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Martha Stewart Arrested

Stewart was indicted today for obstruction of justice among other charges; company executives say investigation has hurt revenues. Plus: Audit fees seen rising by 35 percent, while Brits mull executive pay fix.
Marie Leone, CFO.com | US
June 4, 2003

Martha Stewart, the famed domestic doyenne and chairperson of Martha Stewart Living Omnimedia Inc. (MSO), was indicted by a federal grand jury today on nine counts. She was charged with committing securities violations, conspiring to commit them, and obstructed justice, among other violations, according to CBS MarketWatch.

Her stockbroker, former Merrill Lynch employee Peter Bacanovic, was also indicted on several counts, including obstruction of justice and perjury.

A report from CNBC say that sources close to the case contend that the indictment will prompt Stewart to step down as chairman and CEO of her eponymous company. But Stewart herself said in a videotaped message played at the company's annual shareholder meeting yesterday that she wouldn't resign, Reuters reported.

The Securities and Exchange Commission is also expected to file a civil complaint against Stewart.

Accused of profiting from an inside trading tip on ImClone Systems, Stewart's alleged $225,000 misdeed could seriously affect the health of her $295 million media empire.

At issue is Stewart's sale of ImClone stock in December 2001, right ahead of a public announcement by the Food and Drug Administration that the agency denied approval of one of the biopharmaceutical company's key products. Stewart maintains her innocence.

A company spokesperson noted that MSO executives and its board have been working on contingency plans regarding Stewart's fate and will take action when it is appropriate. Documents recently filed with the SEC say that MSO executives are finding it hard to quantify the negative ripple effects of the investigations. However, they do blame first-quarter business woes on the uncertainty surrounding the probes -- and the bad publicity generated by the alleged scandal.

In general, the executives say the Stewart investigations are partly responsible for a decline in circulation and prospects for the magazine group, a decrease in magazine advertising revenues and prospects, a "softness" in response rates for the catalog and Internet direct-sales businesses, and a slowdown in new business development and strategic partnerships.

More specifically, for the quarter ending March 31, 2003, total revenues at MSO slid by about 15 percent, to $58 million, from the $68 million it reported in the same period a year ago. Publishing revenues, which accounted for 62 percent of MSO revenues in 2002, dropped by $9 million during the first quarter, to $34 million. Ultimately, say company officials, they won't be able to predict the effects of the Stewart situation on MSO with any accuracy.

Whatever the legal outcome, MSO was forced to increase spending on corporate communications and legal fees at a time when revenues are sputtering.

Government prosecutors are still mulling whether to charge Stewart with obstructing an investigation or with the more serious insider-trading allegation, according to a report in The Financial Times. Both carry prison sentences and can potentially lead to a ban on Stewart serving as an MSO director.

Survey: Sarbox 404 Increases Audit Fees by 35 Percent
Public companies will likely spend 35 percent more on audit fees to comply with Section 404 of the Sarbanes-Oxley Act, according to a new survey by Financial Executives International (FEI). Estimates for how many extra man-hours the compliance efforts will eat up vary tremendously; ranging from 80 hours to 65,000 hours, depending on the size and complexity of the company, say survey authors.

FEI polled 83 of its members at public companies that averaged $3.3 billion in revenues. On average, the survey participants said they would spend more than 6,000 hours -- including time devoted to internal resources, external resources, and attestation -- and shell out $480,000 each for software and IT consulting to comply with Section 404.

Sarbox 404 requires companies to design, implement, document, and continuously monitor internal controls and financial reporting procedures.

U.K. Ponders Excessive Pay Problems
When British shareholders protested the excessive compensation paid out to directors at underperforming GlaxoSmithKline and HSBC, the British government took note. As a result, Trade and Industry Secretary Patricia Hewitt announced this week that her department is considering developing an official "framework" for shareholder complaints.

Hewitt admits that executive pay is the purview of companies and shareholders -- and that the government had "no problems with big rewards for big success," according to a CBS MarketWatch. But she believes that "shareholders are rightly concerned when directors leave failing companies and walk away with excessive payouts."

Public comment on the framework idea is slated to end in September. American investors, also fed up with high pay in the context of for non-performance, will be watching the U.K. pay debate closely.

PNC Escapes Possible Prosecution with $115M Payout
A PNC Financial Service Group subsidiary reportedly agreed to pay $25 million in penalties and set up a $90 million restitution fund to avoid federal prosecution related to accounting fraud charges


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If the Pittsburgh-based company abides by the terms of its deferred-prosecution agreement with the Department of Justice, the charges of conspiracy to violate federal securities laws will be dropped in 12 months. This according to Reuters.

DOJ officials say that management's willingness to acknowledge wrongdoing, continued cooperation with the criminal investigation, and the remedial payments contributed to the decision to defer action.

The bank's subsidiary, PNC ICLC Corp., reportedly tried to reduce its exposure to bad loans and make its financial results look better by hiding $762 million in off-balance-sheet accounting structures, mainly problem loans and venture capital investments. By January 2002, the Federal Reserve and the SEC were investigating the accounting treatments.

The restitution fund will help settle pending shareholder suits against PNC.

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