Martha Stewart copy - Grade: A PDF

Preview

Summary

Martha Stuart insider trading scandal...

Description

Case Report # 1 – Martha Stewart: Insider Trader?

Introduction:

The purpose of this case report is to analyze the legal and ethical issues in the Martha Stewart case. I will define Business Law and Business Ethics and I will define and apply Utilitarian, Kantian, and Virtue ethics to this case. I will come to a conclusion and make recommendations.

Facts: On December 27, 2001, Martha Stewart sold her stake in the biotech company ImClone. Two days later, the company’s stock dropped 16 percent when the Food and Drug Administration said it had rejected the ImClone’s main drug, Erbitux, for cancer treatment. Stewart had owned 3,928 shares of ImClone. By selling just before the FDA’s announcement, she avoided losses of approximately $46,000, a tiny fraction of her net worth, which Forbes had estimated at $700 million just six months earlier. Stewart was not the only ImClone investor who avoided losses ahead of the FDA’s decision. On the

same day she placed her trade, ImClone’s Chief Executive Officer Sam Waskal and his daughter asked their broker to sell all their ImClone share held at Merrill Lynch, which were worth more than $7.3 million. Merrill Lynch sold the stock of the daughter for approximately $2.5 million but declined to sell Sam Waksal’s shares, citing concern about insider trading. Waksal’s father also sold shares worth more than $8 million, and smaller shares were sold by Waksal’s other daughter and sister. For regulators, catching Waksal for insider trading was simple. A CEO and his family selling a large block of the company’s stock just days before a significant regulatory announcement is an obvious red flag. Waksal himself said later in an interview with “Dateline” that his case was easy and that “the Securities and Exchange Commission had me.” Stewart’s case was more tricky. She had made a timely sale, but that wasn’t enough to accuse her of insider trading. To prove that she committed inside trading, the government would have to show that Stewart traded while in possession of information that was nonpublic and material – something that is not widely known and that a regular investor would consider important in making a decision about a trade. Stewart was a friend of Waksal, which could have meant he had told her about the FDA’s decision and that she had sold her stock based on that information. But Waksal hadn’t told her about the decision. He hadn’t spoken to Stewart at all that day. Stewart and Waksal had the same broker at Merrill Lynch, Peter Bacanovic. Although neither Bacanovic nor his assistant, Doug Faneuil, knew about the Erbitux deci-

sion, both knew that Waksal was trying to dump his stock. And they warned Stewart about it. That Stewart knew Waksal was selling his stock but not the reason behind the sale complicated this case. Knowing about the FDA decision would qualify as nonpublic and material. Just knowing the CEO was trying to sell $8 million worth of his shares was nonpublic information and would have made a difference to an ordinary investor. Stewart did not have a duty to refrain from trading on the information in question. She wasn’t on the Imclone board of directors and had no official ties to other insiders like Waksal. It is a clear indication that there was no breach of fiduciary duty in this situation. She had merely traded on a tip. However, she knew Bacanovic had breached his duty as a broker when he told her about Waksal’s trades. When questioned by the SEC and the FBI in the months following her trade, Stewart said she had no knowledge of Waksal’s trade and that she had sold on a standing agreement with her broker to sell if shares traded below $60. Bacanovic confirmed the story, but his assistant Faneuil eventually came forward and revealed the truth, furthering the case against Stewart. Later, Stewart’s own assistant testified that Stewart had tried to change a record of Bacanovic’s phone message to her about ImClone. A longtime friend of Stewart, Pasternak testified that Stewart confided her on Dec. 30, 2001, that she knew Waksal was trying to dump ImClone shares. She claimed Stewart added:‘’Isn't it nice to have brokers who tell you those things?’’

The nuances in Stewart’s case ultimately drove the government to back down from charging her with insider trading. Instead, it focused its case on the lies she told to cover the trade. On the day the insider trading scandal broke, however, Stewart barely responded to the accusations, leaving the media and public left to their own interpretations. The absence of communication suggested that she had something to hide. To the jury in Stewart’s trial, it seemed clear she had lied. They made the case that Stewart knew she was doing something wrong. First, long before she became America’s most famous homemaker, Stewart had been a broker herself, so she knew Bacanovic couldn’t inform her about what his other clients were doing. Second, she would not have had a reason to lie if she thought it was a fair trade. Third, Stewart’s boast to her friend Pasternak is a clear sign that she was comfortable reaping the benefits that fame and money got her, even if she was indulging in unethical acts to protect her investments. Martha Stewart had a lot of knowledge on the ethics surrounding trading of stock being a CEO of a publicly traded company, but her ideal concerns were the potential losses she would have incurred as a result of a decline in share price. She thought that it was fair and acceptable to avoid personal losses, while she did not bother to warn the shareholders about the upcoming losses. Martha’s actions had a grave impact on the company’s market share causing losses to other investors in the ImClone company. She bluntly did not care about the shareholders bearing losses as long as she was not a part of the imminent demise.

Martha Stewart did commit insider trading, since she possessed material information about the company's financial instability in addition to being deceptive to authorities of what knowledge she was given; continuously fabricating a story that they had had a pre-existing agreement to sell shares if the stock price fell to $60. Her actions can be analyzed through egoism philosophy where right or acceptable behavior defined in terms of consequences to the individual, regarding maximizing self-interest. She thought that it was fair and acceptable to avoid personal losses, while she did not bother to warn the shareholders about the upcoming losses. Having defined the three ethical theories earlier, it’s evident that Martha Stewart didn’t respect all three of them. By maximizing her self-interest, avoiding losses, and not bothering to warn the shareholders about the upcoming losses, she definitely did not promote the greatest happiness to the greatest number of people encouraged in the Utilitarian theory. She even harmed shareholders of her own company as the stock price plummeted after the scandal since virtually every product her company made had her name on it. The net loss in profit in 2003 was $2.7million as compared to 2002 when there was a profit of $7.2 million.

References: • Eichenwald, K. (2003, June 5). Prosecuting Martha Stewart: Prosecutors have reasons for stalking celebrities. The New York Times, p. C4. • Fournier, S. (2004). Marta Stewart and the ImClone scandal....