An Inside Look on Martha Stewart
Introduction
Martha Stewart made her name as a prim, poised woman who always maintains the proper etiquette. She is credited for her drive to succeed and her ability to build a mega-million dollar empire based around her image. Along with a highly successful business, Stewart has several investments. It was her investment in ImClone, a pharmaceutical company owned by a friend of hers, which jeopardized her entire career and sent the proclaimed “domestic diva” to prison. Charged with insider trading, obstruction of justice, and perjury, many thought this would be the end of Martha’s empire.
Background Information
Martha Helen Kostyra was born in New Jersey in 1941, growing up in a working class neighborhood. She began modeling at age 13 and studied various forms of history at Barnard College. As a sophomore, she married Yale Law School graduate Andy Stewart and they had their only daughter, Alexis in 1965.
For five years beginning in 1968, Martha was a successful securities broker for a boutique on Wall Street, before moving to Connecticut to be a homemaker and full-time mom. She became heavily invested in gourmet cooking and launched her own catering business, A Catered Affair (Biography.com). Her enterprise grew into a million-dollar business over the next decade, with a diverse line of offerings, including books, retail stores, and endorsements for Kmart. By 2001, Martha, Inc. included 34 books, 4 magazines, a catalogue company, radio show, and a segment on CBS This Morning (Jennings).
Insider Trading
The start of Martha’s legal troubles began on December 27, 2001. Stewart held a personal investment account at Merrill Lynch with Peter Bacanovic as her broker. Dr. Samuel Waksal, CEO of ImClone (a pharmaceutical company), was also a client of his. ImClone’s success was heavily involved around the marketing of Erbitux, a cancer-treatment drug that was pending FDA approval.
Back in October, Bristol-Myers Squibb offered to purchase 20% of ImClone’s shares at $70 each. At this time, Martha’s company, Martha Stewart Living Omnimedia, Inc. (MSLO) owned 51,800 shares in its pension fund, along with an additional 5,000 that she owned personally. Since there had been rumors about Erbitux not receiving FDA approval, she took advantage of Squibb’s offer and sold off as many shares as she could. After the trade was done, the remaining ownership amounted to 3,928 shares of personal stock.
By December 2001, it became more apparent to employees that Erbitux was not going to receive FDA approval. At this time, Waksal ordered Bacanovic to start selling all of his and his family’s shares of ImClone right away. Although the broker was on vacation, his assistant Douglas Faneuil alerted him of the situation. During these conversations, Bacanovic abruptly stated that they needed to alert Martha right away (US v. Stewart).
Stewart was also vacationing at the time, but upon hearing this information from Bacanovic, she told Faneuil that she wanted to sell her remaining shares of ImClone stock. On December 27, 2001, Stewart sold 3,928 shares for $58 a piece. On December 28th, the day the public became aware of the situation, the stock price had dropped to $45. She saved $39,507 on a deal that ultimately sent her to prison (Jennings).
Lying to Investigators
Although Stewart was obviously guilty of insider trading, her real downfall was in the fact that she tried covering it up. Dr. Waksal was convicted by the federal government for his illegal activities, after which attention shifted to Stewart. When questioned by internal investigators at Merrill Lynch, Bacanovic and Faneuil explained that her shares were sold for tax-loss purposes, as had been planned. Faneuil knew that selling Martha’s shares did not coincide with this tax strategy but was coached by Bacanovic to say so.
Days later, Faneuil was approached by the SEC and Stewart’s business manager, Heidi DeLuca. The SEC questioned him on the sale of stock by Waksal’s family, while DeLuca complained that this ImClone transaction totally messed up Stewart’s tax-loss plan. When he alerted Bacanovic of the situation, the senior broker advised him that Stewart’s sale of ImClone stock was actually related to a pre-existing agreement to sell if the stock fell below $60 per share, although there was no concrete evidence to support this. Bacanovic repeated this story to the SEC (US v. Stewart). At this point, Faneuil felt guilty about what was transpiring. Bacanovic told him that his relationship with Martha was integral to his career, and that he was being selfish for bringing attention to it (Jennings).
On February 4th, 2002, Stewart spoke to the US attorney’s office, SEC investigators, and an FBI agent about ImClone. She told them she decided to sell her remaining stock if it fell below $60, that she did not speak to Faneuil, and did not want to be bothered on vacation. Stewart and Bacanovic continued to lie to investigators, attempting more cover-ups in the process. Faneuil was unable to bear lying anymore and came clean to Merrill Lynch and federal investigators. He agreed to cooperate, while admitting guilt for “receiving money or things of value as a consideration for not informing against a violation of the law." As a consequence, he was no longer able to work in trading securities (US v. Stewart).
Stewart and Bacanovic were both convicted on four counts of perjury, conspiracy to obstruct justice, and making false statements, with Bacanovic receiving an additional charge for insider trading. They were sentenced to five months in prison, with two years of supervised release (including five months on house arrest). Stewart paid fines of $30,000 and Bacanovic had $4,000 (US v. Stewart).
Serving Time
Stewart considered going through the long process of appeals, but instead elected to serve the time and move on. She entered a minimum-security women’s prison in West Virginia on October 8, 2004, claiming that she wanted to get out in time to plant the spring garden (Jennings). Martha described her time as calming and relaxing, due to the release of pressure brought on by legal and media demands. Her job was to vacuum and clean machines for 12 cents an hour. She said the prison food was terrible, and worked with other inmates to microwave “kale quesadillas, dandelion greens, and vegetable mélange” from the remnants of a shoddy garden. She worked out for an hour each morning, and taught yoga classes in the evening.
However, the hardest part for Martha was being cut off from her work. She met with certain advisors, who were allowed to tell her the happenings of the company, but she was not allowed to make any decisions. In spite of this obstacle, Martha was constantly thinking of ideas to use upon release. Although unable to run her company from the inside, MSLO still gained millions in revenue due to the success of “Desperate Housewives,” (which she helped develop) and a merger of Kmart with Sears. Martha became $148 million richer while sitting in prison.
She began contributing to MSLO once again on house arrest. The company did extensive marketing research, and determined that Martha’s unfavorable rating, at 21%, was much lower than other prominent women like Hillary Clinton (33%). Working with her team, she expanded into Martha-branded houses, how-to videos, and her own version of “The Apprentice” (Sellers). Though MSLO experienced some declines as well, Martha came back as strong as ever.
Ethical Lapses
The root of Martha Stewart’s downfall is insider trading. Using privileged information is hurtful to the public because it creates an unfair advantage. All investors of the public stock exchange deserve to use the same data for decision-making and it is the stockbrokers’ duty to keep undisclosed facts confidential. Without transparency, select traders would have all the power to succeed in securities, while the public would be helpless. Prohibiting insider trading allows the market to remain in balance.
At the beginning of this scandal, Bacanovic held the most blame for providing Martha with this information. She did not ask for the privilege, but was given the temptation to save thousands. Her decision to sell or stay would not have impacted her net worth materially, yet she conceded.
Lying to investigators hurt Stewart and Bacanovic the most. Once the ImClone investigation began, they thought they could get away with their actions by coming up with a good story. This was not an effective strategy because documentation, forensics, and guilt by Faneuil uncovered the truth. A better solution would have been to come clean immediately and endure a “slap on the wrist” or lighter penalty, like Faneuil did.
They were seduced by hubris, performing unethical acts to get ahead. Bacanovic valued Martha as one of his top clients and felt that telling her about ImClone would help forward his career. Stewart acted on this information in order to protect a small portion of her net worth. As a broker and former trader, both knew what they were doing was wrong. They used a short cut to get ahead, although both would have prospered without this decision.
An Example
Some (including Alexis Stewart) argue that Martha experienced an overly harsh punishment and that prosecutors wanted to set an example with her. Perhaps they disliked her character and wanted to see her humiliated. Whatever reason, it is not often that someone with Martha’s poise and success is charged with such serious crimes. Sending her to prison sent a message to the public that these actions would not be tolerated, even for someone like her.
The purpose of punishment is for deterrence, restitution, and reformation. An appropriate penalty will improve a criminal’s morality, while a lesser one will not, and a harsher one will only create resentment. Prison is generally associated with adequate punishment but only affects deterrence. In this case, Martha’s crime amounted to approximately $40,000. In order to achieve restitution, she could have paid millions in fines and avoided public humiliation.
However, the federal government spent large quantities at the expense of taxpayers to take her case to court, which was embarrassing to her. Sending Martha to prison did not benefit anyone. Charging millions in fines might have made a larger impact on her and others considering insider trading (Kalman) . Whether her punishment was reasonable or not, Martha managed to handle the situation with the grace and composure she is known for. Her empire continues to thrive despite the setback. It remains unknown however if she feels guilty for her actions or if it just served as a deterrent.
Conclusion
Martha Stewart’s insider trading scandal surprised the nation and left many wondering whether she would be able to return to success. Her presence on TV, in magazines, and at retail stores since prison has indicated that she was able to overcome her mistakes. Although illegal trade triggered her downfall, it was the lying that led to her conviction. Her case serves as a reminder of the seriousness of this crime and the possibility of incarceration for even the most elegant of people. Unlike other notorious white-collar criminals, Martha managed to create success out of adversity and appears stronger. However, it cannot be known whether this strength came from the guilt of her misdeeds or simply her implicit desire to succeed.
WORKS CITED
"Martha Stewart." 2011. Biography.com. 14 Mar 2011. <http://www.biography.com/ articles/Martha-Stewart-9542234>.
Kalman, Israel. Martha Stewart and the Immorality of Prison. December 2004. 14 March 2011 <http://www.bullies2buddies.com/Martha-Stewart-and-the-Immorality-of-Prison>.
Sellers, Patricia, and Eugenia Levenson. "Remodeling Martha." Fortune 152.10 (2005): 100-122. Business Source Complete. EBSCO. Web. 14 Mar. 2011.
U.S. v. Stewart, 433 F. 3d 272, 284-285 (2d Cir. 2005).
