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By James T. Madore Newsday

July 24, 2002
NEW YORK - Martha Stewart's stock problems extend beyond allegations of insider trading in shares of drug maker ImClone Systems Inc.

A lawsuit claims there was financial chicanery surrounding the successful initial public stock offering of Stewart's company, Martha Stewart Living Omnimedia, nearly three years ago.

Shares rose 178 percent to $50 on the first trading day in October 1999 but fell steadily in subsequent months, reaching a low of $13.38 in April 2000.

Investors allege the IPO was rigged to benefit investment banks that underwrote the stock instead of individual shareholders, according to court documents.

They also say Stewart, as chief executive and chairwoman of her company's board, had a responsibility to warn investors about problems with the IPO but failed to do so.

While the suit's primary target is investment banks, experts say, it could further damage Stewart's public image and her company's stock price, which have been battered by charges that she sold her ImClone shares in advance of devastating news about federal regulators rejecting its cancer drug.

The Stewart case is likely to garner more attention in coming weeks because it is part of a wider probe into IPOs during the late 1990s. More than 300 companies and about 45 underwriters of those stocks are being sued by disgruntled investors. Among those under scrutiny are Internet high-flyers such as Ask Jeeves, Priceline.com, Prodigy Communications, TheStreet.com and Webvan.

Some of these businesses also are being investigated by the Securities and Exchange Commission, law enforcement agencies and various attorneys general. No one has suggested these probes include Stewart or her company.

A spokesman for Martha Stewart Living Omnimedia said, "These practices do not involve the issuer in any way, and as they relate to Martha Stewart Living Omnimedia , are wholly without merit. MSO has not been contacted by any regulatory agency relating to this matter, the suit has no relationship whatsoever to the ImClone investigation, and it has not had, nor is it expected to have, any impact on the ongoing business of MSO. The suit is part of an ‘omnibus' litigation in which MSO has not played an active role,” he said.

Spokesmen for the lead underwriter, Morgan Stanley Dean Witter & Co., and most of the six other investment banks named in the suit declined to comment.

"We believe these allegations have no merit and we intend to vigorously defend ourselves in court,” said spokeswoman Victoria Harmon of Credit Suisse First Boston, parent of Donaldson, Lufkin & Jenrette who participated in the IPO. Merrill Lynch spokesman Bill Halldin added, "We are confident we acted appropriately in our role in this offering.”

Three years ago, Martha Stewart announced plans to sell a minority stake in the company she built around her homemaking ideas. Approximately 7.2 million shares with an initial price of $18 would be sold on the Nasdaq stock market.

The lawsuit charges Morgan Stanley and the other underwriters devised a "laddering” scheme to illegally pump up the stock price by requiring customers to purchase additional shares in the days following the IPO in return for an allotment of the $18 shares, according to court documents. This created "artificial demand” for Martha Stewart Living Omnimedia stock, the suit claims, increasing the price a whopping 178 percent before falling back to close at $35.56 per share on Oct. 19, 1999, the first trading day.

Documents also allege that some investors reaped huge profits by selling their shares at the inflated price. They then were forced to divide the proceeds with the investment houses.

The lead plaintiff is Saul Kassin, a Manhattan businessman, who purchased 2,000 shares about a month after the media company went public. He paid $54,100, or $27 per share, for the investment. Five months later, as the stock was falling, he dumped his entire stake valued at $36,149, or $18 a share. He had lost nearly $18,000.

In December 2001, Kassin filed suit in U.S. District Court against Martha Stewart Living Omnimedia, its top executives and the stock underwriters. He also is involved in at least 19 other IPO cases including those against Drugstore.com, MP3.com, Redhat, eLoan Inc. and Ziff Davis publications.

Kassin declined to comment yesterday, referring questions to his attorneys at the law firms of Sirota & Sirota and Lovell & Stewart, both in Manhattan.

Victor E. Stewart of Lovell & Stewart said, "Mr. Kassin and his family own a successful business and they felt the stock market was a safe and honest place to invest in ... they aren't frequent filers of lawsuits.”