Sorting Out the Martha Mess
The latest CEO to become entangled in the widening series of corporate scandals is Martha Stewart, founder of Martha Stewart Living Omnimedia Inc. (MSO ) America's most celebrated homemaker has become the subject of screaming headlines and messy questions into her stock trading. The U.S. Attorney for the Southern District of New York, along with the Securities & Exchange Commission and a House Commerce & Energy subcommittee, are trying to figure out whether Stewart is guilty of insider trading after dumping her 3,928 shares in the tiny biotech ImClone Systems Inc. one day before the stock plummeted on bad news. The scandal has sliced more than 13% off the stock price of Omnimedia since June 6, when news broke of its founder's lucky timing. Here are some of the questions surrounding Stewart's trading:
Why is Stewart under investigation when other people also sold stock on that day?
Not only is she a good friend of former CEO Samuel D. Waksal, who faces criminal charges of insider trading, but her broker is a former ImClone employee who also has Waksal's daughter Aliza as a client. Aliza is one of several family members who allegedly sold stock before Stewart dumped her holdings on Dec. 27. Stewart could face charges if a company insider tipped her off to impending news and she acted on that information. She could even be guilty if the broker passed along inside information that she knew or should have known came from Waksal.
Stewart says she told Merrill Lynch & Co. broker Peter Bacanovic in late November to sell if the stock went below 60, but he allegedly told investigators that the discussion took place in mid-December. Why does the timing matter?
Stewart's defense is much stronger if she issued the order in November. By early December, some ImClone officials became aware that the Food & Drug Administration might not accept the application for approval of their much-awaited cancer drug Erbitux, and could have alerted her to that fact.
Where is Bacanovic, and why hasn't he come to his client's defense?
He was in Britain as the tabloids hurled mud at Martha in recent days, but sources say he's now back in the U.S. He has cooperated with investigators and is due to meet with congressional officials during the week of June 24. Still, don't expect many public statements or interviews while the investigation is under way.
What kind of evidence is needed to press charges against Stewart?
Investigators need concrete proof that either Bacanovic or an ImClone insider relayed information to Stewart about the impending FDA announcement. That could come through some documentation of telephone calls with her broker or evidence of direct contact with Waksal before the sale. Stewart admits to phoning Waksal after ordering the stock sale but says he never called her back. Indeed, some investigators already doubt they will find enough to make charges stick.
Aren't phone calls with brokers taped?
The only calls that are routinely taped are to and from brokerage trading desks. While brokers may request to be taped, it's not standard practice. Merrill Lynch (MER ), where Bacanovic works, said it does not comment on either client relationships or ongoing investigations.
However, Bacanovic may have handwritten notes that document when Stewart authorized the sale. She has already said there was no formal "stop-loss" order, just a verbal agreement. Without a record of what transpired between the two--and when it took place--there's little proof to convict.
Is it likely that Stewart is telling the truth and simply had brilliant timing?
It's certainly possible. For one thing, the stock had a significant runup in November and was in a volatile sector. It had already started to slip as rumors of trouble with the FDA application surfaced in the days before Stewart sold off her holdings. Investigators also have to ask why she wouldn't have simply sold in mid-December if she got wind of a possibly devastating FDA ruling. Another basic question: Why would a woman worth more than $500 million risk so much for a payout of less than $230,000? As a former stockbroker and CEO of a public company, Stewart knows the rules surrounding insider trades. Investigators have to prove she ignored the risk of getting caught for a relatively small gain.
Is this controversy likely to hurt her $300 million media and retail empire?
Investors are skittish, but consumers may not care. They read Stewart's magazine, watch her TV show, and buy her products for the lifestyle they project. That could change, of course, if the domestic icon actually faces a criminal conviction.
Not only has the company weathered an ad drought and the recent bankruptcy of Kmart Corp., its founder is already one of the most skewered and parodied CEOs in history. Laura A. Richardson, vice-president for equity research at Boston's Adams, Harkness & Hill, thinks this scandal will melt away like a soft lemon sorbet. Even without ImClone, she says, "everybody in America has heard some negative story about Martha at this point."
By Diane Brady, with Emily Thornton in New York and Mike McNamee and Amy Borrus in Washington
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