Marvellous Martha loses her magic

NOT SINCE Walt Disney first put artist's pen to paper has the reputation of a business empire rested so heavily on an image of wholesome American family values. So when Martha Stewart, the US queen of elegant living, was caught up in an insider trading scandal, it was as if Mickey Mouse had been done for kerb crawling.

Stewart, 60, was accused of selling shares in a biotech company after receiving a tip-off from its boss that the shares were about to collapse. She is being investigated by Congress but strenuously denies any wrongdoing and has not been charged.

However, her bit-part role in the ImClone story - even if it proves to be an entirely innocent one - has the power to tarnish and perhaps destroy an all-American business brand built on her reputation as Uncle Sam's favourite homemaker.

Investors fear that the American public, sickened by the recent exposés of corporate excess, are in no mood to forgive. And that applies even to a woman whose syndicated columns, TV cooking shows, books and kitchen products have defined US middle class aspirations for a generation.

Stewart's frequent denials have failed to dispel the whiff of scandal that hangs over her business empire. The problems date back to a now notorious sale of shares in ImClone in December. She instructed her broker to sell 3,928 shares worth $227,000 (£151,000) on 27 December, the day before US regulators rejected the company's application for a cancer drug, sending the shares spiralling 84% lower.

She has always insisted that the sale was 'entirely proper and lawful', despite logged phone calls that show she called her Merrill Lynch broker and the office of ImClone chief executive Samuel Waksal, a former boyfriend of her daughter, on the day of the share sale. Waksal has been charged with insider trading and the broker Peter Bacanovic has been suspended. However, Stewart maintains she did not speak to Waksal about the shares on that day.

Although there is no direct evidence yet that consumers are spurning Martha Stewart products because of the ImClone connection, on Wall Street they are taking no chances. Since her name was first linked to the ImClone criminal inquiry less than a fortnight ago, shares in her quoted company Martha Stewart Living Omnimedia Inc have been dropped quicker than a tray of burned muffins.

On Monday they fell to their lowest since flotation three years ago, losing more than 20% of their value to $12.55. On Tuesday, they staged a recovery, rising $1.05 to $13.60. They have lost about a third since Martha was first linked to the ImClone saga.

The ImClone public relations disaster came just as the business was showing signs of recovery from a particularly rocky spell when its flagship magazine Martha Stewart Living and its associated websites were hit by the collapse of advertising spending. First-quarter results in April revealed a halving of profits to $2.9m on sales 2% lower at $68.7m.

Forecasts of an improved performance in the second quarter as ad revenues start to recover were largely ignored as they were overshadowed by the gathering ImClone storm. However, it was not all good news. Sales of Martha Stewart branded houseware, sold through the Kmart stores chain - currently in Chapter 11 protection from creditors - were 'deteriorating'.

Analysts on the Street are already debating whether the company could survive without its founder and figurehead. Some argue that her product range is now so wide that the removal of Stewart herself would not kill the business. Only 4% of the company's revenues, for example, are generated by her TV shows, the vehicle most dependent on her presence. The company claims it is building ideas for TV programmes that will 'evolve the brands from dependence on Martha'.

Others are less sure. They say that Stewart, a former junior stockbroker who rose to take a seat on the board of governors of the New York Stock Exchange, has fatally lost the confidence of her backers. She also has few friends in the US media, which has taken delight in reporting every detail of the crisis. Without the blonde homecare diva who raised bedroom stencilling to an artform, the company would be an empty shell, say the critics.

Whatever the outcome, the ImClone saga will leave a stain on Stewart's previously squeaky clean reputation. On 7 May Martha Stewart Living Omnimedia sacked its then auditors, Andersen, in a showy display of post-Enron corporate cleansing. It would be a rich irony indeed if Stewart joined Kenneth Lay, Dennis Kozlowski and the others in the rollcall of villains from the Era of Enronitis.

Lifestyle 'tyranny' that is all pervading