Business Case Studies, Women Executives/CEO's, Brand CEOs: The Case of Martha Stewart

 

The ImClone Scandal: Martha, Penny Wise...? Cont...

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The Securities and Exchange Commission (SEC), the Federal Bureau of Investigation (FBI) and the USAttorney's office investigated into the timing of the sale of ImClone stock byWaksal's family and Martha. The investigations centered on whether the trades weremade in violation of securities laws and regulations that prohibit trading on the basis of material non-public information .On the charges of insider trading and breach of fiduciary responsibility involved therein, Waksal was sentenced to more than seven years imprisonment andwas ordered to pay a fine of $4.3million.When investigators asked about the tipping and the reasons for the timing of the sale, Martha said that her stock sale was based on a previous agreement with her broker atMerrill Lynch⁷ , Peter Bacanovic, to sell the shares if the stock fell to $60 a share. Though there was some discrepancy in what Martha and Bacanovic said regarding the date of their agreement, a business manager of Martha testified that Bacanovic mentioned, in November 2001, about selling Martha’s ImClone shares at $60 or $61.⁸

The case came to a climaxwhen the government's starwitness,Douglas Faneuil, Bacanovic's assistant at Merrill Lynch testified on February 3rd 2004, that Bacanovic ordered him to informMartha thatWaksals were selling ImClone stock. He said that he was not aware of any prior agreement. On February 10th 2004,Martha’s assistant,AnnArmstrong confirmed that her boss altered a phone message left by Bacanovic indicatingWaksal’s stock sale, on December 27th 2001, and asked her to change it back. Bacanovic’s passing of information about one client Waksal, to another, Martha, was in breach of the duties of trust and confidence owed to Merrill Lynch and its clients. Moreover, Bacanovic and Martha were said to have made false statements regarding the phone message left by the former to Martha on the day of the sale and the standing agreement between them, trying to cover up and conceal the reason for the sale. Though the charges of securities fraud or insider trading were dismissed for lack of evidence, they were convicted on the following counts - of lying, of obstruction of justice and of conspiracy. They were convicted under '1001' that prohibited lying to any federal agent, even by a person not under oath and accused of any other crime.9 Ironically, ImClone’s cancer drug, which was at the center of the story, got approval fromFDA, in February 2004, when she was on the verge of being convicted. This came as a "gift of the magi"10 to Martha who was found guilty not for the action but for lying about it.

The whole drama episode had its impact on the CEO's image and hence on the brand image. There was an obvious slide in MSO’s revenues¹¹ . Publishing, MSO's largest business segment,which accounted for $182.6million, or 62%of total revenues in 2002, fell by 25.6% to $135.9million, in 2003.Merchandising represented 17%, or $48.9million in 2002. But in 2003, it increased by 9.2%to $53.4million. Internet /Direct Commerce business segment of Martha Stewart: The Catalog For Living, marthastewart.com, and marthaflowers.com contributed 12%, or $36.9 million, of total revenues, in 2002, which dropped by 26.4% to $30.8million in 2003. The television segment recorded its highest ever in 2002, contributing 9% or $26.7 million to the company’s total revenues. But then, in 2003, it recorded $25.7 million, a decline by 3.7%. The television show, Martha Stewart Living was dropped from Viacom’s CBS and UPN stations afterMartha's indictment in 2003.While the scandal had already started affecting the company’s sales, analysts wondered if the company would survive in the wake of Martha’s conviction and imprisonment. They suggested that MSO should distance itself from its founder, as it was believed, "Once you do anything that creates doubt, you undermine your ability as a leader."¹² Soon after, she was declared guilty on March 15th 2004, Martha resigned from her positions as the director and chief creative officer of the company, but continued to discharge her duties as founding editorial director. The sentencing was set for June 17th 2004.

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7]A leading global financial management and advisory company in the United States.
8]"Timeline: Martha Stewart", http://money.cnn.com
9]"On the rise and fall of Martha Stewart", op.cit.
10]A short story by O Henry, which is famous for its abrupt and satirical ending, where Jim and Della, the newly weds end up selling their most valuable possessions in order to buy Christmas gifts for each other. Della sells her long hair to buy a platinumchain for Jim's watch, and Jimsells his watch to buy combs for Della. These gifts were, however, of no use to them.
11]www.marthastewart.com
12]Seidle Russell, "Is ethical conduct possible in the wake of such disasters as Enron, ImClone?", http:// www.mcgilltribune.com/media/storage/paper234/news/2002/10/16/FeaturesThePrice.Of.Corporate.Ethics.In.The.Free.Market-297740-page1.shtml?norewrite200607050602&sourcedomain=www.mcgilltribune.com, October 16th 2002