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It May Be No-Win for Martha Stewart Living

The SEC makes a point that she could stay at the company -- but it might be moot.

Federal regulators left open the possibility that Martha Stewart could remain an officer of her namesake company even if she's found guilty of civil and criminal charges related to her alleged insider trading.

The question is though whether she or the company would want her to do so.

Stewart, the chairman and CEO of

Martha Stewart Living Omnimedia


, was indicted on Wednesday on charges of conspiracy, obstruction of justice and making false statements. In addition to those criminal charges, the

Securities and Exchange Commission

brought civil charges against Stewart, accusing her of insider trading.

The charges relate to Stewart's sale of


stock just before the Food and Drug Administration rejected a drug produced by ImClone, a move that sent the company's stock price tumbling.

The SEC is seeking to bar Stewart from serving as a director of Martha Stewart Living or any other public company. And the agency is seeking to limit what she can do at the company as well.

But the SEC chose not to try to bar Stewart from serving as a officer because of the role she plays at her company, said Barry Rashkover, associate director of the SEC's northeast regional office.

"We're seeking a remedy that is appropriate for these particular facts," Rashkover said.

By making that distinction, the SEC may be trying to sidestep the kind of reaction it got for a perceived a heavy-handed approach against

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Critics of the SEC charged that the agency's decision to file a criminal indictment against the whole company was essentially a death warrant. Indeed, following the indictment and its later conviction on the charges, the company lost nearly all of it clients and laid off all but a token staff.

Thus far, Stewart's company appears ready to stand behind her. On Tuesday, they defended her and denied reports that she would step down from the company in response to the charges.

Meanwhile, marketing experts have said that the company has little choice in the short term but to back Stewart, because so much of Martha Stewart Living's value is wrapped up in Stewart's persona and public image.

But the company's support for Stewart may well disappear if she is found guilty of the civil and criminal charges. Even if she could legally remain an officer of the company after that, the company may not want her to do so, said Ron Geffner, a former enforcement official with the SEC and a securities attorney with Sadis & Goldberg in New York. In fact, assuming that the company could find a way to force her out -- a big assumption considering Stewart controls nearly 94% of the voting stock of Martha Stewart Living -- it's unlikely that she could find a job anywhere as an officer or even a consultant if she's convicted, Geffner said.

"She's going to be a hot potato for a while," Geffner said.

The problem for Martha Stewart Living is how the company might replace its namesake founder.

The company is in something close to a no-win situation, said one fund manager, who asked to remain anonymous. Even with Stewart, the company has lost money the last two quarters. And with the charges filed against her, the company's situation isn't likely to improve anytime soon, said the fund manager, a longtime observer of Martha Stewart Living.

Already, advertisers are reassessing whether they want to run ads in Martha Stewart Living's magazines, the fund manager said. The company may soon have to start worrying about whether its audience will be turned off by the scandal as well. And while the trial unfolds, the company risks losing much of its talent to rival companies, the fund manager said.

"It's abundantly clear that things have eroded in spectacular fashion," said the fund manager, who does not have a stake in Martha Stewart Living. And don't expect things to turn around even if Stewart is cleared of all charges and stays at the company, the fund manager said.

"Even in best case scenario, it's dubious whether this company can turn a profit."

The dilemma facing Martha Stewart Living is that without Stewart, there's not much left of the company, said the fund manager. Stewart's persona is the underpinning for nearly all of the company's business, from its magazines, to its television specials to its Martha Stewart-branded products.

Martha Stewart Living could possibly try to carve out a niche for itself offering something similar to its current line of products and magazines but without the "Martha Stewart" label, the fund manager said. But the audience for that would be far smaller than the company's current audience. And positioning the Martha Stewart Living to cater to that smaller audience would involve a wrenching transition, involving mass layoffs, steep cutbacks and creating some kind of new image or persona to embody the company's ideals, the fund manager said.

"This organization may have an impossible time making that transition," said the fund manager. "You're probably better off starting such an entity from scratch."