According to Hays (2003), the case and disposition against Martha Stewart became one of the highest-profile insider trading scandals in respect to the attention it attracted from different stakeholders including stock trading partners, the federal government, and the media. The case, involving ImClone, a drug manufacturing company to which Stewart was a stakeholder, saw a number of legal charges brought against its top officials and stakeholders for engagement in insider trading and securities fraud among other illegal financial activities. Blodget (2016) posited that the ambiguity surrounding the determination and penal aspects of being proven guilty or innocent added to the high profile of the case. A study by Stewart (2011) examining the role of false statements in impeding justice in the American legal system posited that the embroilment of Martha Stewart, the founder of Martha Stewart Living Omnimedia, in the scandal came in the wake of a tip of the potential drop in ImClone stock prices from their broker Peter Bacanovic. The developments that followed the insider trading conspiracy by different stakeholders at ImClone not only brought to light the corrupt culture in organizational dealings in the US, but also resulted to indictment of Stewart and plunged ImClone into financial and managerial crises from which it never recovered until its acquisition.
The Stewart case highlighted the egregious practices of some of the top executives in leading organizations in relation to their dealings in trading of shares. Though Stewart became the center of attention in the case, what triggered the developments that led to the prosecutions can be argued as a common occurrence involving egocentric stakeholders seeking to maximize profits at the expense of others. According to Stewart (2011), the engagement of ImClone top officials and stakeholders in fraudulent insider trading preceded the projected drop in the company’s share prices in 2001, which came to pass, following the expected failure of Erbitux, a colon cancer drug, to get approval of the Food and Drug Administration. Chief officials at the company instructed their associates and relatives to sell their shares, and Martha Stewart was implicated for the selling of shares estimated to be worth $230,000 in December of 2001, just before the announcement of the decision by the FDA. The events that followed led to issuance of false statements by those implicated as a means of covering up their involvement, and further investigation into the case resulted to prosecution of offenders, among them Stewart on different charges including conspiracy to commit insider trading, bank fraud, securities fraud, perjury, and obstruction of justice, though the implication for each individual varied.
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Impact of the Case on Martha Stewart
From the case US v. Stewart , 433 F.3d 273 (2d Cir. 2006), Stewart and Peter Bacanovic were charged for offenses that were an outcome of their communications with personnel from the US Security Exchange Commission (SEC), Justice Department, and the Federal Bureau of Investigation, investigating the trading activities of ImClone stock. According to Hays (2003) and Scannel and Rose (2004), Stewart was found guilty of all charges preferred against them. The verdict by a federal Manhattan jury that indicted Stewart was considered the biggest win for the federal government in the fight against white-collar crime (Scannel & Rose, 2004). Stewart was found guilty of obstructing justice through by providing false statements, which was a reprieve for them because they were acquitted of other charges of conspiracy and insider trading.
According to the SEC (2016), insider trading can both be legal and illegal depending on the approach taken by the accused. Illegal insider trading refers to the buying and selling of securities through process that breach fiduciary duty or relationship founded on trust and confidence, following possession of non-public information on securities. Based on the definition, Martha Stewart can be categorized under friends and business associates of the “tippers” who traded securities after receipt of such information, or persons misappropriating and taking advantage of confidential information from their employers. Seitzinger (2002) posited that the Securities Exchange Act of 1934 is specifically designed to encourage such dealings. However, while other officials at ImClone were found guilty of insider trading, such was not the case with Stewart because legal authorities could not prove that they were in possession of such confidential information before the decision to sell their shares at ImClone. However, the indictment on charges of falsification and obstruction of justice had adverse implications for them.
Martha Stewart was affected by the case in a number of ways. Stewart’s reputation as a founder of Martha Stewart Living Omnimedia, a media and merchandising company, took a major blow. Hays (2003) posited that during the commencement of the case, the United States attorney for the Southern District of New York, said, ''This criminal case is about lying, … lying to the F.B.I., lying to the S.E.C., lying to investors.'' … ''Martha Stewart is being prosecuted not for who she is, but because of what she did.'' However, one can argue that intent in the words of the attorney is clear, and Stewart was used as an oedipal scapegoat in the fight against white-collar crime that has time and again proven authorities ineffectiveness. This argument is corroborated in a law review by Moohr (2006), which posited that the case served as a reflection of the need to for review and analysis of the existing federal and criminal laws against white collar crime and their enforcement.
However, the case also had negative effects on Stewart at a personal and career level. In the case the US v. Stewart , it was posited that upon revelation of the Stewart potential involvement in insider trading of ImClone shares following congressional investigations into the FDA decision not to approve Erbitux, the shares of Martha Stewart Living Omnimedia company declined, subsequently leading to decline in the net worth of it founder. Consequently, Stewart was faced with a dual battle – fighting off the charges brought against them, and defending the decline in Martha Stewart Living Omnimedia share prices, brought by the erosion in investors’ trust and confidence, through public statements. Scannel and Rose (2004) also reported that Martha Stewart Living Magazine experienced decline in consumer interest forcing the reduction in its circulation from 2.3 million to 1.8 million. The future of these companies and product lines remain uncertain. The indictment finally broke Stewart, forcing their resignation as a chairperson and executive of Martha Stewart Living Omnimedia, though they retained their position as a director (Hays, 2003). Scannel and Rose (2004) posited that the SEC could also instigate charges to bar Stewart from holding office or directing any public company. The confession by Stewart of their unpreparedness for the trial bespoke volumes of the developments to come. According to Hays (2003), Stewart was sentenced in July 2004 to 5 months in prison and home confinement a piece, and placed on two-year probation for falsifying statements. It is important to recognize that the implications of the case for Stewart and ImClone are not intertwined as evidenced by the differences in the fates of the two.
Implications for ImClone Company
According to Seitzinger (2002) insider trading attracts both civil and criminal penalties conferred by the SEC and Justice Department respectively. The variation in penalties depends on the statutes the offender is found guilty of. For instance, the civil penalty for securities transactions done in light of information not in the public domain can attract a penalty of up to three times the financial benefits accrued. Willful violation of other antifraud securities statutes can attract penalties of up to $5 million or 20 years’ imprisonment for individual and organizations, and $25 million for organizations. Such is the predicament of the top officials of ImClone who based on guidelines by USSEC (2003), illegally traded the company’s securities after learning of a major, confidential corporate development – the eminent FDA decision to not to approve the company’s major drug, Erbitux – that could potentially result to a decline in the company’s stock prices. Though the actions of ImClone top officials and stakeholders did not cause the decline in share prices (the FDA decision did), they exacerbated the situation and set in motion events that would affect the ImClone adversely.
According to Stewart (2011), ImClone as the central entity in the case, experienced a sharp drop in its stock prices following the announcement of the FDA decision in relation to the drug Erbitux in 2001. Stewart (2011) posited that ImClone executives and their close relatives made millions from insider trading of the securities, which plunged the company into a financial crisis. The charges brought against these officials piled pressure on ImClone as investors lost trust and confidence in its management, leading to a further drop in stock prices. According to Stewart (2011), the subsequent congressional inquiry in the operations of ImClone revealed a corrupt culture among organizational echelons and in addition to the indictments and conviction of some, the company was thrown into managerial disarray. The investigations brought to light numerous fraudulent acts including forgery for financial by ImClone CEO Waksal, the never concluded internal investigation by the company on the same, failure to report such practices to relevant authorities, and lack of action to have Waksal removed from the position of CEO. These developments were the key ingredients in the company’s stock prices plummeting.
In 2004, the Erbitux drug was approved by the FDA following new clinical trial by ImClone partner, Merck KGaA, but the damage had already been done because competitors were a head in the market with variants of the same. Initially, following the revelations of the insider trading scandal, Bristol-Meyers Squibb Company committed $2 billion for acquisition of 20% of ImClone stock based on the potential of Erbitux as a blockbuster drug. However, when the directors of ImClone put up the company for sale in January of 2006, they failed to attract any buyers and the sale was withdrawn mid the same year. It was not until April in 2009 that ImClone was acquired by Eli Lilly and Company for an estimated total of $6.8 billion. These developments are evidence that the company never recovered from the scandal, and had to be sold as a subsidiary to a major competitor to regain the trust and confidence of investors through new and fresh management.
Conclusion
The case of Martha Stewart brought to light a number of issues related to corporate culture of corruption, and the inadequacy in insider trading laws and legal frameworks. The acquittal of Stewart on charges of insider trading and indictment on providing false statement and obstruction of justice is evidence of the desperation by law enforcement apparatus to use Stewart as an example to deter other potential offenders. Nevertheless, the implications of the case for Stewart and ImClone were immense. Evidence suggests that Stewart faced negative publicity that tarnished their personality and reputation leading to their resignation from Martha Stewart Living Omnimedia, and decline in stock performance of their respective assets and total worth. Conviction to imprisonment and house confinement was also a psychological blow to Stewart. On the other hand, ImClone experienced a decline in share prices and the indictment of its top executives caused enormous loss of investor trust and confidence, a situation from which the company never came out of, leading to its acquisition in 2009.
References
Blodget, H. (2016). The charges against Martha. Slate Magazine . Retrieved 30 November 2016, from: http://www.slate.com/articles/business/dispatches_from_the_martha_stewart_trial/features/2003/_2/the_charges_against_martha.html.
Hays, C. (2003). Prosecuting Martha Stewart: The overview; Martha Stewart Indicted by U.S. On Obstruction. New York Times . Retrieved 30 November 2016, from: http://www.nytimes.com/2003/06/05/business/prosecuting-martha-stewart-overview-martha-stewart-indicted-us-obstruction.html.
Moohr, G. S. (2006). What the Martha Stewart Case Tells Us About White Collar Crime. Houston Law Review , 43 , 592.
Scannel, K., & Rose, M. (March 2004). Martha Stewart Is Found Guilty of All Charges. The Wall Street Journal. Retrieved 1 December 2016 from: http://www.wsj.com/articles/SB107833235519345426.
Seitzinger, M. V. (2002, January). Federal Securities Law: Insider Trading. CRS Report for Congress. Retrieved 1 December 2016 from: http://www. iwar. org. uk/news-archive/crs/8043. pdf.
Stewart, J. (2011). Tangled webs: How false statements are undermining America: From Martha Stewart to Bernie Madoff. New York City: Penguin Press. ISBN 9781594202698.
U.S. Securities and Exchange Commission. (January 2013). Insider trading. Retrieved 1 December 2016 from: https://www.sec.gov/answers/insider.htm.
US v. Stewart , 433 F.3d 273 (2d Cir. 2006).
