A Recipe for Disaster for Martha Stewart’s Empire
Legal and business pressures on Martha Stewart are mounting, as federal investigators step up probes into allegations of insider stock trading, prosecutors press her friends to testify against her and investors continue to batter her company’s stock.
Prosecutors this week added one of Stewart’s friends to those cooperating in their inquiry into Stewart’s trades last year of ImClone Systems Inc. stock. This comes on top of reports that an assistant to Stewart’s stockbroker is negotiating a plea agreement in exchange for testimony against her.
As investigators for the Justice Department, Congress and the Securities and Exchange Commission focus on Stewart’s inner circle, her multimedia empire is suffering and its very public chief executive is trying to maintain a low profile.
Stewart’s strategy--crafted by an array of corporate lawyers from both Washington and New York--has been to lie low and avoid self-incrimination. Stewart has cut back on regular TV and radio appearances and, other than carefully worded statements, has avoided commenting on the matter when questioned in public.
Although keeping out of the limelight is a time-honored and often successful legal practice of the rich and powerful, white-collar crime experts say, that tactic is uniquely difficult for Stewart, whose company’s fortunes depend on her public relationship with American consumers.
Stock in Martha Stewart Living Omnimedia Inc.--which publishes magazines, produces television and radio shows and sells merchandise through Kmart stores and its Web site--has lost two-thirds of its value since the scandal broke. And the longer the inquiry drags on, the more the company risks losing revenue as advertisers and customers grow wary of association with Stewart and her legal morass.
For once, Stewart seems to be in the wrong place at the wrong time, implicated in an insider trading scandal as prosecutors and the American public are hunting for corporate wrongdoers, whom they see as modern-day robber barons.
“She is feeling the pressure,” said Ira Lee Sorkin, a white-collar criminal defense lawyer, former federal prosecutor and onetime director of the SEC’s New York office. “This all has got to have an impact, even if you didn’t do anything wrong. It’s got to hurt you. It’s got to have an emotional impact.”
Stewart, who has denied wrongdoing, has not been charged with any crime. She and her spokeswoman declined to comment.
Sources close to the investigation say two key witnesses are cooperating with the Justice Department’s investigation of Stewart’s activities before and after she sold her 4,000 ImClone shares Dec. 27, the day before the Food and Drug Administration announced it would reject the company’s application for a cancer drug. The company’s stock plunged on the news.
Among those being interviewed, a source close to the inquiry said, is Stewart’s friend Mariana Pasternak. She was flying with Stewart to a resort in Mexico when Stewart says she made several calls about ImClone’s performance and eventually sold her shares.
Prosecutors also are working on a plea agreement with Douglas Faneuil, an assistant to Stewart’s Merrill Lynch broker who first confirmed Stewart’s statements about her ImClone trade, then recanted, the Wall Street Journal reported.
“If you look at the number of people who can provide information, clearly she has got a lot to worry about,” said Christopher Bebel, a securities lawyer with Houston firm Shepherd, Smith & Bebel who previously worked as a federal prosecutor and SEC enforcement lawyer. “The pressure wears on them all. And that is going to work to the government’s advantage.”
The potential witnesses also could help prosecutors prove inconsistencies in Stewart’s statements, leading to possible obstruction of justice charges, legal experts say. Insider trading often is difficult to prove.
This week, after Stewart declined to be interviewed by a congressional committee investigating the ImClone matter, Rep. Bart Stupak (D-Mich.) said on the “Today” show that Stewart should be subpoenaed to answer questions about ImClone if she is not more forthcoming by Aug. 20.
“We’ve been trying for a month to interview her personally, but her lawyers have refused to let that happen,” said Ken Johnson, spokesman for Rep. W.J. “Billy” Tauzin (R-La.), head of the House Energy and Commerce Committee, which is investigating the ImClone matter. “Her attorneys have given us statements that have been in conflict with other statements that have been made and, in some cases, her own story has been tweaked several times.”
One of Stewart’s lawyers, in a letter to the committee, responded that she has not refused to be interviewed but rather asked that such an appearance be delayed until her legal team is “better informed” about the government’s allegations against her.
“They’re trying to put a nice spin on it, saying it’s premature, but what they’re actually saying is that she’s not going to testify,” said John Coggins, a law professor at Columbia University and an expert in securities law and white-collar crime. “The unanimous view of defense counsel is that when you’re in the kind of position she’s in, you cannot testify. You are just inviting perjury and obstruction of justice charges.”
It’s a strategy demonstrated most recently by former Enron Corp. Chairman Kenneth L. Lay and others, who earlier this year invoked his 5th Amendment right against self-incrimination before a congressional committee.
But Stewart built her company by showing mainstream America the ways of gracious domestic living. Her corporation’s fortunes depend on her public acceptance. So far, among those speaking out in support have been fans via an e-mail campaign.
That makes declining to answer questions particularly tricky.
“The pressure Congress brings is knowing that people do not like looking like Mafia dons, which is what [taking] the 5th Amendment looks like to most American citizens,” Coggins said. “That’s got to be true for Stewart.”
The trouble with ImClone began in late December, when prosecutors allege that Samuel D. Waksal, then the company’s chief executive and a friend of Stewart, learned of the FDA’s pending announcement rejecting ImClone’s cancer-fighting drug Erbitux.
Waksal then allegedly warned family members, including his father and daughter, to dump stock before he unsuccessfully tried to sell ImClone shares himself on Dec. 27.
Stewart has said she sold her stock as a result of a standing agreement with broker Peter Bacanovic, also the broker for Waksal’s daughter, to sell if shares fell below $60, as they did that day.
Investigators are looking into whether such a “stop-loss” order existed. Bacanovic’s assistant, Faneuil, originally said there was such an order but has since changed his account.
In interviews with congressional investigators, Stewart’s attorneys first said she arranged the stop-loss order in late October, a House Energy and Commerce Committee spokesman said. But after the committee pointed out that the stock had fallen below the $60 mark twice in November, her lawyers said they had erred and meant to say she made the stop-loss order at the end of November.
Rep. James Greenwood (R-Pa.), who heads the House panel’s oversight and investigations subcommittee, said Friday that e-mails between Bacanovic and Faneuil suggest that they knew about pending bad news affecting ImClone on Dec. 27 and may have tried to inform Stewart that day.
As often happens in white-collar cases, Stewart’s biggest problems come not from her ImClone sale--which most experts say would be tough to link with insider trading--but in what she may have done afterward to cover it up.
“This is the kind of insider trading case that normally would not be criminally prosecuted and might not even be civilly prosecuted, but there is a harsher, more unforgiving environment today,” said Columbia University’s Coggins, noting that the $43,000 in losses that Stewart averted on her ImClone sale is probably less than she already has spent on her legal team.
“But prosecutors have always had this attitude that they will be unforgiving and punitive if you lie to them once an investigation begins, and that’s to protect their own processes.”
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Stewart’s Empire
Publishing: Martha Stewart’s magazines include Martha Stewart Living, Martha Stewart Weddings and Martha Stewart Baby. Stewart has published more than 30 books, and her askMartha column appears in more than 230 newspapers. 2001 revenue: $181.7 million
Broadcast: Syndicated TV series ‘Martha Stewart Living’ airs six times a week; segments also air on Food Network. Stewart does a 90-second daily radio spot that airs on more than 300 stations. 2001 revenue: $29.5 million
Merchandise: The company has a range of products sold mainly through Kmart stores. 2001 revenue: $35.6 million
Direct sales: Martha Stewart products are sold through the company’s Web site and by mail order. 2001 revenue:
$48.8 million
Sources of revenue
Percentage of 2001 revenue
Publishing -- 61%
Direct sales -- 17%
Merchandising -- 12%
Broadcast -- 10%
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Source: Company reports
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Researched by JOHN JACKSON / Los Angeles Times
