Archive for Sunday, June 30, 2002

Stewart’s stock problems provide perfect summer distraction

June 30, 2002


Stock prices are tumbling. The recovery's in doubt. In some places, you can't even wash your car or water your flowers, thanks to the drought. It's shaping up to be a lousy summer.

Except that now we have Martha to get us through it.

In past summers, we might have turned to Martha Stewart to tell us how to plant cactus in our parched flower beds, or how to plan the perfect barbecue. But this summer, we have her for something much better as the poster child for the corporate ills that seem to have made us poorer.

We no longer have to disperse our ire among a bunch of gray-suited executives from such places as Enron and Arthur Andersen, faceless managers who supposedly did things most of us cannot understand. Instead, we can focus on the perfect protagonist as we follow the 2002 version of "what did she know and when did she know it."

Americans already have a love-hate relationship with Stewart. It's as easy to dislike her smugness and hubris as it is to admire her up-from-nothing success. She's a bit too perfect and preachy, and her private life is a soap opera. She's just the kind of person we like to see cut down to size, and the new Martha stories will make perfect beach reading.

And if it turns out she did nothing wrong, as she says, we can bask in a little painless moralizing. Perhaps regulators were tougher on her because she's a woman. If a man had been accused of the same thing, we might have shrugged it off as routine corner-cutting among the rich and powerful.

Regulators, prosecutors and Congress are looking at Stewart's sale of nearly 4,000 shares of Imclone Systems Inc. on Dec. 27, the day before the company announced a regulatory setback for its cancer drug, causing Imclone's shares to plummet. Stewart has claimed the sale was triggered by a stop-loss order, a prearranged order to sell automatically if a stock falls to a certain price.

But Imclone's former chief executive, Samuel Waksal, has been charged with insider trading for allegedly tipping off family members ahead of the bad news and trying to dump shares of his own. Waksal was a close friend of Stewart and her daughter, whom Waksal dated another detail right out of a Jacqueline Susann novel.

On Friday, Merrill Lynch put Stewart's broker on paid leave, citing "factual issues" concerning the trade. Press reports say the firm has doubts there was a stop-loss order, making the trade all the more suspicious.

Insider trading is not the same as, say, knocking over a jewelry store. But it is a form of theft like selling a car without revealing that the transmission is shot.

It means trading a stock on the basis of information that is not available to the public. Most cases involve corporate executives and directors, but the law applies to any improper beneficiary of inside dope spouses, family members, friends, the mother of your girlfriend ...

Who is cheated? Most directly, the person on the other side of the trade. If you buy knowing, for example, that the company is about to be awarded a valuable patent, the seller will miss out on the gains he could have realized had he known the news. If you sell with inside knowledge of trouble to come, you make the buyer take your losses.

Insider trading is about cheating people. Securities regulations are about maintaining a level playing field. Sure, different investors will have different views about a stock's prospects. But the views should be based on different interpretations of the facts the same facts should be available to everyone.

In the Stewart case, there is another twist: Her troubles have caused shares in her own company, Martha Stewart Living Omnimedia, to fall significantly. All her shareholders are victims, too.

The recent scandals over corporate accounting and biased analysts' reports have shaken investors' confidence in the market's fairness, helping drive stock prices down and making all of us victims. Invariably, these scandals are about self-dealing powerful insiders putting their own interests ahead of shareholders'.

It's hard for laypeople to understand the arcane accounting issues in cases such as Enron's. But insider trading is easy to get.

And Martha Stewart is a fascinating example, since the shares she sold were worth just $227,000. If there was insider trading, why would a millionaire many times over risk so much for so little? A compulsion to win? A sense of entitlement gained from making it and running with a rich crowd? Or perhaps it was an uncharacteristic mistake worsened by clumsy attempts to cover up.

It's going to be fun to find out. I can't wait for the next chapter.

Commenting has been disabled for this item.