Business Ethics Course Fall 2009/ 2010 Instructor: Dr.

Saud Kateb

Assignment: Martha Stewart: Free Trading or Insider Trading?

Students: Doaa Ba’amer ID#: 0510296 Doaa Baothman ID#: 0610083 Moudi Al-Ghashyan ID#: 0610125 Roaa Jamjoom ID#: 0810392

Introduction:

Fraud, lying, conspiracy...not terms that any individual generally wants associated with their history, nonetheless with their reputation and personality; especially if that individual happens to be Martha Stewart. Martha Stewart: a name which almost every person who calls themselves an American can recognize. Her name pronounces itself across cookbooks, magazines and even has its own show on Style and The Learning Channel. It now pronounces itself with yet another captivating theme, as part of one of America's major scandals. The high profile nature of the Martha Stewart insider trading case led to abundant research and writing by academic and media professionals. In this presentation we seek to discuss the central moral and ethical issues surrounding the case. In addition, the greater issue of insider trading will be examined and moral foundations for the issue will be established and discussed. Finally, the presentation will conclude with a suggestion for the most consistent ethical approach to insider trading.

Background: Martha Stewart owned shares of a company Called ImClone System

Incorporated, which was founded in 1984, it is a biopharmaceutical company committed to advancing oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. In 2001 ImClone received notification that a new prescription drug, in which the company poured extensive money into research and development, would not receive approval by the Food and Drug Administration. The CEO of ImClone, Sam Waskal, in an effort to avoid financial losses to his shares of ImClone, made a call to his stock broker to dump his shares of the company stock. The broker, who also served as a broker for Martha Stewart, notified Stewart that the CEO was liquidating the
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company stock and that it would be in her financial interest to follow suit by selling off her own shares of the company, which totaled almost 4,000 shares. The Securities and Exchange Commission noticed an unusual coincidence between the selling of mass amounts of shares by the CEO of ImClone and Martha Stewart and began an investigation to determine if Martha Stewart was guilty of insider trading. Insider trading is defined by the SEC as “Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. However, in an interesting legal technicality, Martha Stewart did not necessarily breach a fiduciary duty to the other investors, since she had no real obligation to inform other investors, which would be the case if she were an officer with the company. It is therefore possible that if Martha Stewart had initially confessed to her activities that she might not have been convicted of insider trading. However, that is not the course that Ms. Stewart took. She instead chose to collude with her broker in an attempt to fabricate a story about how there was a standing order for Ms. Stewart to sell her shares if the stock price fell below $60 per share. This dynamic in the case represents an important ethical distinction in the decisions made by Ms. Stewart up until this point. When Ms. Stewart initially received the information about the potential drop in the stock price of the ImClone stock and subsequently asked her broker to sell her shares, it is possible that she did not knowingly engage in illegal behavior. While there might be discussions as to whether or not insider trading is unethical or should be illegal, the question of whether or not it is ethical to lie to federal investigators is blatantly illegal and unethical. By conspiring with her broker to defraud the Securities and Exchange Commission Ms. Stewart knowingly
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engaged in unethical behavior, for which no claim of ignorance would be credible.

Guilty of a serious crime: Martha Stewart was found guilty because of the insider trading action in

ImClone and the cause of defrauding and misleading her shareholders in her company. To illustrate, she has traded on insider information about the biotech company ImClone Systems, and by doing so; she avoided a loss of about $51,000/320,000 by selling nearly 4,000 shares of ImClone stock on the 27th of December 2001 before the news was broke to the public. On the day after, the stock tumbled by 60% due to the regulators’ rejection of the company's application for a key cancer drug (Stewart convicted on all charges, 2004). Furthermore, Ms. Stewart has sold significant amount of stocks of Martha Stewart Living Omnimedia Inc. to protect herself and to avoid losses that would have resulted after the government announced public charges against her. Shareholders of her company were deceived since she did not tell them the truth behind the significant amount of the sell. Accordingly, Ms. Stewart conducted unethical behavior by conducting insider trading actions and the misleading of her companies’ shareholders. She had also continued her unrighteous path by deceiving the government and misleading them to believe that she had an agreement with her brokers to sell ImClone stock if it fell below $60. These actions indicate unethical behavior and define the lack of integrity that made Ms. Stewart strongly guilty. In addition, we oppose to what was written in Newsweek by Martha’s retired secretary that “…Martha Steward is not Enron.” Martha’s actions were similar to what Enron’s CEO and top executives did. They have all

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cashed out their money by selling their stocks before the news broke to the public. Martha Stewart is characterized with egoism philosophy, where right or acceptable behavior defined in terms of consequences to the individual, maximizing personal interest. Moreover, according to the Cognitive Moral Development, Kohlberg’s model indicates that Martha was in the second stage, which is the stage of individual instrumental purpose and exchange, hence taking the decision of selling her stocks in both companies. To exemplify, Martha’s action are purely out of selfishness and her thoughts were aimed to reach one goal: to maximize her own interest. She sold the stocks to avoid personal losses. She thought that it was fair and acceptable to avoid personal losses, while she did not bother warn the shareholders about the upcoming losses. She bluntly did not care about the shareholders bearing losses as long as she was not losing.

Martha and the Media: Martha was attacked by the media from everywhere. T.V. news,

newspapers, radio, etc were all talking about Martha’s case. Numerous fans and reporters waited for her outside the court where the trial took place. The mass attack was due to her popularity and fame. As a result, the excessive media attention has hurt Martha. To illustrate, Martha Stewart Living Omnimedia Inc stocks have plummeted by 60%. Furthermore, criticism rose against her as well as the jury were not in her favor. Stewart said, "Dear Friends: I am obviously distressed by the jury's verdict but I take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail" (Stewart convicted on all charges, 2004).
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Although when looking at the big picture; many people think that the excessive media has hurt Martha negatively, we, on the other hand, think that it provided benefits to her in the long run. For example, it benefited her in increasing the level of famousness. Millions of people are now exposed to her. The increasing level of exposure via watching her T.V. shows and passing by her products in shops constantly makes people more curious to know about Martha. People feed on gossip, especially females –which is the original targeted market for Martha- the more they talk about her, and the more she is mentioned or attacked by the media; the more people want to know more about her. The media is helping her profit in an indirect way. An average person who walks the street and sees a poster of Martha in hand cuffs will start looking for more information about her, the people who have never heard of her will start surfing the internet to read her blogs or fan pages or even decide to buy one of her products. Another scenario would be watching her T.V shows and getting her recipes, with the effect of the media; Martha Stewart are gaining new fans every day. Furthermore, with an informal collaboration with the media; K-mart has chosen to sell Martha Stewart’s embattled company, and has extended their agreement for two years.

Martha’s Sentence: Insider trading punishments are usually on par with street crime penalties

even though it does not include physical violation actions. The person can be fined, banned from sitting on the executive or board of directors of a public company and even jailed depending in the situation. In the case of Martha Stewart, she was convicted of conspiracy and obstruction of justice in an insider stock trading case in 2004 and her punishment was five-month jail sentence, five-month house arrest, two years' probation and a $30,000 fine.

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Martha Stewart's five-month jail sentence was too lenient. It has been realized that a celebrity, a wealthy businessperson, or a political leader can get off more easily and due to their ability to pay the jail-out, they usually do not get the suffering they should feel an deserve in the prison life, instead they pay the fine demanded and exchange the small stiff cell bed in jail for a $10,000 cushion at the privacy and safety of their own home while watching their favorite T.V show and having an expensive snack. Usually there is a concern that the justice system may be unfair to the poor who have fewer resources, therefore, they cannot protect themselves nor defend themselves like wealthy criminals. Since white collar crime -insider trading- tends to occur among those of higher socio-economic standing, they can afford a better lawyer to argue in their defense. Because she is famous, Martha Stewart was able to get the most lenient sentence that normal people could not receive it if they were convicted of the same crime. Usually judges are inflexible and strict with white collar crimes especially after the multiple financial scandals -such as the case of Enron and Arthur Anderson- but that did not occur in Martha Stewart’s case. The judge Miriam Goldman Cedarbaum was sympathetic with Martha since she helped people outside her family. The judge was not being fair to the stakeholders in her leniency. Cedabaum respects social responsibility and since Martha is an active member in the society she based her sentence due to biased beliefs and an unbalanced practice of law. Being an active member in the society does not give her the right to commit whatever crime she desires, and it surely does not give the judge the right to base the case according to her liking. Equality must be implemented among all and paying for mistakes should be valued by the same amount for all people regardless of whether it was a yearly sentence, a large check or community service hours. Although Ms. Stewart's punishment was not appropriate because she had her special treatment, the media coverage affected her company stock value
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negatively leading to huge losses. This affected her badly and that was the most powerful punishment.

The Role She Should Play in Her Company: Research has shown that reputation of the CEO and top management is

linked to the reputation of the firm which is a key factor that promotes investors' confidence and customers' trust in the firm. If reputation is damaged by ethical misconduct; solving the problem will be difficult and will take a long time to stabilize. As a result, Martha Stewart should be kept away from playing any critical role in her company. After the case is settled and all losses caused by Martha are recovered and the reputation of the company re-elevates from its tarnished image, Martha should be put under probation from managing the company. Unfortunately for the company and the shareholders; since Martha is the face of the company and is the main source of profit for the company (before the scandal), it is crucial that Martha remains a part of the company. That does not mean she should continue in her old position, this only means that Martha will not be laid-off the company. She will be the face of the company without actual managing of business affairs. In addition to being a simple picture on the cover of her book or magazine, she is required to finish a certain amount of hours in community service and helping the ones in need or doing some form of extracurricular activities that would add to the value of the company which was lost with its bad image. Unfortunately for her, gaining the audience and the fans after losing them is much tougher than gaining them the first time, so repairing the image will take a long time. When the state of the company increases to the level it sustained before the scandal or even if it increases more than that of the previous state; Martha should be given a level of "monitored" authority to

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manage a sector of the company and to have a moderate say in its operations.

Martha’s present life: After her release from prison in March 2005, Stewart launched a highly

publicized comeback, and was once again involved in Martha Stewart Living. In addition to that, offerings of her company's Martha Stewart Everyday line at Kmart were expanded to include a new line of ready-made home furnishings, and its mass market interior paint line became available at larger Sears stores. However, the most heavily publicized and promoted aspect of her comeback was day time television, The Martha Stewart Show which she returned to hosting. She also appeared in an adapted version of The Apprentice also known as (The Apprentice: Martha Stewart). Both shows were premiered in September 2005, and The Martha Stewart Show is currently in its fifth season, in contrast to her other show, The Apprentice which only lasted for one season due to the received poor ratings during its conclusion; that did not encourage Martha to continue with another season. In the reading field, Stewart released a new book called The Martha Rules on starting and managing a new business, and a month later her company released Martha Stewart Baking Handbook, both of these books were released in 2005. After a year from releasing The Martha Rules, she released her own Home keeping Handbook, a reference book about looking after your house. She also is a regular contributor of cooking, gardening, and crafts segments on NBC's Today show. In the awards field; Stewart's daily talk show was nominated in six categories for the 33rd Annual Daytime Emmy Awards in 2006, including Best Host and Best Show.

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With her increasing number of fans in various fields of the business sector, MSLO was encouraged to launch a line of houses that carry her name to be built by KB Home initially in Cary, North Carolina and various other locations nationwide. Those homes started to finalize its buildings early 2006, the plan was set according to 650 homes and were planned to be sold for prices ranged $200,000 to $400,000. A line of paper-based crafts for EK Success is also in development. In September 2007, she launched an upscale line of home wares for Macy's, which is the largest brand launch in Macy's history putting in mind that Stewart has designed more than 2,000 items exclusively for Macy's. In addition to television and merchandising and to add to the income of publicity and by using creative ways to target potential employees Stewart made a special appearance on the comedy-drama series Ugly Betty. Moreover, MSLO launched a 24-hour satellite radio channel with Sirius in November 2005, on which Stewart currently hosts a weekly call-in show. In July 2008, Craft items under the names "Martha Stewart Celebrate" and "Martha Stewart Create", two divisions of Martha Stewart Living Omnimedia, premiered in Wal-Mart stores which increased the income level of Wal-Mart highly in addition to providing sky high profits for Martha –due to the huge number of customers entering Wal-Mart daily-. The deal came about in part due to the closing of more than 600 K-Mart stores in the U.S.

Her conviction made her face big challenges and since she overcame these challenges her success rate has been increasing rapidly in during the last period. Even though a few years back her Moral compass was set to head for the opposite way –that’s when her only exit out of embarrassing and pathetic situations was by lying and deceiving- but when her morals were improved and her ethical standards leveled up a notch, that is when

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she managed to get out of the difficult times, healed her wounds, regained her fans, paid her fines and recovered her position bravely and rapidly.

References:

Ferrell, , Fraedrich, , & Ferrel, . (2009). Business ethics: ethical decision making and cases. South-Western College Pub.

Martha Stewart. Retrieved From http://en.wikipedia.org/wiki/Martha_Stewart

Shabana, km. Martha Stewart: free trading or insider information

Stewart convicted on all charges. (2004). Retrieved from

http://money.cnn.com/2004/03/05/news/companies/martha_verdict/

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