Cooking Martha's numbers

Stewart's critics want her relatively minor controversy to seem dastardly, but there are other examples of Wall Street abuse far more worthy of our scorn.

By Eric Boehlert
Published June 27, 2002 10:04PM (EDT)

Forty-three thousand dollars and $228,000.

The first figure is the amount of money Martha Stewart saved by placing her now infamous sell order of ImClone stocks last Dec. 27, one day before the biotech firm's value crashed when the Federal Drug Administration refused to OK its cancer wonder drug. The second number, $228,000, is how much Stewart's stocks sold for on the open market. The recent arrest of ImClone CEO Samuel Waksal on charges of insider trading has raised allegations that Stewart, Waksal's close friend, was tipped off from the inside.

Yet amid the media stampede of magazine cover stories, Page 1 Wall Street Journal exposés and endless TV chatter, it's helpful to keep in mind what a small-potato transaction it is that's being dissected by reporters, prosecutors and congressional investigators whose bosses would rather parade Stewart's case around than enact serious corporate reform -- reform that's desperately needed to reign in rampant fraud on Wall Street.

The disparity between Stewart's scant what-if gotcha story and the serious, concrete corruption was there for readers to see on the Wall Street Journal's front page Wednesday. Right above the paper's excited update of the unfolding Stewart scandal was this headline: "Accounting Fraud at WorldCom Tops $3.8 Billion," detailing the largest accounting scandal in U.S. history. The boondoggle will cost 17,000 WorldCom employees their jobs starting Friday, and news sent stock tumbling yet again.

The report was just the latest example of brazen Wall Street deception, like Enron executives, unencumbered by everyday ethics, who paid out millions in bonuses as the company verged on collapse. Or its accounting firm, Arthur Andersen, which abandoned acceptable practices in order to retain Enron as a $50 million client. Or Merrill Lynch traders who were caught belittling stocks in private e-mails while pushing the same stocks to unknowing clients. Or cable operator Adelphia Communications, which recently filed for bankruptcy. That company is the target of a Securities and Exchange Commission accounting probe, and two federal grand jury investigations, for overstating its revenues, cash flow and subscriber base, not to mention multibillion-dollar off-balance-sheet loans to the CEO's family.

And for pure, unadulterated greed, look no further than Tyco's former hard-charging CEO Dennis Kozlowski. He's facing tax evasion charges for going to elaborate lengths to avoid $1 million in sales tax on $13 million worth of fine art he purchased.

Yet the press remains in a tizzy because Stewart might have saved herself $48,000 by selling ImClone stock? It's obvious criminals are running amok on Wall Street today, but Stewart does not appear to be among the major offenders.

That's not to downplay an allegation of insider trading. And if, during her flight to an exclusive Mexican resort last December, Stewart did dial up her broker and cash in illegally, she deserves the ridicule that's hounding her. But to date, the case against her remains murky at best. Yes, she called Waksal on Dec. 27, but he never returned the call. And Stewart called only after she'd already sold her ImClone stock. And as a former stockbroker herself (she once, in a previous incarnation, worked at Paine Webber), it would be astonishing if Stewart purposefully acted on inside information knowing the consequences she and her publicly traded company would face. Astonishing, but in today's climate not unthinkable.

The irony is that Stewart is one of Wall Street's good guys, so to speak. Her impressively successful company, Martha Stewart Living Omnimedia, doesn't play accounting games or cook its books. (At least as far as we know.) Instead, the $300 million public company posts profits the old-fashioned way; it earns them ($22 million in 2001). The sprawling multimedia empire boasts television, publishing (three magazines, 34 books) and merchandising, including more than 5,000 Martha Stewart products sold through direct mail or at Kmart stores.

Since its introduction in 1997, Martha Stewart's Everyday line of products for Kmart posted sales increases of 25 per cent annually. And ad pages for Martha Stewart Living magazine jumped 12 percent during the second quarter, far outpacing the industry norm. That's a record that should be toasted, not mocked.

There's no denying Stewart's stock tale has made for some summer fun, with the prospect of our preeminent homemaking maven caught with her hand inside the gold-leaf cookie jar. And the New York tabloids have had a field day with the WASPy queen bee of perfection suddenly ensnared in a Wall Street sting. Newsweek even put Stewart on the cover this week, while Time reported that Stewart's close friend may have also been in on some insider ImClone trading. Both Time and Newsweek ran grainy, unflattering, paparazzi-type photos of Stewart in the back seat of a car, as if captured fleeing the scene of a crime. (Does anyone honestly believe a male CEO in Stewart's place facing the same minor charges would be getting the same treatment?)

And yes, the story serves as quick shorthand for the growing frustrations many Americans feel over how the rich and famous play by different rules, casually exchanging lucrative insider information the way most moms and dads trade tips about neighborhood babysitters.

But Stewart's just a bit player. The ImClone story centers around CEO Waksal who, after getting advance word of the FDA's unfavorable ruling, tried to sell $5 million of company stock. When ImClone attorneys stopped him, he brazenly tried to give them to his daughter so she could sell them, but was blocked again. The daughter and Waksal's father did manage to dump their own stock in advance of the bad news from the FDA. Unlike Stewart's transaction, though, those stocks were worth millions. Yet if it weren't for the Stewart angle, the press wouldn't care less about Waksal, yet he's been arrested for insider trading and can provide answers to the question of whom he tipped off.

Prosecutors too, perhaps caught up in the glow of the growing media story, now seem overly obsessed with the case of Stewart's petty crime. According to Wednesday's Wall Street Journal, they were widening their probe to include possible obstruction of justices charges. (Or does the more difficult to prove insider trading case suddenly not look so strong?) They're "boring in" on whether Stewart and her stock broker Peter Bacanovic misled authorities when the two insisted they had previously made a verbal agreement to sell her ImClone stock if it ever dipped below $60, which would explain the Dec. 27 sell-off. (The stock price had been sagging for days even before the FDA announcement.) If the two did have an agreement, there's no case against them. If they concocted one, as the Journal reports Bacanovic's young assistant now claims, then the two are in trouble.

And leave it to the Journal to leave no stone unturned in its dogged Stewart coverage. Although informed that "little is known about" him, readers did learn Bacanovic's assistant once worked at Bill's House of Pizza in Boston nearly a decade ago. Talk about gum-shoeing.

Strangely, though, two pertinent facts were not included in the Journal's Page 1 exclusive, the one that appeared right below news of WorldCom's $3.8 billion implosion. Missing was the amount of money Stewart saved by selling ImClone stocks on Dec. 27, and the total cost of her transaction.

Forty-three thousand dollars and $228,000, respectively.

Eric Boehlert

Eric Boehlert, a former senior writer for Salon, is the author of "Lapdogs: How the Press Rolled Over for Bush."

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