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Martha Stewart Insider Trading: Case Study

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Martha Stewart Insider Trading: Case Analysis Report

Part I: The Case

Fraud, lying, conspiracy...not terms that any individual generally wants associated with their history, nonetheless with their reputation and personality, especially if that individual happens to be Martha Stewart. Martha Stewart: a name which almost every person who calls themselves an American can recognize. Her name pronounces itself across cookbooks, magazines and even has its own show on Style and The Learning Channel. It now pronounces itself with yet another captivating theme, as part of one of America's major scandals.

Martha Stewart may be America's most famous businesswoman. Considered a "cultural icon" (Byron, 3), she made a name for herself through the fundamentals of home-making. As an expert on home decorating, cooking, gardening, elegant weddings and do-it-yourself crafts, Martha entered the homes of millions of Americans with the 1982 publication of her book Entertaining. Eventually, she turned her book and a small catering business into an empire. By 1999, Martha took her company public on the New York Stock Exchange as Martha Stewart Living Omnimedia. The new company astounded Wall Street with its opening stock rising from $18 to $52, and finally settling at a solid $36. Her once small business, now includes a website, 27 books, two magazines, two TV shows and a partnership with Kmart (Byron, 5-6). However, despite one's wealth, success and fan base, people make mistakes. On December 27, 2001, Martha made one that put her career, her company and her reputation in jeopardy.

Trouble Brewing

The case started with a company called ImClone. ImClone was a hot biotech company in which the owner, Sam Waksal, thought was about to get a lot hotter. With the introduction of a cancer drug called Erbitux, Waksal's company was going to skyrocket...or so he thought. The drug had only one stipulation until its success, and that was to pass through the strict eye of the FDA. Waksal thought that the drug's success was in the bag, however, the FDA decided otherwise. On December 20, 2001, the FDA notified ImClone executives that it had reached a decision on Erbitux and that its announcement would be made on December 28, 2001. On December 25, 2001 someone from Bristol-Myers Squibb notified Harlan Waksal, Sam's brother, that the FDA would indeed reject Erbitux in a public announcement three days later. Harlan immediately contacted his brother to warn him of the disturbing news. Maybe it was out of panic or maybe it was sheer disbelief and shock, but something ignited Sam to make a horrific decision; he began calling his friends and family to advise them to sell their shares of ImClone (Slater, 23-26).

A Brief History of Long Friendship

Sam Waksal knew Martha through her daughter Alexis Stewart. He had once dated Alexis despite her being 18 years younger than him. Through Alexis's relationship with Sam, Martha got to know and became close friends with Waksal. Possibly due to her friendship with Sam, in 1999 Martha bought 2500 shares of ImClone at $32 a share. Later, the stock split, leaving her with 5000 shares. In 2000, Martha sold 1,072 shares, leaving her with 3, 928 shares of ImClone (Slater, 12-14). Martha's account was managed by a young man named Peter Bacanovic, a broker for Merrill Lynch. Ironically, Peter was also a close friend of Sam Waksal's. As a former director of business development at ImClone, Sam and Peter knew each other well. Also involved in the relationship circle was Doughlas Feneuil, the assistant to Peter Bacanovic. Feneuil would be the one to find out that Waksal and his family were dumping their shares of ImClone the morning of the FDA's announcement (Steinhaus, 2-3).

The Beginning of the End

So how did Martha Stewart, a power woman, one of the top businesswomen in the country get tangled up in such a debacle? It started with four phone calls exchanged between her and Sam Waksal on December 21, 2001, the day after the FDA announced that they had made their decision concerning Erbitux. One of these phone calls involved Martha telling Waksal where and how she could be contacted between December 27th and January 2nd (Slater, 15). As Christmastime closed in, Bacanovic and Stewart met to review her portfolio. While Martha insisted that she hold her shares of ImClone, Bacanovic urged her to sell. Allegedly, they finally determined that if the stock fell to $60, she would at that point sell her shares (Crawford, 2). However, authorities later determined that the particular agreement never took place.

A Day of Infamy

On the morning of December 27th, 2001, the day before the FDA would make their announcement concerning Erbitux, Sam Waksal and another member of his family called Doug Feneuil to insist that he sell his ImClone shares. He then made the call to Peter Bacanovic, warning him that Sam Waksal was dumping his $7.3 million in ImClone shares. Within minutes of the call, Bacanovic went through desperate measures to reach Martha Stewart. However, Martha was onboard her private plane headed toward Cabo San Lucas, Mexico, so he contacted the next best person, Martha's secretary Ann Armstrong (Slater, 25). With Ann, he left possibly the most infamous 10 words of the entire case: "Peter Bacanovic thinks ImClone is going to start trading downward" (Slater 25). Officials later concluded that Stewart actually changed the wording in her phone log from "Peter Bacanovic thinks ImClone is going to start trading downward," to "Peter Bacanovic re Imclone [sic]", and then later told her assistant to return to the original phrasing before handing her records over to authorities (Steinhaus 5). With that, Martha's plane touched down in San Antonio, Texas where she called Ann to receive her messages. When responding to the message left by Balcanovic, there is controversy concerning whether Martha spoke to Feneuil or Bacanovic. Officials alleged that she spoke to Bacanovic who tipped her off that Waksal and his family were dumping their shares of ImClone, while Stewart claimed to have spoken to Feneuil. Either way, after receiving the disturbing message, Stewart contacted one of the two and gave him authority to sell her shares of ImClone which took place at $58.43, totaling $228,000.00 for Martha Stewart. Various evidence indicated that the agreement between Martha and Bacanovic agreeing to sell her shares of ImClone at $60.00 never existed. On a worksheet that Bacanovic kept indicating information on what was to be done with Martha's stocks, ImClone was marked



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