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NEW YORK — Martha Stewart and her eponymous media company received a one-two punch Wednesday as criminal and civil charges were filed against her by the U.S. attorney’s office and the Securities and Exchange Commission, respectively.
This story first appeared in the June 5, 2003 issue of WWD. Subscribe Today.
The SEC suit charges her with insider trading stemming from her sale of ImClone Systems stock in 2001. Besides seeking financial penalties, the suit looks to bar Stewart from being a director of her or any company, and would limit her current executive duties as chairman and chief executive officer of Martha Stewart Living Omnimedia. An SEC official hinted, however, that the agency might be amenable to Stewart continuing her role as the company’s public face. “There’s no desire to do anything to unnecessarily harm [the company],” SEC regional director Wayne Carlin said at a press conference.
Nine criminal counts were brought against Stewart and her broker, Peter Bacanovic, including obstruction of justice and false statements by both, perjury by Bacanovic, and securities fraud by Stewart — although not for her ImClone trades. Instead, Stewart allegedly defrauded investors in Martha Stewart Living Omnimedia through false statements she made about the trades in order to prevent the company’s stock price from falling.
Stewart and Bacanovic pleaded not guilty to all criminal counts during a brief arraignment Wednesday but made no other public comment and were ushered out a side door of the Federal District Courthouse. If convicted, federal sentencing guidelines would force them to serve mandatory jail time; the maximum penalty for securities fraud alone is 10 years in prison and a $1 million fine.
Which, as Stewart might put it, would be a bad thing. While shares of her company closed up 5 percent to $10 Wednesday after the uncertainty of her indictment was settled, Lazard Freres cut its investment rating to “sell” from “hold” and other analysts were barely more optimistic about the media company’s outlook. “We expect that advertisers and potential retail partners will stay on the sidelines until there is a final resolution,” Lazard Freres analyst Mandana Hormozi wrote. While advertising industry executives said Tuesday they didn’t see any impact on Martha Stewart Living from the design guru’s legal problems, they hedged that an indictment might change things dramatically.
“Although not good news for the company, we continue to believe that the deterioration that has occurred in Martha Stewart Living Omnimedia’s business is of greater concern to investors than all but the most dire of outcomes to Ms. Stewart’s legal situation [incarceration],” wrote William Blair & Company analyst Alissa Goldwasser in a research note.
Officials at Kmart, Stewart’s licensing partner, could not be reached for comment.
Stewart’s prosecutors, meanwhile, insisted they did not want to harm the long-term prospects of her company. “Martha Stewart runs, or really is a company that’s filled with hundreds of employees,” said U.S. attorney James Comey at a press conference. “If this hurts them, the company, and the shareholders, it is a tragedy. But it’s a tragedy that could have been prevented…lying is not a way out.”