Martha Stewart And ImClone Systems
Summary
December 2001, Martha Stewart, Chief executive of “Martha Stewart living” was indicted into prison for five months after being charged with insider trading, along with obstruction of justice, for lying to federal regulators. Martha sold 3,928 of her shares which accumulated to $227,000, two days prior to the FDA dis approval of “Imclone Systems” Erbitux cancer drug. While this typically wouldn’t raise any red flags, until the investigation further determined that Martha had a personal relationship with the owner of “Imclone Systems” Sam Waksal had dated Martha’s daughter for several years, and had called Martha two days prior to the public release of the drugs dis-approval, and suggested she sell her stocks. Waksal also tipped off numerous large investors of the dis-approval of the drug, and was also sentenced to an 87 month imprisonment, based on “insider trading”. Although Martha managed to save $45,000 dollars on the inside trade, immediately after she was proven guilty of insider trading, the stocks of her personal company “Martha Stewart living-OmniMedia” plummeted 12 percent, and continued to decline over time. In Conclusion, the negative costs of her five month sentence, reputation and company was far greater than the $45,000 saved on a poor investment. |
Questions
1. Identify the ethical transgressions that took place in this case.
2. When the connection between Imclone Systems and Martha Stewart was first revealed, analysts speculated that she would emerge relatively unscathed from any investigation., “forced at worst to return any profit she made from selling Imclone.” Does her subsequent jail sentence imply that she was targeted as a high-profile test case of insider trading? Why or why not?
3. Does the size of Stewart’s transaction (3,928 shares for about $227,000) make her behavior any more or less ethical than that of Waksal’s daughter who sold $2.5 million in ImClone shares at the same time as Stewart? Explain your answer.
4. What would prompt a high regarded public figure such as Martha Stewart to obstruct the course of justice by failing to reveal the true nature of her sales transaction with the ImClone stock?
5. What do you think would have happened if Stewart had cooperated with the federal investigators?
6. If Martha Stewart’s sale really was a high-profile test case, what messages do you think it sent to other high-profile investors?
2. When the connection between Imclone Systems and Martha Stewart was first revealed, analysts speculated that she would emerge relatively unscathed from any investigation., “forced at worst to return any profit she made from selling Imclone.” Does her subsequent jail sentence imply that she was targeted as a high-profile test case of insider trading? Why or why not?
3. Does the size of Stewart’s transaction (3,928 shares for about $227,000) make her behavior any more or less ethical than that of Waksal’s daughter who sold $2.5 million in ImClone shares at the same time as Stewart? Explain your answer.
4. What would prompt a high regarded public figure such as Martha Stewart to obstruct the course of justice by failing to reveal the true nature of her sales transaction with the ImClone stock?
5. What do you think would have happened if Stewart had cooperated with the federal investigators?
6. If Martha Stewart’s sale really was a high-profile test case, what messages do you think it sent to other high-profile investors?
Answers
1. The ethical transgressions that occurred in the case of Martha Stewart and the drug company ImClone Systems was insider trading and obstruction of justice. Insider trading occurred because Martha Stewart had a close relationship with the chief executive Dr. Sam Waksal, and was able to gain prior knowledge of the stock losing value, which gave her the opportunity to sell her 3,928 shares of stock for an average price of $58. Since she had this prior knowledge, she was able to gain $227,000 from the transaction. Furthermore, she was charged with obstruction of justice because she lied to federal regulators under oath about the details surrounding the transaction.
2. We believe that she WAS being used as a high-profile test case. Due to this case being covered so heavily by the media at the time, something drastic had to be done. If the media hadn’t covered this case as intense, the punishment more than likely would have been far less severe. We feel the public needed to see something done. When it came to the final verdict, I think the justice system not only needed but was presented with a perfect opportunity to show that nobody is above the law and people will be held accountable for their actions.
3. Regardless of the amount of money Stewart had invested in the company, she was still breaking the law. Yes, Waksal’s daughter sold a much higher volume equating to much more money, but that doesn’t make either case less or more ethical. When you break the law, you break the law. Her criminal actions were the same as Waksal’s, just with a different numeric value.
4. Martha Stewart knew that the repercussions of her actions if fully found out, would be extremely devastating to her company and her personal image. Stewart was a highly respected individual which has previously done a lot of work for communities, and was a significant role model for woman everywhere. If the true nature of this transaction had made its way into the public eye it would put a dark cloud over everything she has accomplished.
5. We think the repercussions would have been far less severe if she had co-operated fully with federal officials. Perhaps she could’ve made the case that it was a poor business choice or didn’t fully understand what she was doing as the executive was giving her information as to what she should do. We think she still would’ve been punished pretty heavily, but not have seen jail time.
6. If Martha Stewarts case truly was a high-profile test case, which we believe it was. This would clearly illustrate that the justice system is cracking down on this type of activity. High-profile investors that perhaps felt they were above the law (which seems to be a common characteristic among many of them), would second guess their decisions whether they were appropriate or not. Often in the media it seems as though rich and famous people seem to get away with a lot of unethical work in the financial sector, and I think the message that people will be prosecuted if caught was a message that’s been needed to be sent.
2. We believe that she WAS being used as a high-profile test case. Due to this case being covered so heavily by the media at the time, something drastic had to be done. If the media hadn’t covered this case as intense, the punishment more than likely would have been far less severe. We feel the public needed to see something done. When it came to the final verdict, I think the justice system not only needed but was presented with a perfect opportunity to show that nobody is above the law and people will be held accountable for their actions.
3. Regardless of the amount of money Stewart had invested in the company, she was still breaking the law. Yes, Waksal’s daughter sold a much higher volume equating to much more money, but that doesn’t make either case less or more ethical. When you break the law, you break the law. Her criminal actions were the same as Waksal’s, just with a different numeric value.
4. Martha Stewart knew that the repercussions of her actions if fully found out, would be extremely devastating to her company and her personal image. Stewart was a highly respected individual which has previously done a lot of work for communities, and was a significant role model for woman everywhere. If the true nature of this transaction had made its way into the public eye it would put a dark cloud over everything she has accomplished.
5. We think the repercussions would have been far less severe if she had co-operated fully with federal officials. Perhaps she could’ve made the case that it was a poor business choice or didn’t fully understand what she was doing as the executive was giving her information as to what she should do. We think she still would’ve been punished pretty heavily, but not have seen jail time.
6. If Martha Stewarts case truly was a high-profile test case, which we believe it was. This would clearly illustrate that the justice system is cracking down on this type of activity. High-profile investors that perhaps felt they were above the law (which seems to be a common characteristic among many of them), would second guess their decisions whether they were appropriate or not. Often in the media it seems as though rich and famous people seem to get away with a lot of unethical work in the financial sector, and I think the message that people will be prosecuted if caught was a message that’s been needed to be sent.