Oh, Martha!

What else is there to say about the haymaker that Merrill Lynch & Co. (MER) threw to Martha Stewart's key backup witness in the insider trading scandal of ImClone Systems Inc. (IMCL)? 

A month ago, the waters of that scandal were barely tickling Martha's toes. Now they're lapping at her throat. We'll take a look in a minute at what this might mean for Martha financially, as well as for investors in her company, Martha Stewart Living Omnimedia Inc. 

But first an update on the latest turn of events in the drama itself, as Martha Stewart - the national icon we both love, and love to hate - morphs into her new role as poster girl for Wall Street's CEO crime wave. 

The man who last week looked able to help her avoid that fate - Merrill Lynch's stockbroker to the stars, Peter Bacanovic - is now suddenly in trouble, too. 

Bacanovic is the broker who handled Martha's sale of 3,928 shares of ImClone Systems stock last Dec. 27th. That sale lies at the heart of suspicions that Martha may have engaged in insider trading in cahoots with her long-time close friend (and ex-CEO of ImClone), Sam Waksal, who could face a felony trial in the case. 

But instead of buttressing Martha's claim that she did nothing wrong, Bacanovic has now begun to look, just possibly, like the man who may have passed along the insider information in the first place - and not just to Martha but perhaps to lots of his clients. 

That at least seems to be the hypothesis on which federal investigators are now operating. Late on Friday, a congressional committee that has been probing the ImClone matter said it asked Merrill Lynch to turn over all of Bacanovic's ImClone-related trading records and client lists for nearly the whole of December 2001, as well as all his phone records, notes and whatnot for the period. 

This suggests - just as I warned in this space a week ago - that the ImClone probe will now spread out to touch one after the next of Bacanovic's wealthy clients, from their East Side townhouses to the sprawling estates of Long Island's East End. 

Martha herself is entangled in all this because of some testimony she gave to federal prosecutors reportedly in April when they, too, began looking into the ImClone situation. Had she simply told them she'd sold her shares because Bacanovic had called her and advised her to do so, no question of insider trading would probably ever have arisen. 

But she doesn't seem to have done that, justifying her sale instead by claiming that she and her broker had placed a $60 sale-trigger on the stock more than a month before she sold it. And it is that explanation, which has begun to crumble under scrutiny, that now has her in trouble. Because of it, she has been forced to defend her claim of an arrangement with Bacanovic that seems at best to have been so vague and casual as to be meaningless. 

With no written evidence of such an arrangement seemingly available anywhere, Martha has badly needed corroborating support from her broker. But when Bacanovic finally emerged in the saga early last week, The Wall Street Journal quickly reported that his version of events didn't square up with Martha's, and her credibility took a big hit. 

Then at week's end came the haymaker from Merrill Lynch, which said that it too had looked into the matter and found something fishy. So, said the firm, it had turned its research over to feds and was placing both Bacanovic and his assistant on leave until things got cleared up. 

As a result of all this, Martha now faces a mountain of business-related problems that didn't exist only a few weeks ago. 

For starters, the Bacanovic bombshell promises to hit her company's stock - hard. The shares have already fallen by 20 percent since the scandal broke, and they could now fall further. 

That is because of the key role Martha Stewart's image plays in marketing her company's products. 

Technically speaking, Martha Stewart Living Omnimedia sells magazines, books and home furnishings. But in reality it sells the morally infused image of its CEO, Martha Stewart, as the embodiment of all that is best and most admirable in the American woman. That image is now under attack as she struggles to avoid being nailed as a white-collar criminal. 

Without Martha in the picture, her stock price looks vulnerable even now. 

Valued conservatively at a multiple of one times its balance sheet assets of about $190 million in cash, property and office equipment, the company should arguably sell for no more than about $4 per share. Any price much above that would represent a speculative bet that Martha Stewart Living Omnimedia can survive with the name of an accused white-collar criminal on literally everything the company sells. 

Pressure on her stock would only be accelerated if her media world business partners begin peeling away. 

One partner to keep an eye on: CBS, where Martha has a contract as a lifestyle correspondent for the CBS Early Show. A CBS spokesman insists it is sticking by Martha. But others at the network say the company was deeply troubled last week because of her refusal to answer their questions even before the Merrill Lynch shocker. Are they going to feel any less troubled now? 

A $4 stock price would crush Martha's net worth, which has fallen from more than $1.2 billion at the time of her initial public offering, to less than half that now. A decline to the $4 range would represent another 75 percent loss in value, reducing her net worth from the company to less than $120 million. 

Martha would still be an enormously wealthy woman, to be sure. But wealthy enough to support her Romanoff's lifestyle, with her collection of palatial homes, her boats and her aircraft, and her countless other toys of the rich? She, and the world, may find out soon enough. 

Her corporate perks could also be threatened. Her employment contract with Martha Stewart Living Omnimedia stipulates that she would have to step aside as chairman and CEO if she were found to have engaged in "willful gross misconduct" - let alone convicted of a felony crime. So Martha may soon be saying bye-bye to that lucrative salary-and-bonus package, which last year totaled $2 million. 

It's also hard to see how the New York Stock Exchange would allow her to continue in her newly assumed seat as a member of the exchange's board of governors. 

Each one of these setbacks would be extensively covered in the press, damaging her image even more. 

In the widening blast zone of repercussions, the shocks would quickly hit Kmart Corp., her main business partner, as well. Kmart has repeatedly said that its relationship with Martha Stewart Living Omnimedia is key to its struggle to re-emerge from bankruptcy. 

So the end seems easy enough to predict - for Kmart and its 234,000 employees - if Martha's problems continue to worsen. The retailer's stock price, already languishing at less than $1.25 per share, has slipped another 26 percent since the Martha crisis erupted, closing at the end of last week at barely 86 cents. A few more weeks of that and Wall Street will have pronounced the nation's second-largest discount retailer worthless and ready for liquidation. 

So add it all up: A collapsing stock, a ruined reputation, two imperiled companies and countless threatened jobs. All this from a single stock sale to save a few thousand dollars on a company that wasn't even her's. How truly sad, for everyone.