Martha Stewart's Rough Trade
This is the story of how Martha Stewart saved $50,000 and lost $166 million trading stocks.
Earlier this month, Sam Waksal, the former chief executive officer of biotech company ImClone (IMCL), was arrested in his Soho loft and charged with insider trading. On Dec. 27, 2001, it is alleged, Waksal got wind that the Food and Drug Administration would on the next day announce its rejection of ImClone's application for its anticancer drug Erbutix. Waksal is charged with giving a heads-up to family members and other associates, who then proceeded to dump hundreds of thousands of shares on Dec. 27 and Dec. 28, saving millions of dollars when the stock fell nearly 20% on Dec. 31.
How does the domestic doyenne figure in all this? On Dec. 27, Stewart, whose daughter once dated Sam Waksal, sold her entire 3,928-share Imclone position at $58 per share. By selling ahead of the bad news, Stewart saved $49,532.
But the trade has cost her far more -- her stock in her own company lost nearly $166 million in value, and her reputation suffered incalculable damage.Regulators are now investigating Stewart's stock trades, and Stewart has categorically denied any wrongdoing. But as a professional decorator and caterer like Stewart knows, appearance and taste matter almost as much as substance. And while circumstantial, the evidence trickling out makes Stewart's denials about as tough to swallow as a brisket that has been braised for just 30 minutes instead of the requisite three hours. When news of her sale was first reported in early June, Stewart said it was triggered by a stop-limit order she had placed with her Merrill Lynch broker, Peter Bacanovic. In this case, said Stewart, the order was set at $60. And on Dec. 27, the stock did indeed fall below $60 for the first time in several weeks. Innocent enough.
Martha Stewart Living PersonifiedMore than perhaps any large company (2001 revenue: $295 million), the value of Stewart's eerily named conglomerate Martha Stewart Living Omnimedia (MSO - Get Report) hinges upon the image of its leader. Sure, it has cash-generating assets, like a magazine, and licenses with retailers like Kmart. But MSO's real asset is Stewart's aura of wholesome domesticity, faux as it is. In a very real sense, the company's stock price represents the value the public places on Martha Stewart and everything she stands for -- quite apart from the fundamentals. Tyco's (TYC) shares took a hit when CEO Dennis Kozlowski was indicted for tax evasion. But the company's customers won't stop buying pumps or home security systems because of it. Not so with Stewart and her merchandise. It's doubtful, for example, that CBS would continue to book her on The Early Show after viewers have seen her doing a perp walk on the network's air. And that's why investors have pummeled Martha Stewart Living's shares since her name became publicly identified with the brewing ImClone scandal on June 6. Monday, they fell to an all-time low of $12.55, down 34% from the June 6 price. This, even as the company reaffirmed that its financial performance would meet or exceed expectations. Even though the stock rebounded by a buck Tuesday, Stewart's personal stake -- 30.7 million shares as of last April, representing 62% of the company -- has lost $166 million in value. On Wall Street, there's short-term greedy and long-term greedy. Throughout her career, Stewart had generally been long-term greedy. She built up a company over two decades, steadily expanded it into new media, and sold shares to the public at the height of the market, all while maintaining ironclad control. At its height, Stewart's stake was worth more than half a billion dollars. When it came to ImClone -- whether she was guilty of trading on insider information or not -- Stewart was plainly short-term greedy. Why was a woman worth $500 million spending her valuable time tracking the action in a stock position worth a piddling $240,000? It's clear now that Stewart -- whether the stop-limit order was phantom or real -- made a decision on a short-term investment without considering how it might affect her most valuable asset, one worth 2,375 times more than her ImClone position. Even before the investigations cropped up, ImClone was a controversial company. Her broker had worked at the company, and Stewart had been publicly identified as a social associate of Waksal. If she did have the information and chose to preserve a few bucks by bailing on Dec. 27, then Stewart is guilty of more than insider trading, she's guilty of stupidity. And if, as she asserts, the trade was the result of an innocent limit order, and she kept quiet about it for six months while other details leaked out, then she's guilty of poor image management. Which, as far as the stock of Martha Stewart Living Omnimedia is concerned, may be the more devastating charge. Either way, it's a very bad thing.
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