On December 21, 2001, Stewart sold about 4,000 shares of ImClone Systems, a company run by her friend Sam Waksal that develops cancer-therapy drugs. The next day, the company s stock tanked after news broke that ImClone s newest cancer drug, Erbitux, had been rejected by the FDA. Waksal, who also sold stock before the drug s rejection was made public, was arrested on charges of insider trading and later sentenced to more than seven years in prison. When questioned about her sale of the stock in June 2002, Stewart denied any insider knowledge and said that the stock was sold based on a previously made agreement with her stock broker, Peter Bacanovic of Merrill Lynch. The next month, Bacanovic was suspended by Merrill Lynch when investigators were unable to confirm that such an agreement actually existed. In September 2002, the Department of Justice began to investigate Stewart s stock sale and alleged insider trading. Less than a year later, she was indicted on charges of securities fraud and obstruction of justice and subsequently resigned as chairman and CEO of the company she founded, Martha Stewart Living Omnimedia, though she remained on the company s board. Stewart s trial began in February 2003.
Days into the trial, Bacanovic s former assistant, Douglas Faneuil, testified that he had been ordered by Bacanovic to inform Stewart that she should sell her ImClone stock. Soon after, a friend of Stewart s testified that Stewart told her she knew Sam Waksal had been trying to sell the stock before dumping her own shares. Though the judge dropped the securities fraud charge against Stewart in February for lack of evidence, she was convicted on all remaining counts?conspiracy, obstruction of justice, and making false statements?on March 5, 2004. Public opinion polls at the time showed that many Americans believed Stewart should serve prison time; others thought Stewart had been unfairly targeted by overaggressive prosecutors.
On July 16, 2004, Stewart was sentenced to five months in prison and five months of home confinement, in addition to being fined $30,000 and given two years probation. She could have received up to 16 years in prison. Stewart requested to serve her time immediately and was sent to the minimum-security facility in West Virginia?known as "Camp Cupcake"--on October 8, 2004.
Despite fears that Stewart s legal battle might devastate her financial empire, Martha Stewart Living Omnimedia s stock price climbed dramatically during her incarceration, with values quadrupling by the time of her March 2005 release. During her subsequent home confinement, Stewart was forced to wear an electronic ankle bracelet to monitor her movement and was able to leave home for only 48 hours each week and only to go to work. Immediately upon completion of her sentence, she began work on two new NBC television shows: a primetime spin-off of the successful reality series The Apprentice and a daytime variety show, Martha.