By Anthony Ogorek
Buffalo, NY – The rash of news impugning the integrity of corporate chieftains continues unabated. The latest disaster affects none other than Martha Stewart. As though poor Martha did not have enough to deal with in terms of her business partner K-Mart filing for bankruptcy, she has been drawn into the ImClone Systems, Inc. insider trading scandal.
For those of you who are not familiar with ImClone, it is a biotechnology company that produced a promising cancer drug by the name of Erbitux. As a matter of fact, the drug was so promising that pharmaceutical giant Bristol Myers sank $2 billion into ImClone based on its anticipation of imminent FDA approval of Erbitux. Unfortunately for Bristol shareholders, as well as those of ImClone, the FDA did not give its approval to Erbitux last December.
The fact that Bristol invested $2 billion of shareholder dollars into a company whose chances of approval they could not adequately assess is scandal enough. Shareholders in Bristol have been unmercifully hammered by management s ineptitude, and both companies, according to The Wall Street Journal, are under Congressional investigation for allegedly misleading shareholders about the significance of the FDA decision.
So, what does all of this have to do with Martha Stewart? It appears that Martha was a pal of ImClone s former CEO Dr. Samuel Waksal, who is under criminal indictment for securities fraud, conspiracy and perjury, according to SmartMoney.com. His alleged crime? Being tipped off to the FDA s plan to reject the application of Erbitux before it became public, and passing along that information to others. Remember, there is nothing inherently wrong with insider information. You just can t trade on it.
According to press reports, his family members sold off approximately $10 million of ImClone stock before news of the FDA rejection became public. It just so happens that Martha Stewart, a close friend of Dr. Waksal also sold her position of about 4,000 shares prior to the public announcement. Based on press reports, Martha s stake in ImClone should have netted her in the area of $225,000; which is really a pittance for a centimillionairess. She denies any wrongdoing and claims to have called Dr. Waksal s office prior to the public announcement, but after selling her shares.
The most incredible aspect of this story is the shoddy financial advice Martha is apparently receiving. As CEO of a company that is inextricably tied to Ms. Stewart s integrity, one wonders why she was allowed to invest in publicly traded companies that could negatively affect her image. Largely due to this revelation, the shares of Martha Stewart Living have fallen 12% since the announcement. Just over $100 million of shareholder value in Martha Stewart Living has been vaporized over a paltry $225,000 transaction on the part of its CEO.
Investors are selling the stock because of a perception that the brand, Martha Stewart, has been damaged. Whether their initial perception will be borne out as events unfold is anyone s guess. In the present environment, any suspicion of impropriety on the part of corporate heads is dealt with severely. Unfortunately, the way the market punishes the CEO is to punish shareholders through a markdown of a company s stock. In the future, shareholders will need to investigate the ethical background of management as well as their business acumen. What the market is telling investors is that unethical behavior doesn t pay. We just hope that CEO s and corporate boards were listening.
Anthony Ogorek is principal of Ogorek Wealth Management in Williamsville.