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Allegations of Insider Trading

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. Martha Stewart Key Players Timeline of Events Martha’s Three Investigations Cooperating Witnesses

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Allegations of Insider Trading

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  1. 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

  2. Case Overview • Martha Stewart • Key Players • Timeline of Events • Martha’s Three Investigations • Cooperating Witnesses • The Problem • Critical Issues & Key Lessons • Possible Solution

  3. The Many Faces of Martha… Martha Stewart

  4. Martha: The Person • Born Martha Helen Kostyra in Jersey City, New Jersey. • Worked her way through Barnard College as a maid and fashion model. • Married a Yale-educated lawyer, Andy Stewart. • Certified Series-7 stockbroker on Wall Street. • Became full-time mother and Westport, Connecticut hostess.

  5. Martha: The Professional • Chairman, CEO and icon of Martha Stewart Living Omnimedia. • In 1991, received nearly $2.7 million Martha in salary and bonuses. • "America's 25 Most Influential People" in Time Magazine’s June 1996 issue. • Owns all Class B shares with sole voting rights. • Named to the Board of Directors of the NYSE in June of 2001.

  6. Martha: The Company Martha Stewart Living Omnimedia Inc. (MSO) • 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.

  7. Martha: The Company • Four core magazines. • Emmy award-winning domestic arts television program. • Weekly segment on CBS “This Morning.” • 34 books, sold over 10 million copies.

  8. Key Player: Dr. Samuel Waksal • 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. • Martha and Waksal became friends. • Purchased shares in Martha Stewart Living Omnimedia when it went public.

  9. Key Player: Peter Bacanovic • Worked at ImClone for two years as a Marketing Director in the early 1990s. • Obtained a position as a broker at Merrill Lynch in 1993. • Handled $10 million in shares sold to Stewart’s friends and family when her company, Martha Stewart Living Omnimedia, went public in 1999. • Clients include some of New York’s social elite, such as members of the Waksal family.

  10. Key Player: Douglas Faneuil • Assistant to Bacanovic at Merrill Lynch. • A recent graduate of Vassar College. • Both Bacanovic and Faneuil are said to be well received in the social circles of New York City.

  11. Other Players with Key Roles • 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.”

  12. Timeline: October 2001 • Late October 2001: Bristol-Myers 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.

  13. Timeline: December 2001 • 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. • December 6, 2001: Harlan Waksal, the current CEO and brother of Samuel, sells $50 million worth of ImClone stock. • December 25, 2001: Harlan Waksal learns that the rejection of Erbitux is “99% likely.” • December 26, 2001: Harlan shares his news with Sam Waksal, founder of ImClone. Sam transfers 79,797 shares of stock to his daughter, Aliza.

  14. Timeline: December 2001 • 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.

  15. Timeline: December 2001 • 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.

  16. Timeline: December 2001 • 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. • 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.

  17. Timeline: December 2001 • 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%.

  18. Timeline: January 2002 • January 7, 2002: First of several shareholder lawsuits filed against ImClone, claiming management misled investors about Erbitux’s prospects. Stock: $35.83. • January 18, 2002: House Energy and Commerce Committee, led by Congressman Billy Tauzin, launches probe into ImClone conduct. Stock: $21.15. • January 25, 2002: Securities and Exchange Commission and Justice Department launch probe into ImClone. Stock: $16.49.

  19. Timeline: May and June 2002 • May 22, 2002: Samuel Waksal resigns from ImClone. Stock: $10.90. • 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. • June 12, 2002: Samuel Waksal is arrested by the FBI and charged with illegal trading by the SEC. Stock: $7.08.

  20. Timeline: June 12 & 19, 2002 • Early June: News breaks of the investigation into Martha Stewart’s ImClone trade. • 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.

  21. Timeline: June 25, 2002 • 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.”

  22. 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.“

  23. The Stop-Loss Story • 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? • December 2001: Peter Bacanovic claims Martha Stewart issued a stop-loss order of $60 on her ImClone stock sometime in December.

  24. Timeline: June 25, 2002 • On June 25, 2002 MSO closed at $13.60 per share. • Martha’s paper losses were estimated at $200 million.

  25. Timeline: Summer 2002 Martha Under Three Investigations: • Justice Department: looking into the possibility of obstruction of justice, which carries a prison term of up to five years. • Securities and Exchange Committee: investigating the possibility of insider trading, with securities fraud carrying a prison term of up to ten years. • House Energy and Commerce Committee: conducting its own investigation.

  26. Cooperating Key Witnesses • 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. • 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.

  27. Timeline: August 2002 • 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. • Dr. Waksal was also charged with bank fraud, perjury and obstruction of justice for allegedly ordering the destruction of documents.

  28. Timeline: August 2002 • August 20, 2002: Martha’s lawyers deliver various records totaling approximately 1,050 pages to the House Energy and Commerce Committee. • The documents are received on the day of the deadline at around 4:00 pm, with only an hour to spare.

  29. Timeline: August 2002 • 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. • 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.

  30. Timeline: September 2002 • 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.

  31. MSO and ImClone Stock

  32. Martha’s Two-Fold Problem • 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. • 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.

  33. 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.

  34. Critical Issues • Brand equity for MSO. • Public Relations and Legal departments competing objectives. • Conflict of interest perceptions at the NYSE. • America’s tolerance level for unethical executives.

  35. Critical Issues: Brand • 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. • 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.

  36. Critical Issues: PR and Legal Strategies • Public Relations and Corporate Counsel often have conflicting agendas, and it is vital to know what concessions to make in each area. • In essence, one must decide how to coordinate a strategy to win in both the court of law and the court of public opinion. • Martha chose to ignore the court of public opinion. • Silence is not always golden to various publics.

  37. Critical Issues: Conflict of Interest • Securities brokers are frequently confronted with non‑public, material information. In such cases, the possibility of a conflict of interest is significant. • Given his or her responsibility to multiple individuals, the timing and specific details of information shared is of critical legal and ethical importance.

  38. Critical Issues: Corporate America • 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. • After months of bad news she could be the poster child for how Corporate America should handle future investigations. • In essence, bad timing for Martha.

  39. Possible Solutions • 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.

  40. How Should Martha Stewart Move Forward From Here? • At this point it is reasonable to assume that Martha will remain silent until all investigations into her sale of ImClone stock are complete. • 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. • 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.

  41. 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

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