Even if Martha Stewart is indicted on criminal charges Wednesday for her alleged role in the ImClone scandal and temporarily steps aside as chairman and chief executive of her company as some expect, she’s not going away quietly. But will Martha Stewart Living Omnimedia be able to turn around its falling fortunes if its namesake and founder is convicted of criminal charges?
THE CHARGES STEWART is facing are based on what prosecutors see as a cover-up — lies she allegedly told after the fact to federal authorities and to investors, sources told NBC.
Stewart has been under investigation for over a year for selling 4,000 shares of biotechnology company ImClone Systems Inc. — just before news broke about problems with a key ImClone-produced drug.
The Securities and Exchange Commission is also expected to file a civil complaint accusing her of insider trading. The SEC had notified Stewart in October of its intent to file the complaint.
Stewart has denied any wrongdoing in the ImClone sale, claiming to have had an arrangement with her broker for the automatic sale of the stock when it dropped to a certain price.
If indicted Wednesday, it’s not clear whether Stewart, who controls just over 60 percent of the company’s stock, would remain in her executive roles.
“Being under indictment does not carry any requirement that you step aside,” said William Lawler, former federal prosecutor with Vinson & Elkins in Washington, D.C. “But as chairperson of public company, the SEC can limit her ability to certify financial statements.”
CNBC reported Tuesday that Stewart is expected to resign her positions as CEO and head of her company’s board of directors.
In a statement, Martha Stewart Living said its directors “have been planning for a number of possible contingencies, are evaluating the current situation and will take action as appropriate.”
That could include Sharon Patrick, the company’s president, taking over as acting CEO and Board member Arthur Martinez becoming the interim chairman. Stewart could remain with the company in a creative role, according to CNBC.
Following the company’s annual meeting Tuesday Martinez told members of the press that shareholders at the small gathering expressed “strong support of Martha.” When asked whether Stewart has resigned, Martinez said she “remains the chairman and CEO of Martha Stewart Omnimedia,” but did not address questions as to whether she would step down if indicted.
Talks with prosecutors reportedly broke down because any settlement would have to entail Martha Stewart pleading guilty to a felony, which she reportedly has been reluctant to do. If Stewart were found guilty of criminal charges, she would have to step down from her company, Lawler said.
Federal prosecutors called Stewart’s lawyers Monday and told them that she was a target of a criminal probe and that she should expect to be indicted soon.
“If Martha Stewart is indicted, she intends to declare her innocence and proceed to trial,” said Robert Morvillo, an attorney for Stewart.
Stewart’s lawyer and her public-relations firm did not return calls to MSNBC.com Tuesday.
CAN IT SURVIVE?
The festering scandal has already hurt the bottom line at Martha Stewart Living Omnimedia. Although news of the possible indictment caused the stock to drop Tuesday, investors are more concern with the company’s deteriorating businesses.
MSO shares have plunged since their peak of $23.15 in July 2001, reaching a low of $5.26 a share in early October shortly after Stewart resigned from the New York Stock Exchange’s board of directors and after an assistant to her stockbroker agreed to help prosecutors investigating Stewart’s sale of ImClone stock.
Stewart has said that her company has lost hundreds of millions of dollars in stock value, legal fees and lost business opportunities due to the investigation.
First-quarter losses were worse than expected, damaged by declining ad revenues and the closing of hundreds of K mart stores where the Martha Stewart Everyday line of home furnishings is sold. K mart sales account for one-third of the company’s business, according to analysts.
Through June, ad pages at the publishing unit, which accounts for approximately 62 percent of earnings, are down almost 30 percent compared to the same time last year, according to Steve Cohn, editor-in-chief of Media Industry Newsletter which focuses on the magazine business.
“The backlash has already hit,” said Steve Cohn, editor-in-chief of Media Industry Newsletter which focuses on the magazine business.
Ratings for the syndicated Martha Stewart television show have also declined as viewers turn to other decorating shows like “Trading Spaces” on cable.
“While the company has been distracted by Martha’s troubles, there has become a lot more competition in the home-related and how-to market,” said Laura Richardson, analyst with Adams, Harkness & Hill.
So-called “anti-Martha” magazines like AOL’s “Real Simple” and Meredith Corp.’s “Living Room” are seen as newer and fresher than the now-decade-old “Martha Stewart Living.”
The company has made moves to be less dependent on its founder’s name and image. A syndicated pet care show, “Petkeeping With Marc Morrone,” is launching in September along with a Web site and line of merchandise.
Test results from a new cooking and recipes magazine “Everyday Food,” have been promising, analysts say. The company expects to launch the 10 issues-a-year magazine in September with Stewart’s name conspicuously absent from the cover.
And a new Martha Stewart Signature Furniture line manufactured by Bernhardt was introduced last month.
While Patrick can effectively run the company’s business, the loss of the halo around the Martha Stewart brand and personality is more difficult to replace, analysts say.
The sooner Stewart’s legal troubles are resolved, the sooner the company can focus on reversing its declining ad revenue and circulation, wrote William Blair & Co. analyst Alyssa Goldwasser in a note Tuesday.
Even so, a turnaround will be “long and difficult at best,” Goldwasser wrote.
Meanwhile, ImClone founder Samuel Waksal, a friend of Stewart, is to be sentenced next week after pleading guilty in the ImClone insider-trading scandal. He could be sentenced to six to seven years in prison, plus fines - although his defense team is seeking a lighter term.
Just this week, doctors concluded Erbitux, the ImClone cancer drug, worked just as well as an earlier company-sponsored study said it did. ImClone stock rose sharply on the news.
NBC’s Lisa Myers and the Associated Press contributed to this story.