able to convince Ms. Stewart to sell her ImClone shares if the price fell below $60 per share.  As previously noted, just one day earlier  -- on December 20th -- ImClone had received notice about a pending FDA action, which was followed by a series of telephone calls between numbers associated with Ms. Stewart and Mr. Waksal and/or ImClone. 

As noted at the outset, we have been prevented from discussing these suspicious telephone contacts and other records with Ms. Stewart. We also have been unable to interview Mr. Bacanovic and Mr. Faneuil.  Thus, the Committee has not been able to answer many of the legitimate questions raised by these records. We understand that your Department already may be conducting an investigation to determine whether Ms. Stewart committed any crimes by: (1) selling all of her shares of ImClone stock the day before the FDA issued a refusal-to-file letter to ImClone on Erbitux; (2) making statements to Federal law enforcement investigators about her stock trades that may be false; or (3) taking actions in connection with Federal investigations by your Department and the Securities and Exchange Commission that may constitute obstruction of justice or a conspiracy to obstruct a Federal investigation.  Accordingly, we believe that your Department should expand this investigation to include the related question of whether Ms. Stewart's representations to this Committee were similarly false.  Knowingly making materially false statements to a Congressional committee is a Federal felony and a serious offense, which, if not prosecuted vigorously by the Executive Branch, could undermine the future integrity and effectiveness of Congressional investigations. 

In addition, we believe that the information we are providing you today may assist your Department in its own reported criminal investigation of Ms. Stewart's actions by demonstrating that her potentially obstructive conduct with respect to Executive Branch investigations into the ImClone matter may not have been a one-time mistake or inadvertent error, but may have been part of a deliberate, repetitive course of conduct.  That she may have engaged in a similar course of conduct against the Legislative Branch also would strengthen the Federal interest in your Department's reported criminal investigation of Ms. Stewart's actions. 

We emphasize again that the Committee has not reached any formal conclusion as to whether Ms. Stewart's statements through her legal representatives to the Committee would constitute a crime under Federal law.  Nor, as previously stated, is it our Constitutional role to do so.  But as Members of Congress, we believe it is our obligation to forward specific and credible information in our possession that could suggest a Federal crime has been committed, or that could possibly assist your Department in an ongoing criminal investigation. 

If you have any questions about this matter or desire additional information, please contact us, or have your Department contact Alan Slobodin of the Committee majority staff at (202) 225-2927, or David Nelson of the Committee minority staff at (202) 226-3400.  Thank you for your consideration of this matter. 

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