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News > Companies
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Martha indicted
Stewart, broker face charges of securities fraud, obstruction of justice.
June 5, 2003: 3:27 PM EDT

NEW YORK (CNN/Money) - Martha Stewart was indicted Wednesday on charges of securities fraud and obstruction of justice arising from her controversial sale of ImClone Systems Inc. stock.

A federal grand jury in New York handed up a nine-count indictment that included charges of securities fraud and obstruction of justice. Stewart's former broker, Peter Baconavic, was also indicted.

Talks between Stewart and prosecutors broke down when she would not agree to plea to any charge that carried the potential for jail time, the Wall Street Journal reported Wednesday morning.

Martha Stewart Living Omnimedia Inc. warned of the indictments on Tuesday. She also faces a related civil action by the Securities and Exchange Commission.

Stewart, chairman and CEO of the company and owner of 61 percent of its shares, did not attend the company's annual shareholders' meeting Tuesday afternoon, though she did address the meeting through a videotape made Tuesday morning.

After the meeting, company director Arthur Martinez, a former CEO of Sears Roebuck & Co., "categorically" denied reports that Stewart had resigned from the company. He voiced support for the company's embattled chief, and said a number of shareholders also voiced support.

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Criminal charges against Martha Stewart could come as early as today. CNNfn's Allan Chernoff reports on the latest regarding a possible indictment.

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"The company has many assets. The assets include our brands, the resource that is Martha Stewart, our extraordinary strong financial position," he said. "We expressed our confidence as a group, both the board and the management team, in moving the company forward."

Stewart maintains her innocence

Robert Morvillo, Stewart's attorney, said Tuesday she would "declare her innocence and proceed to trial." A federal law enforcement official familiar with the case told CNNfn an indictment could come "very soon."

After falling about 15 percent Tuesday, Martha Stewart (MSO: Research, Estimates) shares fell another one percent in early trading Wednesday.

See documents from FindLaw
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House panel asks for DOJ probe
Stewart's employment agreement
MSO business contracts

Officials at the U.S. Attorney's office in New York said they had no announcement to make and a company spokesman declined to elaborate. The Justice Department declined to comment.

But Stewart's sale of nearly 4,000 shares of ImClone Systems Inc. has been the focus of investigators trying to determine if Stewart knew that the Food and Drug Administration was about to reject ImClone's application for a new cancer drug.

The Dec. 28, 2001, FDA rejection, the day after Stewart's sale, sent the stock of the small biotechnology company tumbling 75 percent during the next month. Late last year, ex-ImClone CEO Samuel Waksal, a friend of Stewart's, pleaded guilty to insider trading charges.

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"The best case scenario -- that investigations would conclude without resulting in formal charges -- is apparently no longer a possible outcome," Allisa Goldwasser, who covers Martha Stewart Living for investment bank William Blair & Co., told clients Tuesday.

The ImClone sale netted multimillionaire Stewart about $229,000, sparked investigations by Congress and the Justice Department, and sent the stock of her company into a swoon.

"Martha Stewart Living Omnimedia and its board of directors have been planning for a number of possible contingencies, are evaluating the current situation and will take action as appropriate," the company said in a statement. A spokeswoman would not elaborate on what action the company might take or when its board members might meet.

Martha Stewart Living's initial public offering during the last gasp of the 1990s bull market made Stewart one of the nation's wealthiest people. Forbes magazine, which compiles a list of the wealthiest Americans, removed her from the list last year as her company's stock slid about 40 percent.

Stewart's employment agreement says the company can fire her in the event of her "conviction of a felony or gross misconduct, which in either case results in material and demonstrable damage to our business or reputation." If the company fires her without cause, it would have to pay her millions in severance and provide health and other benefits for years.

No simple resolution for company's woes

Stewart sold 3,928 shares of ImClone (IMCLE: Research, Estimates) Dec. 27, 2001, the day before the FDA's rejection of the company's application for Erbitux was announced. ImClone stock recently has surged amid new-found optimism over Erbitux but is still down 47 percent since the FDA's announcement.

Stewart, insisting she had no advance knowledge about Erbitux, has said she had an arrangement with her stockbroker to sell when ImClone fell below $60.

In addition to the drop in its stock, sales at Martha Stewart Living have suffered since Stewart's trouble began. The company lost money in its first quarter, reflecting weak advertising at its flagship magazine, weaker-than-promised sales at retailer Kmart Corp., and her legal problems.

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CNNfn's Mary Snow takes a closer look at the impact of current controversy on Martha Stewart's business. Can it thrive without her?

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Adams Harkness & Hill analyst Laura Richardson said simply firing Stewart and changing the company's name won't be enough to solve its problems, since it faces competition on a variety of fronts.

"There are three sides of the company -- the personality side, the creative side and the advertising side," said Richardson, whose firm has no banking relationship with the company and owns no shares. "If you change the personality without changing the creative side, that's not good for the company."

The first quarter was the second straight period in which the company posted a net loss, and the company warned it will lose money again in the current quarter rather than post a profit as Wall Street analysts had expected.

Chief Financial Officer James Follo said recently that royalty income from Kmart for Martha Stewart-branded merchandise is below guaranteed levels, although the company expects Kmart will make up the difference.

However, Kurt Barnard, president of Barnard's Retail Consulting Group, expects demand for Martha Stewart products to remain strong despite its founder's legal troubles.

"Retail sales of Martha Stewart products won't suffer in a terminal way because right now Kmart needs Martha more than Martha needs Kmart," said Barnard. "Her products are selling well because people really like them."

"One area that could suffer greatly may be her magazines because advertisers will pull out if this goes badly for her," Barnard added.

A Kmart (KMRT: Research, Estimates) spokeswoman declined to comment.  Top of page




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