Martha Stewart

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.

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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, 292, a loss of $49,708. Also the trading of Martha Stewart’s shares occurred during the company’s blackout period which commenced on December 21st.

At this time no shares from the company were permitted to occur and the stockbrokers at Merrill Lynch would have known that and should have advised their clients accordingly. It is our belief that prosecutors might consciously have had additional motives for pursuing the case. Martha Stewart a celebrity of high profile would sell newspapers if investigated and later indicted. A prosecutor who was able to make a strong, believable case would bring fame to himself/herself and possibly new job opportunities.

3. Do you agree with the jury that she was guilty beyond a reasonable doubt of the conspiracy and obstruction of justice charges? We agree with the jury that Martha Stewart was guilty beyond a reasonable doubt of the conspiracy and obstruction of justice charges. To establish a reasonable doubt of conspiracy, four main things must occur:

a) Two or more persons in some way or manner, coming to a mutual understanding, in trying to accomplish a common and unlawful plan as charged in the indictment. An example of this includes the breakfast meeting between Martha Stewart and Peter Bacanovic on January 16th - after the sale of the shares - to construct a statement that they reproduced to the criminal authorities – that is, that Martha had agreed to sell her shares if the share price fell below $60.00 per share. Another example was illustrated when Douglas Faneuil was persuaded by his boss (Peter Bacanovic) to agree to the conspiracy constructed by his boss that there was a $60 stop-loss order on Martha Stewart’s ImClone shares.

b) The person willfully became a member of such a conspiracy. Mr. Fanueil accepted a bribe from his boss (Peter Bacanovic) in the form of an extra week of vacation and a paid trip, so that he would not reveal the fact that Martha Stewart had been tipped off. Fanueil’s actions were acts of choice.

c) That one of the conspirators during the existence of the conspiracy knowingly committed at least one of the methods (or overt act) described in the indictment. Bacanovic and Stewart repeatedly lied to the government agencies and attorneys in order to try to hamper the investigations. Bacanovic tampered the worksheet by adding “@60” near the entry for Stewart’s shares of Imclone.

d) That such ‘overt act’ was a knowingly committed act done in order to carry out or accomplish some object of the conspiracy. Justification of this was seen when Bacanovic informed Faneuil that he must call Stewart to inform her of the Waksal’s actions. He decided to leave the message with Stewart’s administrative assistant in order for her to receive the message to allow her to carry out or give instructions on what actions to take. Faneuil had asked Bacanovic if he was allowed to tell Stewart and he stated “Of course that’s the whole point” On realizing what the written policy inside of the office stated he was very worried. Obstruction of justice is a crime.

It is an offense that arises when someone tries to prevent, impede or influence the administration of justice, for example, bribing a juror, threatening a judge or encouraging false testimony. Obstruction of justice occurred when Stewart and Mr. Bacanovic conspired and continuously lied about the reason why Stewart sold her shares in an effort to hamper investigations. One such lie was the prearranged plan to sell Stewart’s shares if the price fell below $60 per share.

4. Was her punishment, including both imprisonment and fines appropriate? Were the punishment of Peter Bacanovic and Douglas Faneuil appropriate? We agree that the punishment imposed on Martha Stewart was a little too lenient. Due to her actions after being tipped off, she was able to make a profit of approximately $50,000, thus a fine of $30,000 still meant that she was gaining approximately $20,000. We believe that all of her profits should have been disgorged as compared to her wealth the amount is relatively small anyway.

The imprisonment of five months imprisonment and then five months of home confinement, we believe was a suitable length of time. The relinquishing of her duties to act as an officer of a public company did not do her any damage as she still drew the same salary as she was accustomed to and even had a bonus. In her after-sentencing statement, she said that this had been no more than a personal matter that had been blown out of proportion; this in itself indicates that she was not remorseful about her actions. Whether these punishments were a deterrent for future action is questionable as Martha Stewart still violated the terms of her house arrest and this had to be subsequently extended for three weeks. We think that the punishments imposed on both Peter Bacanovic and Douglas Faneuil were inappropriate.

First we look at Douglas Faneuil. Although he was following the instructions of his boss, he knew what he was told to do was wrong. He knew there was a displayed, written office policy with respect to client information privacy. He accepted a bribe from Mr. Bacanovic and waited approximately seven months after the incident before coming forward with the truth. A short term of imprisonment at a minimum security facility might have been added. With respect to Mr. Bacanovic, his penalties should have been harsher. His position at Merrill Lynch afforded him access to certain non-public information and as such his actions should have been within the law.

He disregarded the policies of the company with respect to confidentiality, he also used his position to influence and bribe another employee of the company to comply with a conspiracy in the commitment of insider trading and he also conspired with his client Martha, to concoct an alibi to avoid prosecution by the government. He should have been given a heavier fine since he was the main person behind the scandal and had gained commission on the sale of both the Waksal and the Stewart shares. Also a longer term of imprisonment would have been fitting, maybe a term of two years.

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