Martha Stewart a known celebrity and founder of Martha Stewart Living Omnimedia (a business which is built on showing others how to cost effectively manage and decorate the home), who was given a tip by Douglas Fanueil and Mr. Bacanovic, employees of the Merrill Lynch brokerage company.
This tip which broke the confidentiality policy of the brokerage company led to the subsequent sale of Martha’s shares in the ImClone company during the latter company’s blackout period with the effects of causing the share price of ImClone’s share to drop and the share price of shares of the Martha Stewart Living Omnimedia to drop after the scandal broke that Martha had engaged in insider trading. Through a series of events, she, her broker and his assistant were subsequently prosecuted and sentenced. In this case study, we will be examining how the public perceived Martha Stewart’s actions and also the penalties that were imposed. We will also look at how her decisions impacted and also provided major setbacks to her business because of her insider trading scandal on the Imclone Systems Incorporated. By carrying out this research, we as a group would determine if the blame should be placed on her or not and also determine if the fines were adequate for the crime committed.
1.Did Martha Stewart commit the crime of insider trading when she sold her ImClone shares on December 27, 2001? We believe that Martha Stewart was guilty of insider trading. The justifications for our point are as follows: a) Martha Stewart was told by Mr. Faneuil (under direction from his boss who was also Ms. Stewart’s stockbroker) that the largest stockholders of ImClone (Sam Waksal and his daughter Aliza) had sold all their shares in the company on that same day, December 27th, and she immediately sold hers as well. This in itself was a breach of client confidentiality and insider information because no one knew about it but their stockbrokers. By virtue of the position Mr. Bacanovic (Mr. Faneuil’s boss) at the brokerage company of Merril Lynch he was not to mention or discuss the actions of any of his other clients. b) Even though Martha Stewart did not know about the FDA’s unfavourable report about ImClone, the sudden ‘dumping’ of the shares on the market was enough for her to speculate that there must be something wrong and that she should get her shares sold as quickly as possible in order to obtain the best possible share price or avoid a loss. Tipped with the knowledge of the Waksals actions and her intuition of imminent disaster she ordered that her shares in that company be sold as quickly as possible. c) She called Sam Waksal as soon as she received the tip-off in the hopes of obtaining the reason behind their actions. d) When investigated by criminal authorities she instructed her secretary to change the original message the secretary wrote from Mr. Bacanovic and then thought better of it and advised the secretary to revise the changes and restore the original message. She also lied repeatedly to criminal authorities on the real reason behind the sudden sale of her shares.
2.Did the U.S. Attorneys and the Securities and Exchange Commission use good judgment in the indictment of Martha Stewart? Do you believe that her indictment was based on evidence of a serious crime, or do you believe that prosecutors consciously or unconsciously had additional motives for pursuing the case? It is our belief that good judgment was exercised in indicting Martha Stewart. The indictment was based on the evidence of reasonable intent. Martha Stewart on hearing of the actions of the Waksals, and making reasonable judgments that the company was in trouble, intended that she should not make a loss on her investment in ImClone and made immediate moves and succeeded in selling her shares in the company for a profit of $228,000. If she had waited until December 28th when the share price fell to $45.39 per share she would have made only $178,...