Martha Stewart's Rise and Fall...and Sort-of Rise Again

Steve Kanaval |

Martha_Stewart.JPGMartha  Martha  Martha

When Martha Stewart was dating Imclone Systems ($IMCL) founder Sam Waksal, I was managing a portfolio which had Martha Stewart in it, and I was surprised to see how loose the regulators had previously been with insider transactions.
We were fresh off 9/11, and our attention was diverted from white collar crime to focus on America recovering from the attacks on the Twin Towers in New York City. I tried to get out of the way, but everyone was trying to fit through the same door, and we took a hit that day.

Martha Stewart shares were trading near $50 before the hijinks with Waksal, and the silly insider trading she took part in to protect $250K ended up losing Martha Stewart's shareholders hundreds of millions of dollars, as shares fell from $50 to the teens before it was all said and done. Shares never regained their lofty stature and expectation, and in November 2007, they fell below $10 per share, where they have remained ever since. 

I noticed today MSO opened a Martha Stewart Cafe in Chelsea, sending shares up +12% to $6.30. This week, a branded Martha Stewart Cafe opened to the public in the Starrett-Lehigh building, which also holds the company's corporate headquarters. In a release, Martha Stewart Living Omnimedia, Inc. ($MSO) described the cafe's offerings of various coffees and teas, saying that Stewart, herself, "curated" the menu. The suppliers include New York-based Kobrick Coffee and Westport, Connecticut-based Arogya for teas.

There is an important rule to remember in trading - once shares trade below $10, their trading only fluctuates by a "Hat Size" for the remainder of their lifetime. Martha Stewart's shares are essentially a micro-cap Stock with little attached multiple, and little hope of ever expanding the multiple.

ImClone and the Fall of Martha

For those who do not know the story - ImClone's stock price dropped sharply at the end of 2001 when its drug Erbitux, failed to get FDA approval. It was later revealed by the U.S. Securities and Exchange Commission that prior to the announcement of the FDA's decision after the close of trading on December 28, numerous executives sold their stock.

ImClone's founder, Samuel D. Waksal, was arrested in 2002 on insider trading charges for instructing friends and family to sell their stock, and attempting to sell his own. His daughter, Aliza Waksal, sold $2.5 million in shares on December 27. His father, Jack Waksal, sold $8.1 million in shares over the twenty-seventh and twenty-eighth, and company executives followed suit. John B. Landes, the general counsel, sold $2.5 million in shares on December sixth. Ronald A. Martell, the vice president for marketing and sales, sold $2.1 million in shares on December eleventh. Four other executives sold shares in the following weeks as well. Later, founder Waksal pleaded guilty to various charges, including securities fraud, and on June 10, 2003, was sentenced to seven years and three months in prison.

Martha also became embroiled in the scandal after it emerged that her broker, Peter Bacanovic, tipped her off that ImClone was about to drop. In response, Stewart sold about $230,000 in ImClone shares on December 27, 2001, a day before the announcement of the FDA decision. Stewart's involvement would have never come to light had Doug Faneuil, Bacanovic's assistant, not disclosed it to investigators.

Although Stewart maintained her innocence, she was found guilty and sentenced on July 16, 2004 to five months in prison, five months of home confinement, and two years probation for lying about a stock sale, conspiracy, and obstruction of justice.

I think we all must admire Martha for her diligence and ability to bounce back and revive her brand after jail time, I just watched a comedy skit where she was giving Justin Bieber advice on what to do in prison, but one thing I can tell you - there is a very small likelihood that MSO ever trades back above $10.


 

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Companies

Symbol Name Price Change % Volume
MSO Martha Stewart Living Omnimedia Inc. n/a n/a n/a 0

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