Martha indicted for insider trading

Sour taste of scandal may hurt ads

Despite the latest blow dealt to Martha Stewart on Wednesday — a nine-count criminal indictment, which caused her to step down as chairman and CEO of her eponymous company — advertisers will likely wait to see how the storm plays out before pulling their media campaigns from Stewart’s print and television holdings, the magazine and syndicated show “Martha Stewart Living.”

“Advertisers respond to audiences. They will first look to see how her loyal viewers and readers respond to these charges,” said John Rash, senior VP and director of broadcast negotiations for Campbell Mithun.

He added, however, that “in a competitive landscape, this certainly does not help Martha or her company.”

Media analysts also say that the worst has already been felt by Martha Stewart Living Omnimedia, the media and merchandising company Stewart founded and runs, due to the high-publicity scandal that has been dragged out in the press for over a year.

The drama was capped late Wednesday when MSO released a statement saying that Stewart would relinquish her role as CEO and chairman. She will remain on the board of directors and as a “chief creative officer” at the company.

Sharon Patrick, MSO prexy and COO is taking Stewart’s place. Jeffrey Ubben, the second biggest shareholder after Stewart, is the new chairman of the board.

In the statement Stewart said she was stepping down because it was “the right thing to do.”

She continuted: “This will enable the company to continue to build the confidence and love of its readers, viewers, customers and strategic partners, without the distraction of my personal legal issues.”

Backlash a reality

Yet even with a now Martha-less MSO, industryites say the worst has already been seen.

“The backlash has already hit, it’s already happened,” said Steve Cohn, editor of the Media Industry Newsletter, who said advertising at Stewart’s magazine was down nearly 30% in the first half of 2003.

Stewart pleaded innocent on Wednesday to counts of securities fraud, obstruction of justice, conspiracy and perjury, in response to a 41-page indictment issued by the U.S. Attorney’s Office for the Southern District of New York. The doc also charged Stewart’s Merrill Lynch broker Peter Bacanovic, who also pleaded not guilty to charges of perjury and obstruction of justice.

Stewart is the latest media kingpin to face criminal and civil charges in a wave of corporate scandals that erupted with energy company Enron and spread rapidly to toys, telecom and TV. John Rigas, founder and former chairman of Adelphia Communications, and two of his sons were charged with multiple counts of fraud that pushed the cabler into bankruptcy last spring.

Gemstar, the parent of TV Guide, ejected chairman Henry Yuen last fall amid an accounting scandal that has decimated the stock. And the Dept. of Justice and SEC are investigating accounting and disclosure issues at AOL Time Warner and Vivendi Universal.

Stewart’s case, while high profile, is a different animal, as her disputed stock trade was unrelated to her company. Martha Stewart Living was always credited with solid management and its prospects were upbeat until it was derailed by news of the investigation.

The effects have been sagging advertising and reported losses for MSO’s last two quarters. Last month the company said it expected a second-quarter loss related in part to Stewart’s imbroglio.

At a news conference Manhattan U.S. Attorney James Comey said, “Miss Stewart is being prosecuted not because of who she is, but what she did.”

What Stewart did was sell $228,000 worth of ImClone stock in December 2001, the day before the FDA rejected the company’s cancer drug. The sale allegedly was spurred by a tip from Bacanovic that ImClone founder and Stewart pal Sam Waksal was dumping shares.

The indictment released on Wednesday provided details reminiscent of Monicagate’s “blue dress” –though not as juicy. For example, when the FBI first requested a meeting with Stewart in early 2002, she changed a message in her assistant’s phone log. The call had been made by Bacanovic the day Waksal sold his stock. The original message, “Peter Bacanovic thinks ImClone is going to start trading downward” was changed to “Peter Bacanovic re imclone.” The wavering Stewart then changed the message back.

Also in the indictment was evidence that Bacanovic had fabricated docs to corroborate claims by him and Stewart that they had decided to sell her ImClone stock if the market price fell to $60 per share. When Stewart sold her stock it was worth $58.43 per share.

The Securities and Exchange Commission also filed a civil suit seeking to bar Stewart from helming a public company. The suit also demands that Stewart and Bacanovic fork over $45,000 — the money the feds say Stewart saved by selling ImClone early.