Vega 1

Dr. Bob Vega

BUS 5304

Business Ethics

Case 7

Winter, 06

Martha Stewart Case Study: Brand in Crisis

Case Study

Martha Stewart was born Martha Helen Kostyra on August 3, 1941, in Nutley,

New Jersey, in a Polish American family with six children. Within this large family, she

developed a passion for cooking, gardening, and homemaking. She learned the science

of canning and preserving, and basics of cooking, baking and sewing from her mother.

Her neighbors, who were retired bakers, helped her polish her baking skills. Meanwhile,

she earned her pocket money by organizing birthday parties for neighboring children.

These skills were to stand her in good stead in her later career as a lifestyle expert.

Stewart worked her way through college as a model. She graduated with

bachelor’s degree in architectural history from Barnard College, working as a model to

pay for her tuition. She married during her sophomore year in college. After college she

worked as a successful stockbroker. Most people would believe that she would surely

know, as a former stock, broker the dangers of becoming involved in an insider trader

scam in which she stood to lose much more than she ever gained.

A timeline of relevant events in the Martha Stewart stock trading scandal:

• Dec. 26, 2001: ImClone Systems Inc. founder Sam Waksal is tipped that the Food
and Drug Administration will decline to review the company's application for its
cancer drug Erbitux, then tips his daughter to sell her ImClone stock and tries to
sell his own.
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• Dec. 27, 2001: Martha Stewart sells all 3,928 shares of ImClone that she owns.
Prosecutors later contend she was tipped that Waksal was trying to sell his
shares.

• Dec. 28, 2001: The FDA makes its decision public. On Dec. 31, the first trading
day after the news, ImClone drops 18 percent.

• Jan. 7, 2002: Stewart's broker, Peter Bacanovic, tells Securities and Exchange
Commission attorneys that he and Stewart had agreed on Dec. 20, 2001, to sell
ImClone if it fell to $60.

• Feb. 4, 2002: Stewart tells the SEC, federal prosecutors and the FBI that she had
an agreement with Bacanovic to sell the stock when it fell to $60 per share.

• June 12, 2002: Waksal is arrested and charged with insider trading. Stewart issues
a statement repeating her assertion the sale came about because of the $60
agreement.

• Oct. 2, 2002: Former Merrill Lynch & Co. assistant Douglas Faneuil pleads guilty
to taking a payoff to keep quiet about the Stewart stock trade.

• June 4, 2003: Stewart and Bacanovic are indicted on nine federal counts. Stewart
resigns as chairwoman and CEO of her company but remains chief creative
officer and a board member.

• June 10, 2003: Waksal is sentenced to more than seven years in prison.

• Nov. 7, 2003: Stewart tells ABC News she is scared of prison and adds, "I don't
think I will be going to prison, though."

• Jan. 27, 2004: Prosecutor claims in opening statements that Stewart sold ImClone
stock based on a "secret tip," then lied to cover it up. Stewart's attorney compares
case with the Big Brother novel "1984."

• Feb. 3-4, 2004: Faneuil testifies that Bacanovic ordered him to tell Stewart that
Waksal was selling stock. Faneuil claims Bacanovic pressured him repeatedly to
cover it up.

• Feb. 10, 2004: Stewart assistant Ann Armstrong testifies that Stewart personally
altered log of a message Bacanovic left on the day Stewart sold ImClone. But
Armstrong also says Stewart ordered the message changed back and never asked
her to lie.

• Feb. 27, 2004: Judge throws out securities fraud count against Stewart.

• March 5, 2004: Stewart convicted on all charges; Bacanovic convicted on all but
one charge, falsifying a document.
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• March 15, 2004: Stewart resigns from board of Martha Stewart Living
Omnimedia Inc. but retains the title of founding editorial director.

• May 18: Producers of "Martha Stewart Living" say TV show will be suspended
after the current season.

• July 8, 2004: Judge refuses to grant Stewart and Bacanovic a new trial based on
perjury charges against Larry Stewart, a Secret Service ink expert who
prosecutors say lied on the witness stand at Stewart's trial; he was later acquitted.

• July 16, 2004: Martha Stewart and Bacanovic each sentenced to five months in
prison and five months of home confinement for lying about a stock sale.

• Sept. 15, 2004: Stewart announces she asked the judge to vacate the stay on her
sentence so she can begin her prison sentence "as soon as possible" and "put this
nightmare behind me."

• Oct. 8, 2004: As federal inmate No. 55170-054, Stewart enters the Alderson
Federal Prison Camp in rural West Virginia and is fingerprinted and strip-
searched.

• Dec. 8, 2004: Stewart's company says it will revive her daily homemaking show
before a live audience, with celebrity guests and the help of "The Apprentice"
producer Mark Burnett.

• Dec. 22, 2004: In a Christmas message posted on her personal Web site, Stewart
calls for sentencing reform and criticizes prison food.

• Feb. 2, 2005: NBC announces plans for "The Apprentice: Martha Stewart," the
second TV project announced for Stewart while still in prison.

• March 4, 2005: Saying in a statement "there is no place like home," Stewart jets
to her estate in suburban New York to serve five months of home detention.
(Timeline, 2005)

The Imclone Controversy

On December 27, 2001, Stewart sold 3,928 shares of Imclone, which was headed

by Stewart's friend Sam Waksal (Waksal). It would have been a routine transaction had it

not been made just a day before the US Food and Drug Administration (FDA) refused

approval for Erbitux, a drug developed by the company to combat colorectal cancer.

Later investigations found out that Peter Bacanovic (Bacanovic), Stewart's broker

at Merrill Lynch was also the broker for Imclone's CEO, Waksal and his two daughters.
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Bacanovic called Stewart on December 27, 2001 to tell her that he thought "Imclone is

going to start trading down." Stewart was then on her way to Mexico on her corporate jet

and did not immediately receive the call. She was said to have called Bacanovic back,

and when he told her about Imclone, to have advised him to sell the shares. The shares

were eventually sold for $58 making Stewart about $228,000.

The Trial and Imprisonment

The case went on trial in January 2004, after a long and cumbersome process of

selecting neutral jurors. Apparently, Stewart's celebrity was such that it was difficult to

find impartial jurors. Most of the American public was divided into two distinct camps -

Martha fans and Martha haters.

At the start of the trial US District Judge Miriam Goldman Cederbaum cancelled

the charges related to securities fraud, which she thought were not strong enough to be

tried. Stewart was eventually tried on four counts - conspiracy, obstruction of justice and

two instances of making false statements. In essence, she was charged with lying to

government investigators about what she was not guilty of in the first place - insider

trading and securities fraud.

Discussion Questions

1. Stewart repeatedly denied any wrongdoing, despite the conviction and failed appeal,
yet she still says she did nothing wrong. Is this the right strategy?

One could say that it is unclear as to whether Martha Stewart actually received a call
from Mr. Faneuil giving her a tip to sell ImClone. However, the case study is based
on the assumption that the testimony of Mr. Faneuil in court, where he says that he
did in fact call her, is true. There are other moral issues involved that deal with the
actions of the CEO and how brokerage firms are to handle their client’s money. Yet,
according to Martha Stewart and her broker, Mr. Baconovic, they had a pre-arranged
agreement to sell her stock if the price went below sixty dollars. The evidence
against Martha refuted this claim.
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Experts say that Martha Steward’s strategy was not a good one:
• First, Martha Stewart never accepted full responsibility for her offensive
conduct. Second, cooperating with the government would have reduced the
sentencing range back down to 21-27 months even if she had received the
organizer/leader upward adjustment in her sentencing.

• Stewart's biggest mistake was not to plead guilty in exchange for a shorter
sentence, shortly after she was indicted in June 2003

• Stewarts Next mistake was failing to admit responsibility Even after

conviction Stewart still isn't accepting responsibility for what she did. Indeed,
her response has been just the contrary. Immediately after the guilty verdicts
came down, Stewart posted the following statement on her website
www.marthatalks.com: "I am obviously distressed by the jury's verdict but I
continue to take comfort in knowing that I have done nothing wrong and that I
have the enduring support of my family and friends." (Emphasis added.)

2. Did Stewart’s actions justify the subsequent sentence to her and those around her?

• Absolutely, as stated above, although the security charges were dropped. The
issue is that she lied to government investigators.

3. Compare other executives from what happened at companies such as Eron and Tyco.

• I do not believe Martha Stewart’s case compares to the Enron and Tyco cases.
• Martha Stewart’s charges had nothing to do with her own company
Omnimedia Inc.
• The subsequent demise of Martha Stewart’s company, Omnimedia Inc. was
due to the fact that they failed to anticipate the dangers of centering a
company on a person who comes to represent its brand.
• Fortunately, for Omnimedia’s long term stock holders, she was able to turn
the company around after her released from prison.

Works Cited

Allenbaugh, M. (2003, June 6). CNN.com - If Martha Stewart pleads guilty, what
sentence might she receive? - Jun. 9, 2003. Retrieved February 10, 2009, from
http://www.cnn.com/2003/LAW/06/09/findlaw.analysis.allenbaugh.stewart/inde
x.html

Allenbaugh, M. H. (2004, March 10). FindLaw's Writ - Allenbaugh: How Much Time
Will Martha Stewart Do? Retrieved February 11, 2009, from
http://writ.news.findlaw.com/allenbaugh/20040310.html

Ferrell, O.C., Fraedrich, J., & L. Ferrell (2008). Business ethics: Ethical decision-making
and cases. 7th edition, Houghton Mifflin Co: New York.
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Timeline of Events in Stewart Stock Scandal - Los Angeles Times. (2005, March 5).
Retrieved February 8, 2009, from
http://www.latimes.com/business/investing/wire/sns-ap-martha-stewart-
chronology,1,4785777.story.