The Martha Stewart Case
Professor Beverly H. Lee | AbstractThis is a brief synopsis into the life of Martha Stewart and the legal fortunes or misfortunes of Martha Stewart. We will delve into the various stages in her life and the outcome of the events that transpire in her life.
By: Paul Cumberbatch
BUSA 2106-200 |

Fraud, lying, conspiracy...not terms that any individual generally wants associated with their history, nevertheless with their reputation and personality; even if that individual happens to be Martha Stewart. 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. As a well-respected author of books on cooking, entertaining and decorating she rose to prominence. It was also due to the expansion of her brand name by means of magazine and television show, and serving as CEO of the Martha Stewart Omnimedia. However; as it would come as an ironic coincidence that she would have to go to court which subsequently led to Ms. Stewart’s resignation from her post as CEO amid allegations of insider trading in 2002. Martha Stewart was born on August 3, 1971 as Martha Kostyra in New Jersey. She was the second of six children as she grew up in Nutley, New Jersey. By Age 13 she was working a model, making appearance in fashion shows, television and printed advertisements. As time went along she began attending Barnard College in Manhattan, Where she earned a degree in European and architectural history in 1962. During her time at Barnard she would meet Andy Stewart who was a Yale law student. By 1961 the two were married. After six years, and the birth of their daughter Alexis, Mrs. Stewart went to work as a stockbroker for the boutique firm of Monness, Williams, and Sidel. She would work on Wall Street until 1972, when her family would move to Westport, Connecticut.
Shortly after her marriage, Martha Stewart and her husband Andrew moved to Westport, Connecticut. Where they purchased and began the restoration of an 1805 farmhouse on Turkey Hill Road which would later become the model for their television studio for the show Martha Stewart living. During that time it became apparent of Martha Stewart’s ability to be an extravagant decorator and restorer. Following this time Ms. Stewart opened a catering business which began in her basement along a friend from her modeling days in Norma Collier. This business venture would become a great success.
The Martha Stewart insider trading case was a high profile case filled with uncertainty; however, based on the information I gathered and the fact she was found guilty it was necessary to start with an assumption of her innocence or guilt. Based on that assumption, there are several reasons that Martha Stewart did not handle her indictment responsibly which can be summarized in a recap of the charges: she lied about receiving illegal information leading her to sell her stock, she lied about having a prearranged agreement to sell her stock when it fell below $60 per share, she tried to hamper the investigation by providing false information, and she worked with her broker to obstruct justice and make false statements regarding the scandal.
Martha Stewart had owned shares in a company called ImClone System Incorporated. It was a biopharmaceutical company which committed to the advancement of oncology care. In this they would research and develop a portfolio targeted to biologic treatments designed to address the medical needs of patients with a variety of cancers. However, in 2001 ImClone received notice that one of their prescription drugs would not be approved by the Food and Drug Administration (FDA). This news was not good for ImClone due to the fact they had poured extensive resources and money into the product. As a result the CEO of ImClone, Sam Waskal, had planned in order to avoid financial losses to his assets with ImClone to have his broker Peter Bacanovic dump his shares with the company.
In this process Peter Bacanovic who was also Martha Stewarts broker, notified Mrs. Stewart that the CEO was liquidating the 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 4,000shares.
As luck would have it the Securities and Exchange Commission (SEC) 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 whether Martha Stewart was guilty of insider trading. To be more precise as to what it means to do insider trading I had to know what it meant, and according to the SEC it is defined 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. With this in mind it could have been possible that if Martha Stewart had initially confessed to her activities that she might not have been convicted of insider trading. That was not the case where she chose to conspire 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.
According to SEC, Stewart avoided a loss of $45,673 by selling all 3,928 shares of her ImClone Systems stock on December 27, 2001, after receiving material, nonpublic information from Peter Bacanovic, who was Stewart's broker at Merrill Lynch. The day following her sale, the stock value fell 16% to $46 per share. In the months that would follow most notably on June 25, 2002, CBS anchor Jane Clayson began to grill Mrs. Stewart on the air about ImClone during her regular segment on The Early Show. As this continued Mrs. Stewart focused on chopping cabbage and famously quipped, "I just want to focus on my salad.” Following this incident on the Early Show, Martha Stewart stepped down from her position on the board of director of the New York Stock Exchange on October 3, 2002. This was part of an agreement that prosecutors made with Douglas Faneuil, who was an assistant of Peter Bacanovic.
In June of 2003, Martha Stewart was indicted by the U.S. government on nine count of securities fraud and obstruction of justice. On the day of the indictment, the Securities and Exchange Commission filed a civil complaint against Mrs. Stewart with charges of insider trading for violating § 17(a) of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934, and SEC Rule 10b-5. However, these civil charges were held pending the criminal proceedings.
As the trail ran the preceding judge was Miriam Goldman Cedarbaum, United States District Judge. The attorneys for the state were Michael S. Schachter, Assistant United States and Attorney Mary Jo White, United States Attorney Criminal Division, New York, NY. Lastly legal counsel for the defendant Martha Stewart were John J. Tigue, Jr., Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C., New York, NY USA. Rebecca A. Monck, Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C., New York, NY USA. Robert G. Morvillo, Morvilo, Abramowitz & Grand, P.C., New York, NY USA and counsel for the defendant Peter Bacanovic were David J. Apfel, Goodwin Procter, LLP, Boston, MA USA. Richard M. Strassberg, Goodwin Procter, LLA, New York, NY USA. The trial was also of the Memorandum Opinionorder which meant the case would not create any precedent. In my look at the case brief the opinion by Judge Cedarbaum was this, “The Government has moved in limine to preclude the defendants from arguing in opening statements or presenting evidence that would tend to show: (1) that the Government's motives in investigating and prosecuting Stewart were improper; (2) that the fact that the indictment does not charge either defendant with the crime of insider trading shows that the Government does not believe that either defendant committed the crime of insider trading; (3) that Stewart is being prosecuted for asserting her innocence and exercising her First Amendment right to free speech; and (4) that Count Nine is a novel application of the securities laws. For the reasons that follow, the motion is granted.” The whole point of this was that the defendants contended that the government's eagerness to obtain evidence against one defendant was relevant to the credibility of cooperating witnesses and that the jury should be permitted to draw inferences from the absence of a charge for insider trading.
Accordingly, Ms. Stewart conducted unethical behavior by conducting insider trading actions and the misleading of her companies’ shareholders. After a highly publicized five-week jury trial that was the most closely watched of a wave of corporate fraud trials. Mrs. Stewart was found guilty in March 2004 of conspiracy, obstruction of justice, and making false statements to federal investigators. In this case she was then sentenced to a five-month jail sentence, a five-month house arrest, two years of probation and a $30,000 fine. In this many may have found the sentence of five months too lenient. This led to speculation 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. As for Mr. Bacanovic and Mr. Waksal were also convicted of federal charges and sentenced to prison terms. In August 2006, the SEC announced that it had agreed to settle the related civil case against Stewart. In this Mrs. Stewart agreed to give up assets gained through illegal acts to the amount of $58,062. This would include the interest from the losses she avoided, as well as a civil penalty of three times the loss avoided, or $137,019. There was also an agreement to a five-year ban from serving as a director, CEO, CFO, or any other officer role responsible for preparing, auditing, or disclosing financial results of any public company.
As the time for incarceration came closer Mrs. Stewart asked to be place in prison in Florida or Connecticut. This was due to not wanting to serve in a Federal Prison Camp in Alderson, West Virginia thanks in part to it being in a remote area. In 2004, Mrs. Stewart’s lawyer would claim that the remoteness would make it difficult for Stewart's then-90-year old mother to visit her. Judge Miriam Goldman Cedarbaum would then recommend the Federal Bureau of Prisons (BOP) that Mrs. Stewart be given her first choice or second choice of which prison to stay in. It was later stated by a spokesperson for the U.S. Department of Justice that the BOP would not send her to Federal Correctional Institution Danbury because the news media could too easily access the facility. It was also problematic to send her to Federal Correctional Complex, Coleman because of the complication provided by hurricane Ivan. As such, the BOP would have Mrs. Stewart assigned to the Federal Prison Camp, Alderson.
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. Her conviction made her face big challenges and since she overcame these challenges her success rate has been increasing rapidly.

Works Cited
Shaw, Nancy. “Martha Stewart Does Insider Trading.” Social Text 21.4 (2003): 51-67. Academic Search Complete. Web. 7 Mar. 2013.
Frohlich, Cheryl, Chris Shoup, and Richard Fretz. “The Effect of the Key Person and Market Efficiency: The Martha Stewart Omnimedia Case.” Journal of Accounting & Finance Research 12.5 (2004): 62-73. Business Source Complete. Web. 10 Mar. 2013.
US District Court Cases, Combined. “2004 U.S. Dist. LEXIS 789, *.” LexisNexis. Web. 12 Feb. 2013.
U.S. Securities and Exchange Commission Litigation Release No. 19794. “SEC v. Martha Stewart and Peter Bacanovi, 03 Civ.” www.sec.gov/litigation/litreleases/2006/lr19794.htm. Web. 12 Feb. 2013.
“Securities Act of 1933.” P.56. www.sec.gov/about/laws/sa33.pdf. Web. 15 Feb. 2013.
Naughton, Keith. "More 'Ridiculousness'" The Daily Beast. Newsweek/Daily Beast, 07 July 2002. Web. 1 Mar. 2013.
"SEC Charges Martha Stewart, Broker Peter Bacanovic with Illegal Insider Trading." SEC Charges Martha Stewart, Broker Peter Bacanovic with Illegal Insider Trading. N.p., n.d. Web. 17 Mar. 2013.
"Martha Stewart Biography." Bio.com. A&E Networks Television, n.d. Web. 17 Mar. 2013.

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[ 1 ]. http://www.biography.com/people/martha-stewart-9542234
[ 2 ]. http://www.sec.gov/answers/insider.htm
[ 3 ]. http://www.sec.gov/news/press/2003-69.htm
[ 4 ]. http://www.thedailybeast.com/newsweek/2002/07/07/more-ridiculousness.html
[ 5 ]. http://www.sec.gov/about/laws/sa33.pdf
[ 6 ]. A motion made at the start of a trial requesting that the judge rule that certain evidence may not be introduced in trial.
[ 7 ]. http://www.sec.gov/litigation/litreleases/2006/lr19794.htm