Transcript Martha Stewart Allegations of Insider and Far Reaching Effects

Allegations of Insider Trading
A Notre Dame case study produced by research
assistants Arianne Westby and Mary Moulton under the
direction of Professor J. S. O’Rourke, IV
Case Overview
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Martha Stewart
Key Players
Timeline of Events
Martha’s Three Investigations
Cooperating Witnesses
The Problem
Critical Issues & Key Lessons
Possible Solution
The Many Faces of Martha…
Martha Stewart
Martha: The Person
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Born Martha Helen Kostyra in
Jersey City, New Jersey.
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Worked her way through
Barnard College as a maid and
fashion model.
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Married a Yale-educated
lawyer, Andy Stewart.
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Certified Series-7 stockbroker
on Wall Street.
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Became full-time mother and
Westport, Connecticut hostess.
Martha: The Professional
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Chairman, CEO and icon of
Martha Stewart Living Omnimedia.
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In 1991, received nearly $2.7
million Martha in salary and
bonuses.
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"America's 25 Most Influential
People" in Time Magazine’s June
1996 issue.
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Owns all Class B shares with sole
voting rights.
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Named to the Board of Directors
of the NYSE in June of 2001.
Martha: The Company
Martha Stewart Living Omnimedia Inc. (MSO)
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Took the company public in 1999 under the guidance of Peter Bacanovic.
Leading creator of "how to" content and related products.
In 2001, valued at $295 million with $21.9 million in profit.
Leverages the “Martha Stewart” brand name across a broad range of
media and retail outlets.
Martha: The Company
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Four core magazines.
Emmy award-winning domestic arts
television program.
Weekly segment on CBS “This
Morning.”
34 books, sold over 10 million copies.
Key Player: Dr. Samuel Waksal
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Co-founder and former CEO of
ImClone, a biotech firm seeking
approval for a promising new cancer
drug named Erbitux.
Reportedly dated Martha Stewart’s
daughter, Alexis, several years ago.
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Martha and Waksal became friends.
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Purchased shares in Martha Stewart
Living Omnimedia when it went
public.
Key Player: Peter Bacanovic
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Worked at ImClone for two years as
a Marketing Director in the early
1990s.
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Obtained a position as a broker at
Merrill Lynch in 1993.
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Handled $10 million in shares sold to
Stewart’s friends and family when
her company, Martha Stewart Living
Omnimedia, went public in 1999.
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Clients include some of New York’s
social elite, such as members of the
Waksal family.
Key Player: Douglas Faneuil
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Assistant to Bacanovic at Merrill Lynch.
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A recent graduate of Vassar College.
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Both Bacanovic and Faneuil are said to
be well received in the social circles of
New York City.
Other Players with Key Roles
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Harlan Waksal, Sam’s younger brother, who also purchased shares
in Martha Stewart Living Omnimedia when it went public.
Aliza Waksal, Sam’s 28-year-old daughter.
W.J. “Billy” Tauzin, the 12-term Republican Congressman from
Louisiana is the Chairman of the House Energy and Commerce
Committee. Tauzin appeared on Stewart’s TV show to cook gumbo
and promote his book, “Cook and Tell.”
Timeline: October 2001
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Late October 2001: BristolMyers Squibb offers $70 per
share for ImClone stock.
Martha indicated an interest in
selling all of her shares, but
because the offer was
oversubscribed, only sells
1000 shares.
Timeline: December 2001
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December 4, 2001: Lily Lee, an executive at ImClone,
writes an internal memo after a meeting with the FDA
regarding the potential rejection of Erbitux.
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December 6, 2001: Harlan Waksal, the current CEO
and brother of Samuel, sells $50 million worth of
ImClone stock.
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December 25, 2001: Harlan Waksal learns that the
rejection of Erbitux is “99% likely.”
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December 26, 2001: Harlan shares his news with
Sam Waksal, founder of ImClone. Sam transfers
79,797 shares of stock to his daughter, Aliza.
Timeline: December 2001
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December 27, 2001: Sam instructs Merrill Lynch to
sell the shares.
Merrill Lynch won’t execute the trade without approval
from general counsel at ImClone.
Sam transfers the shares to Bank of America, which
imposes the same requirement.
Aliza Waksal sells her personal shares for $2.5 million.
Sam’s father, Jack, sells his shares $6.7 million.
Timeline: December 2001
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December 27, 2001: Martha Stewart is en-route to
Mexico when she is contacted by her broker.
11:07 a.m., that same morning, ImClone’s stock price
dropped below $60 to $59.98 or the first time since
Martha placed the alleged $60 stop-loss order.
1:41 p.m., Martha returns the call.
1:43 p.m., Martha sells 3,928 shares of ImClone stock
for $58.30 per share.
Timeline: December 2001
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December 28, 2001: At 2:55 p.m., ImClone receives final notification
from the FDA that Erbitux has been rejected. The company releases
the news at 4:30 p.m. when the market closes.
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Earlier the same day, Bart Pastnernak sold 10,000 shares of
ImClone stock following a conversation with his ex-wife, Mariana,
who was traveling with Martha to Mexico. His sale was executed
hours before the information of the FDA’s rejection of Erbitux was
made public.
Timeline: December 2001
$80.00
$60.00
$40.00
12/31/01:
$46.46 at
closing.
$20.00
$0.00
Dec-03-01
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Jan-02-02
Jan-31-02
December 31, 2001: The market opens and 18.5 million
shares of ImClone stock are traded. When the market closes
the share price is $46.46. ImClone stock plunged 16%.
Timeline: January 2002
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January 7, 2002: First of several shareholder lawsuits
filed against ImClone, claiming management misled
investors about Erbitux’s prospects. Stock: $35.83.
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January 18, 2002: House Energy and Commerce
Committee, led by Congressman Billy Tauzin, launches
probe into ImClone conduct. Stock: $21.15.
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January 25, 2002: Securities and Exchange
Commission and Justice Department launch probe into
ImClone. Stock: $16.49.
Timeline: May and June 2002
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May 22, 2002: Samuel Waksal resigns from
ImClone. Stock: $10.90.
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June 4 2002: Congressional investigators issue
subpoena for Samuel Waksal to appear at June 13
hearing and look into the company’s development
and promotion of Erbitux. Stock: $8.95.
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June 12, 2002: Samuel Waksal is arrested by the
FBI and charged with illegal trading by the SEC.
Stock: $7.08.
Timeline: June 12 & 19, 2002
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Early June: News breaks of the investigation into Martha
Stewart’s ImClone trade.
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June 12 & 19, 2002: Martha releases personal statements
asserting that she had no insider information and sold the
stock based on a previously arranged “stop-loss order” with
Merrill Lynch and her broker, Peter Bacanovic.
Timeline: June 25, 2002
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Martha makes her regularly scheduled
appearance on CBS’s “The Early Show”
in a segment on how to make summer
salads.
Jane Clayson, the show’s anchor, asks
Martha a pointed question about
ImClone.
She replies that she hopes the scandal
will be resolved soon and that she would
be “exonerated of any ridiculousness.”
In between hand gestures with her
butcher knife, she says “I just want to
focus on my salad.”
Timeline: June 2002
Bacanovic maintains that Martha Stewart’s
ImClone stock sale was based an agreement
to sell her shares if the price fell below $60.
 June 19, 2002: Faneuil recants an earlier
statement and claims he was not aware the
stop-loss order.
 June 21, 2002: Faneuil and Bacanovic are
suspended with pay from Merrill Lynch after
an internal investigation uncovers “factual
issues regarding a client transaction.“
The Stop-Loss Story
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Late November 2001: Martha claims she
issued a stop-loss order on her ImClone stock
to broker, Peter Bacanovic.
Or was the stop-loss made in December?
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December 2001: Peter Bacanovic claims Martha
Stewart issued a stop-loss order of $60 on her
ImClone stock sometime in December.
Timeline: June 25, 2002
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On June 25, 2002 MSO closed at $13.60 per share.
Martha’s paper losses were estimated at $200 million.
Timeline: Summer 2002
Martha Under Three Investigations:
1. Justice Department: looking
into the possibility of obstruction
of justice, which carries a prison
term of up to five years.
2. Securities and Exchange
Committee: investigating the
possibility of insider trading, with
securities fraud carrying a prison
term of up to ten years.
3. House Energy and Commerce
Committee: conducting its own
investigation.
Cooperating Key Witnesses
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Mariana Pasternak
Mariana, a friend of Martha, and real-estate agent in Westport,
Connecticut. She was on her way to Mexico with Martha, when
Martha ordered her broker to sell her ImClone shares.
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Dr. Bart Pasternak
Bart, a Westport, Connecticut physician and ex-husband of Mariana,
invested $134,000 in ImClone Systems, Inc. He sold 10,000 ImClone
shares December 28, 2001, just hours before the company
announced the regulatory setback.
Timeline: August 2002
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August 7, 2002: Samuel Waksal, ImClone’s former CEO, was
indicted on charges of securities fraud for trying to sell shares and
for tipping off others to sell stock before the FDA released
information on the rejection of Erbitux.
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Dr. Waksal was also charged with bank fraud, perjury and
obstruction of justice for allegedly ordering the destruction of
documents.
Timeline: August 2002
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August 20, 2002: Martha’s lawyers deliver various records
totaling approximately 1,050 pages to the House Energy and
Commerce Committee.
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The documents are received on the day of the deadline at
around 4:00 pm, with only an hour to spare.
Timeline: August 2002
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August 22, 2002: Howard Rosen, a Martha Stewart Living
Omnimedia shareholder sues Martha for selling stock in MSO
before the investigation of her ImClone sale became public.
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Late August 2002: Conrad Hahn, an MSO shareholder, files a
class action lawsuit against Martha for brand equity damage due
to her alleged role in ImClone insider trading.
Timeline: September 2002
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September 10, 2002: The House
Energy and Commerce Committee,
led by Billy Tauzin, ends its
investigation and refers the matter
to the Justice Department.
September 25, 2002: Douglas
Faneuil agrees to plead guilty to a
misdemeanor charge and provide
testimony against Ms. Stewart and
others in the case.
MSO & IMCL Share Price
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MSO and ImClone Stock
MSO
IMCL
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Martha’s Two-Fold Problem
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First, the possibility of illegal or unethical conduct by a
prominent business figure is of primary concern in an era
known for multiple incidents of corporate corruption.
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Second, there is the problem of brand equity for Martha
Stewart Living Omnimedia and the impact of her situation on
the profitability of the company.
Key Stakeholders
1. MSO employees and shareholders.
2. Kmart Corporation.
3. MSO branded products customers.
4. MSO competitors.
5. CBS’s “The Early Show” and other media outlets.
6. Corporate America, business leaders and the investing public.
Critical Issues
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Brand equity for MSO.
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Public Relations and Legal departments
competing objectives.
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Conflict of interest perceptions at the NYSE.
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America’s tolerance level for unethical executives.
Critical Issues: Brand
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A brand is the promise of an experience, but when a brand is
built on just one individual, it may affect a company’s ability to
make good on this promise.
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As the center of a brand, Martha Stewart has some level of
responsibility to her customers and shareholders. MSO suffered
significant losses as a result of this incident. The company may
be so dependent on Martha Stewart, the person, it may not
survive in its current form without her.
Critical Issues: PR and Legal Strategies
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Public Relations and Corporate Counsel often have conflicting
agendas, and it is vital to know what concessions to make in
each area.
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In essence, one must decide how to coordinate a strategy to
win in both the court of law and the court of public opinion.
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Martha chose to ignore the court of public opinion.
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Silence is not always golden to various publics.
Critical Issues: Conflict of Interest
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Securities brokers are frequently confronted with non-public,
material information. In such cases, the possibility of a conflict of
interest is significant.
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Given his or her responsibility to multiple individuals, the timing
and specific details of information shared is of critical legal and
ethical importance.
Critical Issues: Corporate America
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America is faced with one more situation in which a wealthy,
prominent businessperson appears to have taken unfair
advantage of her position for personal gain.
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After months of bad news she could be the poster child for
how Corporate America should handle future investigations.
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In essence, bad timing for Martha.
Possible Solutions
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Martha will have to decide about her communication strategy and
confront the public once the investigations near completion.
Redefine MSO’s brand so the company is not reliant on any one
individual.
Change internal structure to better protect and improve both its
profitability and sustainability.
Dilute Martha’s ownership.
How Should Martha Stewart Move
Forward From Here?
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At this point it is reasonable to assume that Martha will remain
silent until all investigations into her sale of ImClone stock are
complete.
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Ideally, if she is truly innocent, she should have addressed the
public by now. This is critical to her personal success in the
future, with or without Martha Stewart Living Omnimedia.
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She needs to act as the business leader she has historically
been touted to be, and take responsibility for her actions and
the far-reaching impact they have had on various stakeholders.
There are Some Things
Money Can’t Buy…
Amount realized from selling ImClone stock on
December 27, 2001: $229,002.
Amount Martha would have received if she sold after
the news was public: $189,495
Overall savings: $39,507
Being able to continue life as an icon…
PRICELESS