The Case of Martha Stewart

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Beginning with a small catering business in the 1970s, Martha Stewart built a vast media conglomerate spanning books, magazines, television, radio and the internet, devoted to providing helpful tips with the sign-off: “It's a good thing”. After her company, Martha Stewart Living Omnimedia, (MSL) went public in late 1999; her stake was briefly worth more than $1 billion. (New Yorker, 2003) 1 However, she was confronted with a far greater challenge in 2003, an investigation for her personal stock trading by the Justice Department and the Securities Exchange Commission. Starting in 2002 her career was rocked by a scandal involving her sale of shares in a drug company days before its application for a new drug was denied. She was eventually convicted of lying to investigators and sentenced to prison in 2004. The Government says Stewart has been involved the crime of insider trading. She saved money by selling stock in ImClone Systems on December 27, 2001. It was just before a negative government report about rejecting the Erbitux (new colon cancer drug) application. It was insider information because it was not yet known to the public. Although Stewart says she sold because she and Bacanovic, her Merrill Lynch & Co. broker, had a pre-existing agreement to sell when the stock fell to $60, the government still says she was tipped that ImClone founder Sam Waksal who was a close friend had been introduced by Stewart’s daughter Alexis was trying to unload his shares. 2 There was a lot of media coverage of the circumstances surrounding the indictment of Martha Stewart on charges of securities fraud and obstruction of justice as well as her subsequent conviction and prison term. When you consider her position as the CEO of a multi-million dollar corporation, her actions in relation to the criminal case had numerous ethical implications in the business world. This all started when Martha Stewart was informed by her broker, Peter Bacanovic the day prior, Sam Waksal, owner and founder of the company was trying to sell off his own shares. She sold, the day after, the Food and Drug Administration (FDA) refused to approve Erbitux, ImClone's new cancer drug and the company's stock plummeted ( 3 After Ms. Stewart sold stock a Government investigation ensued. The Government contended that she was tipped by Mr. Bacanovic, which resulted in the sell off of 3,928 of stock she owned. Mr. Bacanovic supported the Government’s theory by telling the Securities Exchange Commission (SEC) attorneys that he and Ms. Stewart had agreed on December 20, 2001, to sell ImClone if it fell below $60. DECEIT

On December 27, 2001, Sam Waksal, the key shareholder in ImClone, ordered his broker to sell all his stock in the company. The broker, who was also Martha Stewart's broker, told his assistant to phone Stewart. 4 The assistant left Stewart a message about Waksal's sales, suggesting she might do the same. Stewart called the broker back and ordered him to sell. 5 "ImClone stock plummeted and Waksal was investigated. The SEC learned of Stewart's sale, and called Stewart to a formal interview. Before the interview, Stewart and her broker conspired to lie. Rather than admitting that the broker gave Stewart an inside tip, they invented a story of a "standing sell order." Stewart gave this story to the government in formal interviews.6 After a lengthy investigation, Stewart on was convicted on various charges on June 4, 2002, although not for insider trading." The SEC investigation concluded that on June 6, 2002 Stewart learned the Wall Street Journal intended to do a story mentioning her December 27, 2001 sale of her ImClone shares. Intending to disseminate false information, Stewart had her New York attorneys give the Wall Street Journal a false, misleading statement that hid the fact that she had been given the tip about Waksal’s sale of his stock and that she sold...
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