Media attention given to the martha stewart case excessive

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Martha Stewart: Free Trading or Insider Trading?

A blowing gust of wind moved the trees in the courtyard where the ImClone emblem stands in front of the company’s headquarters in New York. ImClone Systems Incorporated, founded in 1984, “is a biopharmaceutical company dedicated to developing breakthrough biologic medicines in the area of oncology. The Company has utilized the many advances made in the fields of molecular biology, oncology, genomics and antibody engineering to build a novel pipeline of product candidates designed to address specific genetic mechanisms involved in cancer growth and development. The company’s main focus is “the development of therapeutic products for the treatment of cancer and cancer related disorders. Twenty stories above the courtyard, Dr. Samuel Waksal, chief executive officer and founder of ImClone, stood behind his office window watching a sunny day turn into a gloomy afternoon as the somber clouds formed at the horizon. He had just received information that the “Food & Drug Administration refused to accept an approval application for ImClone’s promising new Erbitux cancer drug. The FDA was planning to make a public announcement of its decision the next day. Now, Dr. Waksal is pondering the future of his company and his investment. Expectations about Erbitux had been a prime reason for ImClone’s soaring stock prices. Indeed, once the FDA’s decision was made public, ImClone’s stock prices would likely suffer.


While there was no escape for ImClone itself from this unfortunate development, Dr. Waksal considered the alternatives available to him to minimize his losses, and maybe the losses of some family members and close friends. Dr. Waksal; his father, Jack; his daughter Aliza; and a number of close friends had significant investments in ImClone. All of them would surely incur substantial losses at the start of the trading day tomorrow. Of course, selling his stock and advising his father, daughter, and friends to sell their stock would reduce their losses. However, because these sales would be based on information not available to the public, these transactions might be deemed illegal. Dr. Waksal was faced with a tough decision. On one hand, he could refrain from engaging in questionable trading practices and thereby incur a significant amount of losses in his investment. On the other hand, he could choose to sell his stock based on the information he received, reducing his investment losses, but violating the law and ethics of fair trade.

The Decision and Its Consequences.

Soon, Dr. Waksal reached a decision. Before the day was over, he was on the phone trying to sell “$5 million of ImClone stock through brokerage accounts at Merrill Lynch & Co. and Bank of America Corp. But the brokers wouldn’t execute the order because his shares were ‘restricted,’ which prevented him as an ImClone insider from selling them. Before long, on Wednesday, December12, 2002, four FBI agents visited Dr. Waksal’s house at 6:30 in the morning and took him into custody after charging him with insider trading. It had been found that Dr. Waksal’s father had dumped $8.2 million in ImClone stock before the FDA announcement. Also, his daughter is believed to have dumped $2.4millionworthof ImClone stock. A close friend of Dr. Waksal’s, Martha Stewart, the founder and chief executive officer of Martha Stewart Living Omnimedia Inc. (MSO), had also sold four thousand shares just before the bad news broke. In addition, Dr. Waksal had been found to have bought “put” options that allowed him to profit from ImClone’s stock decline.


The government and Dr. Waksal reached a plea agreement wherein he pleaded guilty to securities fraud and other charges. Also, Dr. Waksal agreed to admit that he had tipped undisclosed individuals to dump their stock before the FDA decision was made public. Dr. Waksal’s attorney, Lewis Liman, “said in a statement, ‘we are glad that we have been able to reach this settlement with the SEC, and that Dr. Waksal will be able to put this part of the legal issue behind him. In return, his father and daughter were spared facing charges. Concerns about the effect of Dr. Waksal’s work history on the plea bargain were raised. Dr. Waksal had been “asked to leave Stanford University, the National Cancer Institute of the National Institutes of Health, Tufts University School of Medicine and Mount Sinai School of Medicine for what supervisors and others said was misleading, and in one case, falsified research. Dr. Waksal is now serving a seven-year prison sentence at the Federal Correctional Institution, Milan, in southeastern Michigan. ImClone Stock Takes a Nosedive. It was the sharp decline in ImClone stock the day after the FDA made its announcement that caught the attention of compliance officers at Merrill Lynch.

The ImClone stock had dropped 16 percent. Later the stock reached a low of $7.55, down from $62.80 on December 24.


The government was also suspicious of Ms. Stewart’s sale of her ImClone stock. It was believed that she had sold her shares after she received information about the FDA’s decision regarding Erbitux before this information was made public. A spokesperson for Ms. Stewart denied the allegations and insisted that Ms. Stewart had a prearranged agreement with her broker, Mr. Bacanovic, to sell ImClone stock if it fell below $60. Her assistant broker, Mr. Douglas Faneuil, however, claimed that such an agreement never existed, and that Ms. Stewart sold her four thousand shares of ImClone after she learned that Dr. Waksal and other family members had dumped their stock. In June 2003, a federal grand jury indicted Ms. Stewart on nine federal counts; she was not indicted for insider trading, the original focus of the investigation. Martha Stewart’s company was built around her personal identity and achievements, and so no one was surprised when the stock took a big hit. MSO stock plummeted by 60 percent after the charges were made public. Stewart resigned as chairwoman and CEO of her company but remained chief creative officer and a board member.


After the plea negotiations failed, as Ms. Stewart would not agree to any plea that required jail time, Martha Stewart appeared in the Manhattan courtroom to be charged. The nine-count indictment alleged that Stewart altered evidence that she traded on inside information about the biotech company ImClone Systems, conspired with her stockbroker to lie to federal officials investigating the trade, and defrauded shareholders in her company, Martha Stewart Living Omnimedia, by misleading them about why she had sold the stock. In response to these charges, Ms. Stewart’s voice clearly echoed in the courtroom: “Not guilty.

A Court Verdict.

In March 2004, Judge Miriam Goldman Cedarbaum announced that Martha Stewart was guilty on four counts: obstruction of justice, conspiracy, and two counts of making false statements. The most serious charge of securities fraud was dropped. Martha Stewart maintained her resolve, but public opinion about the verdict was mixed. While some believed that Ms. Stewart was justly tried and convicted, others insisted that Martha Stewart was a victim of a frustrated government and a scapegoat for the big corporate scandals like Enron and WorldCom. She resigned her positions as board member for Revlon and the New York Stock Exchange.

Was Stewart a Scapegoat?

Earlier, after the charges had been brought up against Ms. Stewart, James Comey, U.S. Attorney for the southern district of New York, asserted, “Martha Stewart is being prosecuted not for who she is but what she did. In contrast, Martha Stewart fans and supporters displayed their support in different ways. Some stood outside the courthouse against police barricades chanting, “We love you, Martha. Others conveyed their message through reports. Rosie O’Donnell, a friend of Martha Stewart’s, expressed her disappointment to Newsweek: “I am outraged and beside myself. This is a travesty. Shame on the federal government. Martha Stewart’s retired secretary also expressed her feelings to Newsweek: “This is all about the need to make an example of a powerful woman. Martha Stewart is not Enron. Martha Stewart’s public image may have played a role. Juror Hartridge expressed her perception of Martha Stewart to a Newsweek reporter: “She seemed to say: ‘I don ’t have anything to worry about. I fooled the jury. I don’t have anything to prove. Even the support that Martha got from friends like Rosie O’Donnell and Bill Cosby seemed to have worked against her in the words of Juror Hartridge, “Like that was supposed to sway our decision.

Martha Is Sentenced.

On July 16, 2004, Ms. Stewart received the minimum sentence of five months in prison and five months in home confinement. In announcing the sentence, Judge Cedarbaum said that she had received more than 1,500 letters written on behalf of Ms. Stewart. The judge stated that it is “apparent that you have helped many people outside of your own family and that you have a supportive family and hundreds of admirers. Ms. Stewart reiterated at that time that she would appeal her conviction. The judge decided that Ms. Stewart could remain free during her appeal, and some experts predicted this could take as long as a year.27 When Ms. Stewart received the minimum sentence, the stock price of her company rose by 37 percent.

After Court

After further development of Erbitux and resubmission for FDA approval, ImClone received approval for its promising drug, and its stock soared again. Unfortunately for Dr. Waksal, he ended up losing his position as chief executive officer of ImClone, paying a hefty fine to the SEC, and receiving the maximum sentence from the court. His daughter and father, however, were spared facing charges based on the plea agreement that Dr. Waksal made with the government.

Martha’s Prospects.

Throughout the process of Martha Stewart’s investigation, indictment, and trial, speculations about the future of her company and its future varied. Some believed that the loyalty to the Martha Stewart brand would endure the tough times. Others, like Mr. Jeff Swystun, a brand consultant with Interbrand, had different expectations. He asserted, “The parent company has got to distance itself from Martha Stewart the person pretty quickly.” He then added, “They have to drop her name from everything that hits the customer. The fans who stood outside the courthouse and those who visited the Martha Stewart website showed the strength of her loyal customer base. The business community supported her as well. Kmart Holding Corp. continued to carry Martha Stewart products. The Wall Street Journal wrote, “Kmart Holding Corp. chose to stand by Martha Stewart’s embattled company, extending its license agreement for two years and dropping a lawsuit over royalty payments. By the trial’s end, the future of Martha Stewart Living Omnimedia Inc. lay in the hands of the American customer. Her challenge was well depicted in the words of Jeffrey Sonnenfeld of Yale University: “Americans love to forgive. But this is going to be pretty damn hard for her to get past.

Martha’s Decision.

With Judge Cedarbaum’s decision to permit Ms. Stewart to remain free during her appeal, which could take a year or longer, speculation about her company’s future ran rampant. Many observers felt that her freedom would work against her company’s stock because the lack of closure would trigger the stock market’s dislike of uncertainty. Furthermore, with Ms. Stewart free for some undetermined length of time, the company’s board would have to address a very important strategic decision regarding the extent of her involvement in the company during the appeals process. Nevertheless, many expressed surprises when Ms. Stewart agreed to serve a five-month prison term and reported to Alderson Federal Prison in West Virginia. She entered prison in October 2004and was released in March 2005, after which she wore an ankle bracelet for an additional five months. In a little over three years since Martha Stewart sold her ImClone stock, her life had changed dramatically. Ironically, the loss she avoided by selling the stock was about $50,000. The cost to her of selling that stock, factoring in penalties, restitutions, and legal costs has been estimated to be about $300 to $400 million. Furthermore, had she held on to her shares of ImClone rather than selling them, she would have made a nice profit.

Martha’s Comeback.

Just two and one-half years after her release from prison, Martha Stewart was moving full force into what Good Housekeeping

called a “rich, packed, larger-than-life life. She told the interviewer she was ready to go the minute she stepped out of the prison. When the interviewer asked if she had any momentary lack of confidence or panic, Ms. Stewart replied, “I've always been fearless. MS. Stewart is once again the driving force behind MSO, but with the title of founder rather than CEO. The magazine Martha Stewart Living is increasing its advertising pages and, after being removed for a period, Ms. Stewart is once again featured in photographs throughout the magazine. She has launched a Sirius satellite radio channel, a new magazine for younger people called Blueprint, and a line of homes in conjunction with KB Home. In 2006, she published Martha Stewart's Home keeping Handbook, a 744-page guide to all things domestic. Ms. Stewart was working on two TV series just six months after leaving prison. The Apprentice had poor ratings and ended after one year; however, The Martha Stewart Show is entering its third season at this writing. Both the show and Ms. Stewart continue to earn Emmy nominations, as they did before her problems began. Plans for the future include a line of foods to be sold at Costco and an upscale line of home products to be sold exclusively at Macy’s. On a personal note, Ms. Stewart donated $5 million to Mount Sinai School of Medicine in Manhattan as seed money for the Martha Stewart Center for Living, a geriatrics center. Her efforts to find quality health care for her mother led her to fund this center in support of its goals of providing not only comprehensive clinical care but also new treatment approaches. In 2006, Ms. Stewart and Mr. Bacanovic appealed their court convictions, arguing that the prosecutors should have realized that a government witness lied under oath. Both convictions were upheld. MS. Stewart is currently prohibited from serving as a director of a public company. Most observers believe that when that restriction is lifted in 2011, she will return to being chairwoman and CEO of MSO.

Questions for Discussion

What are the ethical issues in this case?

Was Martha Stewart guilty of a serious crime, or was she a scapegoat for other, more serious, CEO Malfeasants who had not yet been brought to justice?

Was the media attention given to the Martha Stewart case excessive? Did this help or hurt her case?

Did Ms. Stewart’s sentence seem appropriate given the magnitude of her offense? Was a prison sentence the appropriate penalty for her offenses?

Reference no: EM132280062

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