Business Ethics Course

Fall 2009/ 2010

Instructor: Dr. Saud Kateb

Assignment: Martha Stewart:

Free Trading or Insider Trading?

Students:

Doaa Ba’amer ID#: 0510296

Doaa Baothman ID#: 0610083

Moudi Al-Ghashyan ID#: 0610125

Roaa Jamjoom ID#: 0810392

Introduction:
 Fraud, lying, conspiracy...not terms that any individual generally wants
associated with their history, nonetheless with their reputation and
personality; especially if that individual happens to be Martha Stewart.
Martha Stewart: a name which almost every person who calls themselves an
American can recognize. Her name pronounces itself across cookbooks,
magazines and even has its own show on Style and The Learning Channel. It
now pronounces itself with yet another captivating theme, as part of one of
America's major scandals.

The high profile nature of the Martha Stewart insider trading case led to
abundant research and writing by academic and media professionals. In this
presentation we seek to discuss the central moral and ethical issues
surrounding the case. In addition, the greater issue of insider trading will be
examined and moral foundations for the issue will be established and
discussed. Finally, the presentation will conclude with a suggestion for the
most consistent ethical approach to insider trading.

• Background:

Martha Stewart owned shares of a company Called ImClone System

Incorporated, which was founded in 1984, it is a biopharmaceutical company
committed to advancing oncology care by developing a portfolio of targeted
biologic treatments designed to address the medical needs of patients with a
variety of cancers. In 2001 ImClone received notification that a new
prescription drug, in which the company poured extensive money into
research and development, would not receive approval by the Food and Drug
Administration. The CEO of ImClone, Sam Waskal, in an effort to avoid
financial losses to his shares of ImClone, made a call to his stock broker to
dump his shares of the company stock. The broker, who also served as a
broker for Martha Stewart, notified Stewart that the CEO was liquidating the

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company stock and that it would be in her financial interest to follow suit by
selling off her own shares of the company, which totaled almost 4,000
shares.

The Securities and Exchange Commission noticed an unusual coincidence

between the selling of mass amounts of shares by the CEO of ImClone and
Martha Stewart and began an investigation to determine if Martha Stewart
was guilty of insider trading.

Insider trading is defined by the SEC as “Illegal insider trading refers

generally to buying or selling a security, in breach of a fiduciary duty or other
relationship of trust and confidence, while in possession of material,
nonpublic information about the security. However, in an interesting legal
technicality, Martha Stewart did not necessarily breach a fiduciary duty to
the other investors, since she had no real obligation to inform other
investors, which would be the case if she were an officer with the company.
It is therefore possible that if Martha Stewart had initially confessed to her
activities that she might not have been convicted of insider trading.
However, that is not the course that Ms. Stewart took. She instead chose to
collude with her broker in an attempt to fabricate a story about how there
was a standing order for Ms. Stewart to sell her shares if the stock price fell
below $60 per share.

This dynamic in the case represents an important ethical distinction in the

decisions made by Ms. Stewart up until this point. When Ms. Stewart initially
received the information about the potential drop in the stock price of the
ImClone stock and subsequently asked her broker to sell her shares, it is
possible that she did not knowingly engage in illegal behavior. While there
might be discussions as to whether or not insider trading is unethical or
should be illegal, the question of whether or not it is ethical to lie to federal
investigators is blatantly illegal and unethical. By conspiring with her broker
to defraud the Securities and Exchange Commission Ms. Stewart knowingly

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engaged in unethical behavior, for which no claim of ignorance would be
credible.

• Guilty of a serious crime:

Martha Stewart was found guilty because of the insider trading action in
ImClone and the cause of defrauding and misleading her shareholders in her
company. To illustrate, she has traded on insider information about the
biotech company ImClone Systems, and by doing so; she avoided a loss of
about $51,000/320,000 by selling nearly 4,000 shares of ImClone stock on
the 27th of December 2001 before the news was broke to the public. On the
day after, the stock tumbled by 60% due to the regulators’ rejection of the
company's application for a key cancer drug (Stewart convicted on all
charges, 2004). Furthermore, Ms. Stewart has sold significant amount of
stocks of Martha Stewart Living Omnimedia Inc. to protect herself and to
avoid losses that would have resulted after the government announced
public charges against her. Shareholders of her company were deceived
since she did not tell them the truth behind the significant amount of the
sell.

Accordingly, Ms. Stewart conducted unethical behavior by conducting

insider trading actions and the misleading of her companies’ shareholders.
She had also continued her unrighteous path by deceiving the government
and misleading them to believe that she had an agreement with her brokers
to sell ImClone stock if it fell below $60. These actions indicate unethical
behavior and define the lack of integrity that made Ms. Stewart strongly
guilty. In addition, we oppose to what was written in Newsweek by Martha’s
retired secretary that “…Martha Steward is not Enron.” Martha’s actions
were similar to what Enron’s CEO and top executives did. They have all

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cashed out their money by selling their stocks before the news broke to the
public.

Martha Stewart is characterized with egoism philosophy, where right or

acceptable behavior defined in terms of consequences to the individual,
maximizing personal interest. Moreover, according to the Cognitive Moral
Development, Kohlberg’s model indicates that Martha was in the second
stage, which is the stage of individual instrumental purpose and exchange,
hence taking the decision of selling her stocks in both companies. To
exemplify, Martha’s action are purely out of selfishness and her thoughts
were aimed to reach one goal: to maximize her own interest. She sold the
stocks to avoid personal losses. She thought that it was fair and acceptable
to avoid personal losses, while she did not bother warn the shareholders
about the upcoming losses. She bluntly did not care about the shareholders
bearing losses as long as she was not losing.

• Martha and the Media:

Martha was attacked by the media from everywhere. T.V. news,
newspapers, radio, etc were all talking about Martha’s case. Numerous fans
and reporters waited for her outside the court where the trial took place. The
mass attack was due to her popularity and fame. As a result, the excessive
media attention has hurt Martha. To illustrate, Martha Stewart Living
Omnimedia Inc stocks have plummeted by 60%. Furthermore, criticism rose
against her as well as the jury were not in her favor. Stewart said, "Dear
Friends: I am obviously distressed by the jury's verdict but I take comfort in
knowing that I have done nothing wrong and that I have the enduring
support of my family and friends. I believe in the fairness of the judicial
system and remain confident that I will ultimately prevail" (Stewart convicted
on all charges, 2004).

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 Although when looking at the big picture; many people think that the
excessive media has hurt Martha negatively, we, on the other hand, think
that it provided benefits to her in the long run. For example, it benefited her
in increasing the level of famousness. Millions of people are now exposed to
her. The increasing level of exposure via watching her T.V. shows and
passing by her products in shops constantly makes people more curious to
know about Martha. People feed on gossip, especially females –which is the
original targeted market for Martha- the more they talk about her, and the
more she is mentioned or attacked by the media; the more people want to
know more about her. The media is helping her profit in an indirect way. An
average person who walks the street and sees a poster of Martha in hand
cuffs will start looking for more information about her, the people who have
never heard of her will start surfing the internet to read her blogs or fan
pages or even decide to buy one of her products. Another scenario would be
watching her T.V shows and getting her recipes, with the effect of the media;
Martha Stewart are gaining new fans every day. Furthermore, with an
informal collaboration with the media; K-mart has chosen to sell Martha
Stewart’s embattled company, and has extended their agreement for two
years.

• Martha’s Sentence:

Insider trading punishments are usually on par with street crime penalties
even though it does not include physical violation actions. The person can be
fined, banned from sitting on the executive or board of directors of a public
company and even jailed depending in the situation. In the case of Martha
Stewart, she was convicted of conspiracy and obstruction of justice in an
insider stock trading case in 2004 and her punishment was five-month jail
sentence, five-month house arrest, two years' probation and a $30,000 fine.

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 Martha Stewart's five-month jail sentence was too lenient. It has been
realized that a celebrity, a wealthy businessperson, or a political leader can
get off more easily and due to their ability to pay the jail-out, they usually do
not get the suffering they should feel an deserve in the prison life, instead
they pay the fine demanded and exchange the small stiff cell bed in jail for a
$10,000 cushion at the privacy and safety of their own home while watching
their favorite T.V show and having an expensive snack. Usually there is a
concern that the justice system may be unfair to the poor who have fewer
resources, therefore, they cannot protect themselves nor defend themselves
like wealthy criminals. Since white collar crime -insider trading- tends to
occur among those of higher socio-economic standing, they can afford a
better lawyer to argue in their defense.

Because she is famous, Martha Stewart was able to get the most lenient
sentence that normal people could not receive it if they were convicted of
the same crime. Usually judges are inflexible and strict with white collar
crimes especially after the multiple financial scandals -such as the case of
Enron and Arthur Anderson- but that did not occur in Martha Stewart’s case.
The judge Miriam Goldman Cedarbaum was sympathetic with Martha since
she helped people outside her family. The judge was not being fair to the
stakeholders in her leniency. Cedabaum respects social responsibility and
since Martha is an active member in the society she based her sentence due
to biased beliefs and an unbalanced practice of law. Being an active member
in the society does not give her the right to commit whatever crime she
desires, and it surely does not give the judge the right to base the case
according to her liking. Equality must be implemented among all and paying
for mistakes should be valued by the same amount for all people regardless
of whether it was a yearly sentence, a large check or community service
hours.

Although Ms. Stewart's punishment was not appropriate because she had
her special treatment, the media coverage affected her company stock value

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negatively leading to huge losses. This affected her badly and that was the
most powerful punishment.

• The Role She Should Play in Her Company:

Research has shown that reputation of the CEO and top management is
linked to the reputation of the firm which is a key factor that promotes
investors' confidence and customers' trust in the firm. If reputation is
damaged by ethical misconduct; solving the problem will be difficult and will
take a long time to stabilize. As a result, Martha Stewart should be kept away
from playing any critical role in her company. After the case is settled and all
losses caused by Martha are recovered and the reputation of the company
re-elevates from its tarnished image, Martha should be put under probation
from managing the company. Unfortunately for the company and the
shareholders; since Martha is the face of the company and is the main
source of profit for the company (before the scandal), it is crucial that Martha
remains a part of the company.

That does not mean she should continue in her old position, this only
means that Martha will not be laid-off the company. She will be the face of
the company without actual managing of business affairs. In addition to
being a simple picture on the cover of her book or magazine, she is required
to finish a certain amount of hours in community service and helping the
ones in need or doing some form of extracurricular activities that would add
to the value of the company which was lost with its bad image.

Unfortunately for her, gaining the audience and the fans after losing them
is much tougher than gaining them the first time, so repairing the image will
take a long time. When the state of the company increases to the level it
sustained before the scandal or even if it increases more than that of the
previous state; Martha should be given a level of "monitored" authority to

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manage a sector of the company and to have a moderate say in its
operations.

• Martha’s present life:

After her release from prison in March 2005, Stewart launched a highly
publicized comeback, and was once again involved in Martha Stewart Living.
In addition to that, offerings of her company's Martha Stewart Everyday line
at Kmart were expanded to include a new line of ready-made home
furnishings, and its mass market interior paint line became available at
larger Sears stores. However, the most heavily publicized and promoted
aspect of her comeback was day time television, The Martha Stewart
Show which she returned to hosting. She also appeared in an adapted
version of The Apprentice also known as (The Apprentice: Martha Stewart).
Both shows were premiered in September 2005, and The Martha Stewart
Show is currently in its fifth season, in contrast to her other show, The
Apprentice which only lasted for one season due to the received poor ratings
during its conclusion; that did not encourage Martha to continue with
another season.

In the reading field, Stewart released a new book called The Martha
Rules on starting and managing a new business, and a month later her
company released Martha Stewart Baking Handbook, both of these books
were released in 2005. After a year from releasing The Martha Rules, she
released her own Home keeping Handbook, a reference book about looking
after your house. She also is a regular contributor of cooking, gardening, and
crafts segments on NBC's Today show. In the awards field; Stewart's daily
talk show was nominated in six categories for the 33rd Annual Daytime
Emmy Awards in 2006, including Best Host and Best Show.

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 With her increasing number of fans in various fields of the business sector,
MSLO was encouraged to launch a line of houses that carry her name to be
built by KB Home initially in Cary, North Carolina and various other locations
nationwide. Those homes started to finalize its buildings early 2006, the plan
was set according to 650 homes and were planned to be sold for prices
ranged $200,000 to $400,000. A line of paper-based crafts for EK Success is
also in development. In September 2007, she launched an upscale line of
home wares for Macy's, which is the largest brand launch in Macy's history
putting in mind that Stewart has designed more than 2,000 items exclusively
for Macy's.

In addition to television and merchandising and to add to the income of

publicity and by using creative ways to target potential employees Stewart
made a special appearance on the comedy-drama series Ugly Betty.
Moreover, MSLO launched a 24-hour satellite radio channel with Sirius in
November 2005, on which Stewart currently hosts a weekly call-in show. In
July 2008, Craft items under the names "Martha Stewart Celebrate" and
"Martha Stewart Create", two divisions of Martha Stewart Living Omnimedia,
premiered in Wal-Mart stores which increased the income level of Wal-Mart
highly in addition to providing sky high profits for Martha –due to the huge
number of customers entering Wal-Mart daily-. The deal came about in part
due to the closing of more than 600 K-Mart stores in the U.S.

Her conviction made her face big challenges and since she overcame
these challenges her success rate has been increasing rapidly in during the
last period. Even though a few years back her Moral compass was set to
head for the opposite way –that’s when her only exit out of embarrassing
and pathetic situations was by lying and deceiving- but when her morals
were improved and her ethical standards leveled up a notch, that is when

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she managed to get out of the difficult times, healed her wounds, regained
her fans, paid her fines and recovered her position bravely and rapidly.

References:

• Ferrell, , Fraedrich, , & Ferrel, . (2009). Business ethics: ethical

decision making and cases. South-Western College Pub.

• Martha Stewart. Retrieved From

http://en.wikipedia.org/wiki/Martha_Stewart

• Shabana, km. Martha Stewart: free trading or insider information

• Stewart convicted on all charges. (2004). Retrieved from

http://money.cnn.com/2004/03/05/news/companies/martha_verdict/

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