Yesterday we made the observation that coverage of the insider trading allegations in the stock of ImClone Systems Inc. had devoted far more attention to Martha Stewart than to Sam Waksal, the biotechnology firm’s founder and former chief executive officer, who was arrested June 12 on federal securities charges for tipping off family members and friends about an impending adverse decision by the Food and Drug Administration.

Now we come to find that prosecutors are taking the same tack.

In today’s Wall Street Journal, Charles Gasparino and Jerry Markon report federal prosecutors have expanded their investigation of Stewart “beyond insider trading to include possible obstruction of justice and making false statements.” [Ed.: Link requires registration and/or subscription.]

The latest controversy concerns whether Stewart, or her broker, Peter Bacanovic of Merrill Lynch & Co., or his assistant, Douglas Faneuil, or all three, lied to investigators about the much-discussed purported prior agreement between Stewart and Bacanovic that Stewart’s ImClone holdings be sold when the price of the stock fell below $60, an event that occurred on Dec. 27, the day before the FDA’s decision was made public.

But here’s the surprising -- and disturbing -- twist to the story: “[F]ederal prosecutors are now boring in on Ms. Stewart . . . and Mr. Bacanovic . . . so intently that the broader investigation of Mr. Waksal and his family members who sold stock is on hold.” [Ed.: Emphasis added.]

This is strange.

Waksal has been arrested and his daughter, Aliza Waksal, and father, Jack Waksal, reportedly took in several million dollars by dumping shares of ImClone stock after getting the heads up from the former CEO that the FDA would soon announce its rejection of ImClone’s cancer treatment Erbitux, which the agency did on Dec. 28.

But instead of investigating the Waksals, and who knows how many other people they might have contacted before Dec. 28, prosecutors have assigned a higher priority to going after Stewart in an effort to determine whether or not the notorious “control freak” allowed a standing order to sell 4,000 shares sit in a computer at Merrill Lynch ready to fire automatically if the price of the stock fell below $60, even if she were on vacation.

As we have said from the beginning, we could be completely misguided in our interpretation of events. But we have emphasized that our comments are simply that, an interpretation, one that offers an alternative scenario to that which so much of the media has adopted as gospel truth in this matter.

Nonetheless, it strikes us as odd that an obstruction charge based on little more than the word of a 26-year-old sales assistant with limited experience working with his broker’s clientele would take priority over one of the most flagrant violations of insider trading laws in recent memory.

Waksal, after all, not only sought to sell some of his own shares of ImClone, but when objections to that maneuver were raised by the firm’s attorneys, he attempted to transfer the shares to his daughter so that she could complete the transaction on his behalf. And Waksal provided material non-public information not only this daughter, but his other daughter and his father, and an as yet undetermined number of relatives and friends -- a list of which should be fairly easy to reconstruct by taking a look at his telephone records and some brokerage order tickets.

Faneuil changes his story

The widened probe apparently was sparked by statements Faneuil made to prosecutors this week According to the Journal, Faneuil, who has worked at Merrill Lynch for less than a year, has retracted his previous account of the Stewart transaction. (By our reading of today’s article, it’s clear that Faneuil or his attorney is the source for the story.)

Faneuil now says he misled lawyers at Merrill Lynch and the Securities and Exchange Commission when he supported Stewart and Bacanovic’s account of the trigger for the sale of ImClone stock. Faneuil, according to the Journal, told Merrill Lynch attorneys that he was not aware of such an arrangement. That statement is not in and of itself damaging, but Faneuil also reportedly said “he concocted his initial account after being pressured by Mr. Bacanovic.”

That could prove to be a major blow to Stewart if it is proved to be true -- what we know of his story now cannot be corroborated by anyone -- and if it can be determined that Bacanovic and Stewart came up with their stories in collusion with each other. On the other hand, if Stewart and Bacanovic can produce the notes they each claim to have about a prior agreement (their accounts of the notes vary as to the time of the conversation) it would suggest that Bacanovic simply didn’t tell his assistant about the agreement but later sought support that would back him up.

In today’s Journal, Gasparino casts doubt on the ability of Bacanovic and Stewart to depend on a verbal agreement to protect themselves. “Merrill [Lynch] officials say they believe Mr. Faneuil would have known about the arrangement if one had existed,” Gasparino reports. By way of explanation, Gasparino offers, “[V]erbal stop-loss agreements are uncommon on Wall Street to avoid confusion; most brokers officially log such arrangements into the firm’s computer system to keep a detailed record of the trade.”

However, Gasparino, appearing this morning on CNBC’s “Morning Call,” equivocated on this very point, calling verbal agreements “a gray area” in the securities trading business.

Faneuil is to meet with prosecutors again, possibly today, to discuss the matter, according to the Journal.

It’s in Bacanovic’s hands

In order to charge Stewart with insider trading, prosecutors would have to show that Stewart’s sale was sparked by knowledge of specific details regarding the FDA’s unannounced adverse decision, rather than rumors in the market, vague comments from her broker, or the observations of the biotechnology analyst at Merrill Lynch.

The only person who can provide that information is Peter Bacanovic. He and Stewart reportedly spoke on the phone for 11 minutes on the morning of Dec. 27. We have not heard nor been given reason to believe the conversation was recorded, but notes may have been taken by either or both parties.

Martha Stewart and Peter Bacanovic

Summing up, then, that call is the crux of the matter. The conversation could have taken any number of directions:

Bacanovic told Stewart ImClone shares looked like they might decline and he sought confirmation that she wished to sell at the predetermined trigger of $60.

Bacanovic told Stewart he thought ImClone shares were about to fall because there already were large sell orders in the market.

Bacanovic told Stewart ImClone shares were about to fall because there were large sell orders in the market including a large block from Aliza Waksal.

Bacanovic told Stewart he thought ImClone shares were about to fall because Sam and/or Aliza Waksal told him the FDA was preparing to reject the firm’s application for Erbitux.

The common link between all of these scenarios is that the determination of Stewart’s guilt or innocence depends largely on Bacanovic’s account of the conversation.

Two things of note happened after the call. First, Bacanovic directed Faneuil to place the order to sell Stewart’s shares, mentioning or not mentioning the prior agreement with his client. Second, Stewart called Sam Waksal, leaving a message, “Something’s going on at ImClone and I want to know what it is.” Waksal did not return the call.

We may be placing far too much emphasis on that remark, but if Stewart were seeking Waksal’s advice why did she call him after she gave the go-ahead for the transaction? And if she had been tipped off to the FDA’s decision, why would she ask Waksal what was happening at ImClone?

Call us confused.

Appearing yesterday on the CBS program “The Early Show,” Stewart said she believes the entire matter will be resolved “very soon” and added that she expects to be “exonerated of any ridiculousness.”

In her inimitable manner, Stewart, while determinedly chopping cabbage with a very large knife, deflected continued attention to the subject by saying, “I want to focus on my salad.” Until we read or hear something more substantial than that which has been presented so far, we suggest prosecutors and reporters do the same.