So why was Martha indicted?

I have to admit that I've been surprised by the outpouring of sympathy for Martha Stewart, who is surely one of the most personally disliked CEO's in America. I had to stiffle my laughter when I read she was the victim of some Bush Junta plot to punish her for contribution to Democratic candidates. The logic of that escapes me. Because if that were true, George Soros and Bill Gates would be cleaning the grounds of Eglin AFB as we speak. Both have been far more lavish in supporting left-leaning causes than Stewart.

What it does show me is that few people actually know anything about Stewart, her business practices and ethics.

First, before you rush to defend the sainted Martha, you should read the two bios on her, Just Deserts, by Jerry Oppenheimer and Martha, Inc. by Christopher Byron. In those books, you will get a portrait of a woman who has pretty much terrorized and victimized everyone she's come across, including her ex-husband. More importantly, the portrait of someone willing to cut corners to make a buck comes through clearly. Questions about her ethics didn't start in 2001, but dogged her through her career as both stockbroker and caterer.

There are ample stories about her cutting corners and cheating or misleading partners going back to the 1970's. Her financial chicanery even efected her deals with both KMart and Time Warner.

Stewart managed to get KMart to buy her a home under questionable circumstances, being that she already owned it. She also tried to minimize the tax liability of her Westport, CN home by building a studio in it, despite the zoning laws and wishes of her neighbors.

Also, if you go into a KMart, a rarer and rarer occurance these days, you'll notice that her merchandize dominates the shelfspace there. Unlike Target or Wal-Mart, which has far different merchandizing deals, Martha has borged KMart, she has taken it over while it doesn't really affect her image as the doyenne of WASP good taste.

Second, as a member of the board of directors of the New York Stock Exchange, (also called the Board of Governors), her conduct has to be above reproach. Since the Board was founded, the name officially changed in 1972, only one officer of the exchange has been charged with a crime (Richard Whitney in 1938). The simple fact is that the exchange's reputation hangs on the ethics of the board. It may not seem all that important to the public, but the idea that a member of the NYSE board could be accused of insider trading, the most elemental financial criminal act, is no small deal to the Feds. Stewart was in the company of the most highly regarded public officials and CEO's in American business when she was a member.

If Stewart had not been a member of the Board of Governors, cutting a deal would have been much, much easier. After all, the feds decided to charge her with stock manipulation instead of insider trading, because of the difficulty of proving the case. Which is not surprising. Making a case like this is always difficult and given her public popularity, winning is hardly assured.

What is also forgotten is that Stewart holds a Series 7 license. As a licensed stockbroker, she knows her actions may have well been illegal. She's not just some innocent who made a mistake or wanted to save her investment. People have been banned from the industry for far less. While it may not seem like a big deal compared to Enron or Worldcom, it is no small deal when a financial professional is alleged to have violated basic securities laws.

Third, the coverup is always worse than the crime.

Stewart's strategy in dealing with these charges ranges from mystfying to arrogant. Instead of seeking to admit her error, she arranged a half-baked coverup to hide her tracks. This whole affair is over the loss of $45,000. She couldn't build a kitchen for that amount of money. Yet, she's destroyed her reputation and company over such a relatively modest sum for someone worth hundreds of millions of dollars.

Make no mistake, Martha Stewart Omnimedia (MSO) is in deep financial trouble. Any kind of protracted legal struggle will cause the stock price to dive even further. It's already 50 percent lower than it was before the scandal broke and with Stewart resigning from her CEO position, it could well be spinning down the drain.

What is mystifying, no stunning, is that Stewart didn't use her considerable public good will to blunt these charges and cut a deal. Originally, they were going to use her to charge ImClone CEO Sam Waskal for insider trading. Instead, the case flipped to prosecuting Stewart. The theory is that the Southern District of New York's US Attorney, James Comley, would benefit from the publicity of a prosecution. However, given the public sympathy already expressed for Stewart, he and his staff have to know a conviction will be fairly difficult to gain.

Instead of trying to gain sympathy, she's tried to mislead Congress, bully the prosecutors into dropping the charges, and basically shove this aside like it was trivial, while investors in MSO took it in the neck. They had invested in the company because of her and they were now losing their investment because of her months of silence. The one interview she did, with The New Yorker's Jeffrey Toobin, a former federal prosecutor, was rather creepy in tone.

If anyone was more likely to get a pass for what are relatively modest charges, Stewart would have been able to. Instead, her refusal to deal with these charges forthrightly has not only cost her money, but investors as well. She will face numerous investor lawsuits long after the federal charges and any punishment are consigned to history.

Fourth, saying that the feds should prosecute Bernie Ebbers and Ken Lay instead is like saying let's ignore the guy who mugged me for the guy who stole my car. Both belong in jail. Stewart screwed a lot of people for that $45000. Including thousands of investors who relied on her business accumen and reputation.

Enron will be one of the most fiendishly complicated cases ever to appear before a federal court. It is the crazy cat house lady of financial crimes. Explaining the interlocking partnerships and other crimes will take years and tying Lay to them in a federal courtroom will be no easy task. The same with Worldcom. These cases will take several years to go to trial and maybe a year to be resolved. So there's a perfectly sound reason why Ken Lay is running around free, they have to line up all the ducks to indict him.

Also, with tainted witneses all around, Sherron Watkins was hardly a whistleblower, proving who was guilty and who wasn't will not be easy. Pipe Dreams: Greed, Ego, and the Death of Enron by Robert Bryce, is probably the best pre-trial book on the subject. In it, he explains how Watkins, who was roundly hated as manipulative by her coworkers, was using Enron's problems to rig a promotion and only became a whistleblower when that didn't work out.

With witnesses like that, a federal case will be harder to make than people think.

Worldcom is little better, with Bernie Ebbers dealmaking all over the place.

Financial crimes are hard to prosecute and win. Which is why the Stewart case took 18 months to investigate and bring to indictment.

Fifth, don't lie to the feds

Stewart would have clearly been better off coming to a deal early on. Now, the SDNY is loathe to deal with someone they clearly feel is both dishonest and arrogant. The fact that she gave money to the Dems is a footnote. It would be unlikely in the discreetly gay-friendly culture which is upper class New York, that giving money to the GOP would impress people. Stewart did what was expected of someone in that milleu. Her broker, Peter Bacanovic, was well known as a walker, a man, usually gay, who escorts rich women to events their husbands, who are either working or spending time with their tall East European mistresses, have neither interest nor time for.

If Stewart had done two things, cover for her broker and tell a believable story, the feds would have cut her a break. While people have been more than willing to let the incredibly unlikable Stewart bake in her own trouble, many wanted to save Bacanovic, who had raised millions for the NY Ballet and had been friends of the Upper East Side social set since childhood.

Much of this has been driven by Stewart's own personality as by what she's accused of. What is not widely known is the utter disdain people who have to deal with Stewart hold for her. We're not talking even odious, like Donald Trump, but reviled. While people would like to say "it's because she's a powerful woman" or "she gave money to the Democrats", it's because she's a hateful person who has collected enemies over the years.

Do you really think anyone would go after HP chief Carly Fiorina or Oprah Winfrey with such venom?

You cannot make unlimited enemies over the years, and then lie to the government, and expect to escape unscathed. Stewart may well plead out or beat the case in court, but most of this trouble comes not from how she spent her money, but how she treats people.

Steve Gilliard

Posted June 05, 2003 09:13 AM | Comments (89)