Martha: Good Taste, Bad Judgment

Her messy handling of the ImClone matter is bound to leave even her diehard fans noticing a fishy odor

By Diane Brady

Few people can popularize a product better than Martha Stewart. A simple visit from the doyenne of domesticity on behalf of her TV show can send sales at even the most obscure store in America into the stratosphere. Small wonder that her sale of almost 4,000 shares in an obscure biotech company has finally put the hubris of America's business elite on the map.

The public may not relate well to the likes of Jeffrey Skilling of Enron or Bernie Ebbers of WorldCom. But they take notice when Martha Stewart -- a millionaire CEO in her own right -- engages in behavior that, at the very least, raise head-scratching questions. Put this episode in the same "What Were They Thinking?" category as charges that ultrarich Dennis Kozlowski of Tyco International shipped his art out of state to avoid New York sales taxes, or that actress Winona Ryder shoplifted a few frocks for fun.


  Even if Stewart is innocent of insider trading in selling her shares of ImClone Systems (IMCL ) one day before a devastating Food & Drug Administration ruling sent the stock reeling, her handling of the crisis is bound to leave a bad taste in the mouths of even diehard Martha fans.

It's still anyone's guess as to whether Stewart actually received a tip on the impending news from her broker, Peter Bacanovic, who also happens to be a broker for indicted ImClone CEO Samuel D. Waksal as well as his daughter Aliza, who dumped her shares a few hours before Stewart on Dec. 27. Stewart has issued statements disputing all charges, although she declines to discuss specifics with an investigation under way.

But a fishy odor has come to permeate the drama, thanks in large part to the lifestyle maven's explanations and handling of the case. For one thing, the notoriously detail-oriented Stewart never issued an actual stop-loss order to sell if ImClone fell below $60 -- which would have left a paper trail that would be easy to trace. Instead, she says there was an informal agreement to call her at that price, of which there is apparently no record either. Industry experts say such agreements, while uncommon, are usually at least recorded on a computer or shared with the broker's team.


  Then there's the alleged discrepancy between when she said she made the request -- in late November -- and what broker Bacanovic recalls as a discussion that took place in December. Investigators argue that the latter date might have allowed her access to inside information. A Merrill sales assistant now is said to dispute the notion of any agreement, and says he misled company lawyers and the Securities & Exchange Commission by agreeing with his boss and his boss's high-profile client in saying that one existed. That raises the specter of obstruction-of-justice charges if Stewart is found to have lied.

So what is Stewart's reaction to the confusion? A woman known to plan every minute of every month and to pore over every plum she preserves, she can only point to a vague conversation with Bacanovic at some point in November. In one of the few opportunities to address the public, during her weekly stint on CBS's The Early Show on June 25, she brushed off questions from the host, saying she would be cleared of any "ridiculousness" and wanted to "focus on my salad."

The facts in the case plainly raise questions about Stewart's ethics. On the day that she sold her stock, Stewart admits to calling her pal Waksal from her private jet to demand an explanation for what was going on. Apparently, they never spoke. But as the head of a public company herself, not to mention a former stock broker, she should have known better than to seek out nonpublic information from the head of a company in which she invests. At the very least, the move suggests an undue sense of entitlement. Stewart maintains that she has done nothing improper.


  Given her close relationship with Waksal, Stewart also had to know that Bacanovic handled trades for insiders at ImClone, which could place her broker in an advantageous -- and dangerous -- position as far as any tips regarding the stock were concerned. Yet we are to believe that she never pumped Bacanovic for information on the company, simply agreeing to sell while calling up her friend Waksal to pump him for information instead. That scenario doesn't sit well with one ex-Wall Street trader, an acquaintance of Bacanovic, who argues that "everyone in that circle passes tips to each other."

The appearance of such clubbiness has already extracted a huge cost from Stewart and her company. Shares in Martha Stewart Living Omnimedia (MSO ) have almost halved in value since news of her sale broke on June 6. That has trimmed hundreds of millions off her net value -- all for a sale that netted $230,000 and would have cost her about $43,000 had she sold when the FDA refusal became public.

Amid the uproar, the relative silence from one of the country's most celebrated icons is deafening. After all, she had kept up her high profile amid a year of poor ad sales, the bankruptcy of retail partner Kmart, and the release of a scathing biography. When it comes to handling her own financial dealings, though, America's arbiter of good taste has shown herself to be a model of bad judgment.

Brady is an associate editor for BusinessWeek in New York

Edited by Douglas Harbrecht

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