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Martha Stewart: an example for Romania

by Andrei Postelnicu
November 2004

Last month Martha Stewart – one of the world’s most successful businesswomen and one of Time magazine’s most influential people in America – reported to a West Virginia penitentiary to begin a five-month jail sentence.

Her downfall represents a potent lesson about a working justice system and a truly functioning economy. The magnitude of this message reveals itself from the very story of Martha Stewart’s ascent to the pantheon of business and the subsequent tailspin therefrom.

Born and raised by an immigrant family in New York City’s suburbs, across the river in New Jersey, Martha Stewart built a business empire based on her vision of a well-kept household, starting from the dishes made by the perfect housewife and ending with the flowerbeds she plants in the garden. The origins of Martha Stewart Living Omnimedia lay in a cookbook she wrote that quickly became a bestseller.

Martha Stewart: this wouldn’t happen in Romania.

Soon enough, the lifestyle sold by Martha Stewart became an eponymous brand.

From magazines and bed sheet lines to television programmes, Martha Stewart had become omnipresent in US media and her company made her a billionaire.

Her success propelled her to the circles of the rich and powerful, where she met Sam Waksal, the founder of ImClone Systems, a company that was developing a treatment for colon cancer, called Erbitux. Convinced of Erbitux’s success prospects thanks to her friend, Ms Stewart bought ImClone shares at some point in the late 1990s.

The problem arose when Erbitux’s sale was halted by regulators, thereby leading to a steep decline in the ImClone share price. So far so good, except that a few days before the event, several sales of the ImClone stock by company insiders had been registered. The insiders had managed to avoid substantial losses through those transactions, which did not go unnoticed by the eagle-eyed US authorities. They quickly began investigating possible insider trading, an illegal share trade based on information the market has not yet had a chance to react to, information that only company insiders had.

Sam Waksal was among the suspicious sellers of ImClone shares, as was his pal Martha Stewart. US authorities pursued the case with a diligence that is hard to describe. To cut a long story short, Sam Waksal had long been in jail by the time Ms Stewart had been handed her sentence, in July.

Insider trading is extremely difficult to prove and is not the reason why Ms Stewart is in prison at present. Equally interesting is the fact that Ms Stewart’s sale of ImClone shares prevented her from losing about $45,000, a fraction of her fortune that snowballed into a huge cost for both Ms Stewart and her company. It’s worth mentioning that since the sale, ImClone’s share price has recovered and risen above the level at which Ms Stewart sold the shares.

So, if the sum involved was negligible, and if the insider trading accusation has never been proven, why is Ms Stewart in jail? For something that could easily pass for an insignificant detail in Romania: the fact that Ms Stewart lied to US authorities and obstructed their investigation of the case.

Neither the amount of money involved in the transaction nor its legality mattered in the Martha Stewart case, but the behaviour of a business superstar when she was confronted with the US legal system.

The paradoxical dimension of this case does not end here, however. As soon as her sentence was given, Ms Stewart’s lawyers began an appeal procedure, arguing that the sentence had good chances of being cancelled in the event of a retrial.

As this appeal process could last months and as Ms Stewart was not ready to stay under the media spotlight for that long, she took her destiny in her own hands and decided to serve her sentence as soon as possible. She surrendered to the authorities without having to do so, compelled only by her desire to end a painful chapter in her life as soon as she could.

In the context of post-communist Romania’s business environment, the reason why Ms Stewart is in jail is a detail no one would bother with. Who in Romania would even think about throwing a powerful 'baron' in jail for lying to the authorities? Furthermore, which among these guys would willingly surrender even under more serious accusations?

Even though it is an example that Romania sorely needs, the Martha Stewart case is an inconceivable story for the local cronies, who would tell you with pride, rather than shame, that it could never happen in Romania.

Andrei Postelnicu writes about global markets for the Financial Times in New York, and writes for Vivid in a personal capacity.