Martha Stewart Shares React to Probe Report

Shares of Martha Stewart Living Omnimedia (MSO) fell sharply Friday, then rebounded to close higher as speculators bet on how the company would fare amid possible investigations of alleged insider trading involving Chief Executive Martha Stewart. 

Stewart, the home decorating diva, sold shares of biotechnology company ImClone Systems (IMCL) shortly before the drugmaker's cancer treatment was rejected.

A spokesman for the U.S. House Energy and Commerce Committee, which is probing ImClone, said the panel is seeking information about Stewart's trade of the biotech firm's stock.

The committee has "asked her attorney to provide us with documentation to corroborate her story," said Ken Johnson, a spokesman for House Energy and Commerce Committee Chairman Billy Tauzin, a Louisiana Republican.

"We'd like to see a copy of the agreement she had with her broker, the executed stock transaction, as well as her phone records," Johnson said.

Earlier, the Wall Street Journal reported in Friday editions that federal prosecutors were investigating whether Stewart had inside information when she sold her Imclone shares.

Federal prosecutors will not comment and the company was not immediately available to comment on the report.

Shares of Martha Stewart fell 8.7 percent to $13.50, their lowest price since September 2001, in early morning trading on the on the New York Stock Exchange before recovering. The shares recovered to close 65 cents, or 4.39 percent, higher at $15.45

Martha Stewart Living Omnimedia's 52-week range is $12.10 to $23.50.

Analysts said the stock was being driven by the reports of the investigation by federal prosecutors.

The stock activity is due to "continued uncertainty related to (the ImClone) issue and news of an investigation," said Davenport & Co. analyst George Smith.

"People right now are pulling the trigger first and asking questions later. They don't want to have anything to do with tainted names in this type of market environment," said Smith.

Merrill Lynch cut its ratings on the company on Friday due to the "ongoing scrutiny" on Stewart. Analyst Karl Choi cut his intermediate-term rating to "neutral" from "buy" and his long-term rating to "neutral" from "strong buy."

"The continued scrutiny, especially in the current environment with increased emphasis on corporate governance, is likely to cause extra volatility in MSO shares, until more clarity emerges," Choi said in a research note.

Stewart, a former girlfriend of ImClone's former CEO Sam Waksal, sold 3,928 shares of ImClone the day before the company's experimental cancer drug was rejected by the Food and Drug Administration, causing ImClone's stock to plummet.

Waksal was arrested on Wednesday and charged with conspiracy, securities fraud and perjury involving an alleged insider trading scheme in ImClone shares.

Stewart has denied any wrongdoing, saying in a statement that she had no inside information and did not speak to Waksal before selling her ImClone shares. She said she had a prearranged agreement to sell the shares when they fell below $60.