On December 27, 2001, Martha Stewart was en route with a friend from her home in Connecticut to apost-Christmas holiday in Mexico when her private plane landed for refu- eling in San Antonio
business case study
Per the Course Syllabus – Students will analyze one case study during the semester using the guideline provided by the instructor. Case study analyses should be a minimum of five double-spaced pages (standard margins, Times New Roman, 12 pt.). The case summary and stakeholder identification should take no more than 1.5 pages with the remaining pages devoted to developing the issue, analyzing the issue in light of various moral philosophies, alternative development, and selection. This case study analysis is worth 20% of your grade. Accounting students must develop an accounting-related case study, incorporating AICPA ethics rules into the discussion. This case study development paper is due February 26, midnight. Textbook: KPMG’s Tax Shelter Business or Martha Stewart: Inside Trading (p. 264-65). ( linked below)
Requirements: 1-1.5 pages
Case: Martha Stewart: InsideTrader?On December 27, 2001, Martha Stewart was en route with a friend from her home in Connecticut to apost-Christmas holiday in Mexico when her private plane landed for refu- eling in San Antonio,Texas.75While standing on the tarmac, she listenedto a telephone message from her assistant, AnnArmstrong, reporting a call from Peter Bacanovic, her stock- broker at Merrill Lynch. The messagerelayed by her assis- tant was brief: Peter Bacanovic thinks ImClone is going to start trading down.?Stewart immediately returned the call, and at some point during the 11-minute conversation was putthrough to her broker?s office at Merrill Lynch. Bacanovic was on vacation in Florida, and so shetalked instead with his assistant, Douglas Faneuil. Faneuil later testified that, on orders fromBacanovic, he told Stewart that he had no information on the company but that the Waksal family wasselling their shares in ImClone. Although Stew- art denied being told this, she instructed Faneuil to sellall of her ImClone stock. Her 3,928 shares sold within the hour at an average price of $58.43 a share,netting her approxi- mately $228,000. Stewart then made one more phone call, to Sam Waksal?soffice, leaving a message that Waksal?s secre- tary scribbled as Martha Stewart something is goingon with ImClone and she wants to know what.? During her vacation in Mexico, she reportedly told herfriend, Isn?t it nice to have brokers who tell you those things??The ImClone TradeMartha Stewart became a national celebrity and self-made billionaire through her print and televisionpresence and the many household products bearing her brand name. After a brief career on WallStreet as a stockbroker, she started a suc- cessful catering business that led to a succession of bookson cooking and household decorating. The magazineMartha Stewart Livingfollowed, along with atelevision series and apartnership with Kmart. In 1999, her company, Martha Stew- art Living Omnimedia (MSLO) wentpublic, with Stewart as the CEO and chairman. MSLO was unique in that Martha Stewart herself wasthe company?s chief marketable asset.Sam Waksal was the founder, president, and CEO of ImClone Systems, Inc., a biopharmaceuticalcompany that sought to develop biologic compounds for the treatment of cancers. Martha Stewart andSam Waksal were close friends, having been introduced in the early 1990s by Stewart?s daughterAlexis, who had dated Waksal for a number of years. It was also through Alexis that her mother andWaksal came to know Peter Bacanovic, who attended Columbia Uni- versity in the mid-1980s whileAlexis was enrolled at nearby Barnard College. Bacanovic worked briefly at ImClone before joiningMerrill Lynch in 1993 as a broker, and Stewart and Waksal became two of his most important clients.Wak- sal helped Stewart achieve an advantageous split from her then-publisher Time Warner in 1997,and in gratitude, she invested an initial $80,000 in ImClone stock. With a net worth of over $1 billion,her investment in 2001 represented three- hundredths of 1 percent of her total holdings.In 2001, the future of ImClone rested on the uncertain prospects of a single drug, Erbitux, for thetreatment of advanced colon cancer. Erbitux was a genetically engi- neered version of a mouseantibody that showed great promise in early tests. In October, ImClone submitted a preliminaryapplication to the Food and Drug Administra- tion (FDA) for approval of Erbitux. This application wasmerely the first step that allowed the FDA to determine whether the research submitted by the
company was suffi- ciently complete to begin a full FDA review. A decision on the application wasexpected by the end of December. On December 28, 2001, ImClone announced that the FDA hadfound the application to be incomplete and would not pro- ceed to the next stage. After the news wasannounced, ImClone stock dropped 16 percent to $46 a share.The previous day, on the morning of December 27, Sam Waksal and his daughter asked PeterBacanovic to sell all of their ImClone shares held at Merrill Lynch, which were worth over $7.3 million.Merrill Lynch sold the ImClone stock of the daughter for approximately $2.5 mil- lion but declined tosell Sam Waksal?s shares, citing con- cern about insider trading. An attempt by Waksal to have hisshares transferred to his daughter so that they could be sold by her failed. Separately, Sam Waksal?sfather sold shares worth more than $8 million, and smaller amounts were sold by another daughterand a sister of Sam Waksal.The AftermathThe Securities and Exchange Commission (SEC) quickly opened an investigation into suspectedinsider trading in ImClone stock. Faneuil later testified that Bacanovic initially told him that dumpingStewart?s stock was part of a tax-lossselling plan. After being informed by Faneuil that Stewart had made a profit, Bacanovic changed thestory, explaining that Stewart had placed a stop-loss order to sell the stock if it dropped below $60 ashare. Stewart affirmed to federal investigators that she had given this instruction to Bacanovic andgave as a reason that she did not want to be bothered about the stock during her vacation. Thisconversation, she claimed, was with Bacanovic, though she had in fact talked only with Faneuil. Shealso said that she was unable to recall whether Sam Waksal had been discussed in the December 27telephone conversation or whether she had been informed about stock sales by the Waksal family.Before meeting with investigators, Stewart accessed the phone message log on her assistant?scomputer and changed the entry Peter Bacanovic thinks ImClone is going to start trading downward?to Peter Bacanovic re imclone,? but afterward told her assistant to restore the original wording.Meanwhile, Bacanovic altered a worksheet that contained a list of Stewart?s holdings at Merrill Lynchwith notations in blue ballpoint ink to include @$60? by the entry for ImClone. An expert later testifiedin court that the ink for this entry was different from that used in the other notations.In March 2003, Sam Waksal pleaded guilty to charges of securities fraud for insider trading,obstruction of justice, and perjury. He was later sentenced to seven years and three months in prisonand ordered to pay $4 million. The Department of Justice accepted a proposal from Martha Stewart?sattorneys that she plead guilty to a single felony count of making a false statement to federalinvestigators that would probably avoid any prison time. However, Stewart decided that she could notdo this and would take her chances in court. A justice department official said, We had no desire toprosecute this woman? but indicated that the lying was too egregious to ignore.76Stewart andBacanovic were charged with conspiracy, obstruction of justice, and perjury?but not insider trading.On March 5, 2004, a jury found both parties guilty. Stewart and Bacanovic were each sentenced tofive months in prison, five months of home confinement, and two years of probation. Stewart wasfined $30,000 and Bacanovic, $4,000. By selling her ImClone stock when she did, Stewart avoided aloss of approximately $46,000. She estimated the total loss from her legal troubles to be $400 million,including a drop in the value of MSLO stock and missed business opportunities.In June 2003, the SEC brought a civil action for insider trading, which was separate from the criminalcharges of which Stewart was found guilty. To convict Stewart of insider trading, the SEC would haveto show that she had received material nonpublic information in violation of a fiduciary duty. Theinformation that she received from Faneuil in the December 27 phone call was that the mem- bers of
the Waksal family were selling their ImClone stock. Neither Faneuil nor Bacanovic had informationabout the FDA rejection of the Erbitux application that prompted thesell-off. Neither one had a fiduciary duty to ImClone. How- ever, Bocanovic owed a fiduciary duty toMerrill Lynch that he breached in ordering that information about the Waksal?s sales be conveyed toStewart.Merrill Lynch had an insider trading policy that pro- hibited the disclosure of material nonpublicinformation to anyone who would use it to engage in stock trading. A con- fidentiality policy alsoprohibited employees from discuss- ing information about a client with other employees except on astrict need-to-know basis,? and further stated, We do not release client information, except upon aclient?s authorization or when permitted or required by law.?Since the information that the Waksals were selling was obtained by Bacanovic in his role as theirbroker, he breached his duty to Merrill Lynch. However, Martha Stewart denied that she was awarethat Bacanovic was their broker. Moreo- ver, as a former stockbroker who understood the law oninsider trading, she knew that she could not act on informa- tion received from an insider like Waksal.But could she trade on information provided by Bacanovic, even if he was violating a fiduciary duty toMerrill Lynch? Stewart was apparently unconcerned about her first interview with fed- eralinvestigators because, according to a close associate, All she thought they wanted to talk about waswhether Waksal himself had tipped her about the F.D.A. decision. She knew she was in the clear onthat one.?77On August 7, 2007, the SEC announced a settlement with Martha Stewart and Peter Bacanovic.78Stewart agreed to pay a $195,000 penalty and accept a five-year ban on serving as an officer ordirector of a public company. Bacanovic was ordered to pay $75,000; he had previously received apermanent bar from work in the securities industry. The SEC?s Director of Enforcement declared, It isfundamentally unfair for someone to have an edge on the market just because she has a stockbrokerwho is willing to break the rules and give her an illegal tip. It?s worse still when the individual engagedin the insider trading is the Chairman and CEO of a public company.?79
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