What Wall Street Misread

Shares of Martha Stewart Living reflect the new reality, recently trading around $18, down 52% from the year's high. Stewart may not be 2005's biggest loser. But she certainly isn't a winner.

The End of Corporate Scandal

When the year began, many people believed the era of big corporate scandal was over. It didn't take long for their faith to unravel.

In February, news came that American International Group(AIG Quote), the world's biggest insurer, was being investigated for alleged accounting irregularities by the Securities and Exchange Commission and New York Attorney General Eliot Spitzer's office. A month later, the probe claimed CEO Maurice "Hank" Greenberg's scalp, as even his longtime friends on the insurer's board forced him out. Soon after, Spitzer filed civil charges against AIG and Greenberg, setting the stage for Greenberg's anti-Spitzer campaign.

The investigation quickly spread as other big insurers -- Berkshire Hathaway's(BRKA Quote) General Re, Renaissance Re(RNR Quote) and MBIA(MBI Quote) -- were accused of using so-called "finite insurance contracts'' to either burnish their corporate books or help other companies accomplish the same.

The bite of scandal was also felt by CEOs at several smaller companies.

Emanuel Friedman resigned as chairman and CEO of Friedman Billings Ramsey(FBR Quote) over an investigation into inappropriate trading in a private stock sale. And Robert McCormick's refusal to pay a $241,000 bill at a New York strip joint cost him his job as CEO of Savvis(SVVS Quote), a St. Louis-based telecom.

The biggest corporate scandal of the year was Refco(RFXCQ.PK Quote), the once-dominant commodities and derivatives brokerage that sold itself to the public for $583 million this August.

Three months after the IPO, Refco was operating under bankruptcy protection. Prosecutors alleged that its former CEO, Phillip Bennett, was cooking the firm's books for years. Bennett, meanwhile, was arrested and charged with securities fraud.

What makes the fraud at Refco so shocking is that it allegedly went undetected by so many savvy investors, investment banks, auditors and fancy lawyers. Indeed, Thomas H. Lee Partners, the Boston buyout firm that sank $507 million into Refco in June 2004, claims it paid $10 million to a raft a firms to make sure there was no hanky-panky at Refco before entering into the deal last year.