Martha Stewart Scandal

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Martha Stewart Scandal

BAF3M

June 12th, 2015

Corporate Overview

With over 100 million customers and consumers,Martha StewartLivingOmnimedia Inc. is a very successful online and merchandising company worldwide. The company influences

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its customers and consumers by offering different lifestyle materials in each of their magazine issues andproducts sold. There are a variety of magazines offeredthroughonline versions and the physical magazines such as Martha Stewart Weddings, Martha Stewart Living and Everyday Food. The company also offers many television programs such as Martha Stewart’s Cooking School, Martha Bakes andother“madefortheweb”videoseries. Finally, Martha Stewart’s companylifestyle products are available throughlimitedretailers such as The Home Depot, Macy’s, Staples and more.

ImClone Systems LLC is a biotechnology company that creates, as well as produces, many different treatments for cancer and other antibody drugs. The company was founded by Samuel Waksal in 1984; there is roughly 1,128 employees according to the company's annual report from 2011. ImClone sales figures were estimated at $1.3 billion dollars worldwide in 2007, roughly $70 per share.ThescandalincludingMartha Stewartoccurred after the company discovered that one of their cancer drugs was not going to be accepted by the FDA. Sam Waksal, with the help of Peter Bacanovic, informedMartha Stewartofthe rejection, also telling her to sell her stocks before news got around. The company has now won clearance from the FDA to sell the drug, which occurred in 2004.

Scandal

Martha Stewart’s career was threatened by her association with a pharmaceutical company, ImClone Systems, in which Stewart owned stocks. Stewart sold 4000 shares of herImClone stocks on December27, 2001.Thenextday, theFoodandDrugAdministration rejected ImClone System’s cancer drug called Erbitux. Following the FDA’sannouncement, the company’s stocks plummeted drastically. There were similar situations that occurred with a number of the company’s insiders, all in the same time frame. ImClone’s Counsel John Landes, sold $2.5 million dollars worth of stocks on December 6; Ronald Martell, the vice president of marketing, sold $2.1 million worth of company stock on December 11; and four other executives dumped their in shares between the dates of December 12 and December 21. These events were very coincidental, which raised much suspicion surrounding ImClone Systems.

A later investigation revealed that after Sam Waksal, the CEOof ImClone anda goodfriend of Stewart, learned that the FDA would reject the drug, he contacted his broker, Peter Bacanovic. Bacanovic was also Stewart’s broker. Waksal told Bacanovic to get rid of $2.4 million worth of stocks. Phone records indicate that Bacanovic contacted Martha Stewart on December 27 and advised her to sell her stock; herstockwas soldten minutes afterthe phone call.

Sam Waksal was arrested on June 12 and was charged with insider trading, obstructionof justice, and bank fraud. Waksal eventually pleaded guilty to insider trading, as well as

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another six out of thirteen charges. He was sentencedtosevenyears inprison, howeverhe was released after five. Inhis plea, Waksalstated: “I amawarethat my conduct,while Iwas in possession of material nonpublic information, was wrong, I’ve made some terrible mistakes and I deeply regret what has happened.”

Although Martha Stewart claimed she was innocent, a jury found her guiltyonfour counts of obstructing justice and lying to investigators. On June 17, 2004, a judge sentenced Stewart to five months in prison and two years of probation, along with a fine of $30,000.

Since this scandal does not specifically relate to financial statements, no GAAP’s would apply, however there are many moral and ethical standards that were violated in this situation. Stock brokers are expected to keep confidential information private. Since Bacanovic was a broker, he clearly violated the ethical standards that stock brokers are supposed to follow. Bacanovic revealed confidential information to the CEO and toMartha Stewart as well; he was the one whoinformedStewart togetridof herstocks andrevealed information that should have been kept private. Because of the broker, Stewart was allowed to benefit off of a situation that was extremely unethical.

The financial statements that have been affected are mainly the balance sheet and income statement. The balance sheet was affected as soon as Martha Stewart sold her stock. By selling her shares, Stewart has decreased the amount of assets that she owned, and when she sold her shares, her total assets decreased. This affected her equity, which has decreased by the selling of assets. Also, the income statement was affected. By selling her shares, Stewart was able to prevent any major losses. If she had kept the stocks, there might have been more losses and expenses, which canlowerthe net profit.However, since she sold her stocks before they were able to depreciate, she evaded any possible loss of money that would have affected the company. Therefore, by selling her stocks, her equity remained significantly unaffected.

Evading Detection

The insider tradingscandalthatoccurredin December2001 involvingMartha Stewarthad three key people involved. The three people were Martha Stewart, SamWaksal, andPeter Bacanovic. Martha Stewart was convicted of insider trading, sentenced to 5 months in prison, 5months house arrestanda fineof$30,000. SamWaksal, CEOofImClone, knewthe drug was not accepted by the FDA therefore informing only few people of theinformation and telling them to sell their stocks, he was also sentenced to prison. Finally, Peter Bacanovic, who was both Stewart’s and Waksal’s stock brokers at the time, was also involved in this crime as he assisted in unethical accounting behaviour.

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All three key players managed to take part in this insider trading scandal by communicating with each member through several personal phone calls. It is known that Martha had attempted to reach Sam before she sold all her ImClone stocks, however she could not reach him. Each person involved had a plan; Sam Waksal had called Martha and his daughter informing them that they should sell their stocks they had invested in ImClone. Martha and her broker also had a plan: if the stock reached below $60 a share Martha ordered a “stop-loss” therefore selling all of her 3,928 stocks owned. Before the FDA rejection, they had planned out their responses just in case they were discovered.