Commentary: Martha: Under a Cloud Long Enough

The delay in justice has proved to be an injustice in itself, not just for Stewart but for her employees and investors as well

Next month will mark an anniversary that Martha Stewart is unlikely to highlight in the monthly calendar of her signature magazine. It has been almost a year since a congressional committee announced that Stewart sold 3,928 shares in ImClone Systems (IMCLE ) Inc. one day before a devastating Food & Drug Administration ruling sent the stock reeling on Dec. 28. Since then, ImClone CEO Samuel D. Waksal has pleaded guilty and begun settling his insider trading charges, the politicians who publicly pursued Stewart with such fervor have moved on, and there has been little action from investigators at the Justice Dept. and Securities & Exchange Commission. The SEC sent Stewart a so-called Wells Notice last September, which often means formal charges will follow within a matter of weeks. That never happened. "This is not Enron; this is not a complicated situation," argues Chris Atkins, who has worked with clients in securities fraud cases as global corporate practice director at Ketchum, a communications consultancy. "She's entitled to speedy due process."

That delay in justice has proved to be an injustice in itself. It's not just Martha Stewart's personal reputation that has been ravaged. Employees and investors in Martha Stewart Living Omnimedia (MSO ) Inc. have been hurt by the legal limbo. The company says its revenues dropped 14.6%, to $58 million, in the first quarter vs. a year earlier, while it reported an operating loss of $7.5 million against last year's $5.8 million gain. The share price is less than half what it was when news of the investigation broke early last June, sales of Martha Stewart Everyday products are down, and advertisers are shunning the magazines and TV shows. Ad pages for Martha Stewart Living magazine were down 24% in the first quarter from 2002, according to Publishers Information Bureau, compared with a 125% jump in ad pages for rival Real Simple and a 20% increase for Better Homes & Gardens.

Given the profound impact that such cases have once they become public, investigators need to stop dragging their feet. Sources on Capitol Hill and at the SEC say their probes have been slowed by a lack of cooperation. Stewart's legal team disputes that assessment, countering that they've provided thousands of pages of documents and spent innumerable hours answering requests. Regardless of who's right, the case against Stewart is now either solid or it's not. Douglas Faneuil, the Merrill Lynch (MER ) & Co. trading assistant who handled Stewart's stock sale, pleaded guilty to a misdemeanor last September, and is cooperating with investigators. "At this point, they should make a decision," says Robert G. Heim, a former assistant director of the SEC and partner in Meyers & Heim LLC. His concern is for shareholders and employees. "There are innocent people whose interests should be considered."

Both the SEC and the Justice Dept. have a lot on their plates these days, and few would dispute that their resources are stretched thin. Still, having confirmed an investigation, they have an obligation to either indict or announce that the investigation has been dropped. An indictment would be bad news for Stewart's company -- but it would be better than the prolonged uncertainty. If Stewart is, in fact, guilty, the sooner MSLO can deal with the problem, the better. Laura A. Richardson, an analyst with Adams, Harkness & Hill, thinks any resolution is better than the current state of uncertainty. "They already have to remove the tarnish this incident has left on them," she says. "It's hard to start that process while this is still going on."

The specter of wrongdoing by Stewart first became public on June 6 of last year, when Representative James C. Greenwood (R-Pa.), chairman of the House energy and commerce subcommittee on oversight and investigations, revealed her suspiciously well-timed ImClone sale. In a summer of corporate scandal, Stewart was the ideal personification of CEO greed. After the visibly frustrated committee asked the Justice Dept. on Sept. 10 to investigate possible felony charges for making false statements to Congress, unnamed government sources predicted action by October, then Christmas, then Easter. Stewart herself has maintained that she sold based on a previous stop-loss agreement with her broker to unload when the price fell below $60 a share. On Mar. 4, while announcing fourth-quarter results, she claimed to be "increasingly hopeful" of an imminent resolution. Two months later, a somewhat taciturn Stewart admitted this was no longer the case, adding: "I can make no predictions."

Of course, an actual indictment could further reduce the role of the company's key personality and nonstop publicity machine. MSLO's longstanding efforts to reduce that vulnerability certainly appear to have taken on a more urgent tone. Everyday Food, a magazine launched earlier this year, plays down Stewart's name. And, last month, the company launched a new brand led by pet-keeping expert Marc Morrone. That raised questions of whether he could be the next face of Martha -- or one of many. President Sharon L. Patrick insists it's just business as usual but admits that "the single biggest factor that's affected our performance is this lingering lack of resolution of the Martha situation. That impacts every aspect of our business."

Investigators bristle at the notion that they have taken too long to lay charges or clear her name. They argue that some cases can take years to uncover and point to the fact that this one is being handled by two separate agencies. That makes it tougher to resolve the matter, according to one government source, because "there's an effort to harmonize what we're doing and when." Moreover, he notes that a criminal case takes more time because it faces a higher standard of proof than the SEC's civil charges. That said, Justice Dept. spokesman Bryan Sierra admits that "we have resolved to accelerate these cases, to commit the resources to them that would allow us to move faster, and to address the concerns of shareholders and investors alike."

Too bad that's not happening with Martha Stewart. Hauling the queen of domesticity over the coals for alleged insider trading may have opened the eyes of Middle America to the issue of corporate corruption. But it has already ripped apart her reputation and her multimedia empire while impeding her ability to defend herself as the legal matters remain unresolved. More important, perhaps, thousands of other people are suffering amid the legal limbo as well. Given the havoc it has wrought on a public company and its shareholders, government investigators charged with protecting that public need to either bring charges -- or drop the case.

By Diane Brady

With Mike McNamee and Lorraine Woellert in Washington

    Before it's here, it's on the Bloomberg Terminal.