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Martha Stewart Insider Trading Case

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ETH 501

Module 1

Case Assignment

The Martha Stewart insider trading case was a high profile case filled with uncertainty. In order to say whether or not Stewart handled her indictment responsibly, it is necessary to start with an assumption regarding her guilt or innocence. For the purposes of this paper, based on the information I have read about the case, and based on the fact that she was found guilty of all counts (although not all specifications) in her stock conspiracy trial (with the exception of the security fraud charge which was thrown out), I will assume that she is guilty. ( Based on that assumption, there are several reasons that Martha Stewart did not handle her indictment responsibly which can be summarized in a recap of the charges: she lied about receiving illegal information leading her to sell her stock, she lied about having a prearranged agreement to sell her stock when it fell below $60 per share, she tried to hamper the investigation by providing false information, and she worked with her broker to obstruct justice and make false statements regarding the scandal. ( As the CEO of Martha Stewart Living Omnimedia (MSLO) and as a successful businesswoman motivated to protect her own personal interests, it might be easy to understand the temptation behind her decisions, but the discussion here will be based on whether or not her decisions were responsible.

Martha Stewart was licensed to sell securities and worked as a securities broker for a period of time from about 1968 to 1975. From that experience, and from being a client of Merrill Lynch & Co., Stewart was familiar with the duties of trust and confidence owed to the clients of Merrill Lynch. It is known for sure that ImClone submitted a Biologics Licensing Application (BLA) to the Food and Drug Administration (FDA) around 31 October 2001. It is also known that the FDA must make a decision on the BLA within 60 days per FDA regulations. It was public information that the FDA decision was expected by the end of December 2001. On the morning in question, 27 December 2001, Peter Bacanovic, Stewart’s broker, was informed that Samuel Waksal, the CEO of ImClone, was looking to sell all of the family’s ImClone shares held at Merrill Lynch. Without speculating as to the phone conversations that happened that day between all the parties involved, it is possible to say for sure that Stewart received the message that “Peter Bacanovic thinks ImClone is going to start trading downward” as this message was entered into a computer system used to store phone messages by Stewart’s assistant ( The prosecution further speculated that Stewart was given information regarding the Waksal’s sale of stock, although this speculation was later thrown out by the judge presiding over the trial ( If the prosecutors were correct in their speculation, then it would be safe to say that Stewart lied in her 12 June 2002 public statement when said that she “did not have any nonpublic information regarding ImClone when [she] sold [her] ImClone shares” ( The rules set forth by Merrill Lynch regarding the confidentiality of client information are for the greater good of the clientele (investors) as a whole in the attempt to level the playing field for all investors. Stewart was well aware that Bacanovic had violated these policies, and her actions were irresponsible.

In addition to lying about receiving information leading to her decision, Stewart also tried to claim that she and her broker had a prearranged agreement to sell her stock in ImClone if it were to drop below $60 per share. There was some disagreement between Stewart and Bacanovic regarding the date of the agreement which could have helped to discredit this claim. However, she was ultimately not found guilty of these particular specifications in the counts of the grand jury indictment ( Bacanovic’s evidence of the prior agreement was a worksheet with the characters “@ $60” written near ImClone, which he claimed was a note to himself that they had discussed selling the stock at $60 per share. The prosecution attempted to prove that the ink used to make that annotation was not the same at the ink used on other parts of the paper. The prosecution’s witness in this portion of the case was a Secret Service agent who was later charged with perjury for repeatedly lying on the stand ( Also, in later questioning the witness admitted that it was impossible to determine how many different blue pens were used on the worksheet. At any rate, the prearranged price as set by Stewart might have seemed a little too convenient to some. The question here continues to deal with duty and the greater good. If Stewart and Bacanovic did not have this prior arrangement set up, then it was Bacanovic’s duty to Merrill Lynch and to the investors to uphold the responsibilities of his position. Again, this situation deals with the greater good of the investors as a whole, not just Martha Stewart as an individual, and therein lies the purpose behind the rules in place.

Aside from lying about her decisions, Stewart also attempted to hamper the investigation by providing false information. Stewart attempted to alter the contents of the phone message from Bacanovic’s 27 December 2001 phone call. This is a fact that was verified by Stewart’s assistant. Altering evidence is generally reserved for the purpose of making a situation look better than it is. The fact that Stewart attempted to change the contents of the message from “Peter Bacanovic thinks ImClone is going to start trading downward” to “Peter Bacanovic re imclone” ( is fairly incriminating in itself. It implies that discovery of the latter as evidence would be less harmful than discovery of the former. However, the fact that she ordered her assistant to return the evidence to it’s original state is also confusing. This case is filled with



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