Reflect on the Martha Stewart Fraud Triangle discussion you participated in last week and be sure to incorporate the insight you gained from participating in the activity. Specifically, your Milestone Three System Flaws and Repercussions analysis should:

• Analyzepersonalorprofessionalpressuresthatmighthavecontributedtoethicsbreakdown,supportingresponsewithcaseevidenceandrelevantresearch
• Analyze opportunities that allowed for illegal/unethical behavior with little risk of detection or consequences, supporting response with case evidence and relevant research
• Analyze rationalizations that might have led those behaving improperly to believe that actions were justified, supporting response with case evidence and relevant research
• Assess dollar and qualitative financial impact of crisis on the company, supporting response with evidence from case study
• Evaluate company?s compliance with implicit expectations of corporate social responsibility and impact on business sustainability, supporting response with case details and relevant research
• Evaluate social costs of the firm?s improper actions and effect on public support for explicit corporate social responsibility policies, supporting response with concrete examples from case and relevant research

FIN 341 Milestone Three Guidelines and Rubric For the final project submission, you must take on the role of an analyst working for a financial consulting firm. The Analysis section is a critical component of a complete and well-thought-out case analysis. Analysis is an essential component of the financial consultant's ability to make appropriate recommendations for corrective actions. Prompt: In this module you will continue your analysis by addressing the system flaws and repercussions identified for your final project case analysis. To begin, reflect on the Martha Stewart Fraud Triangle discussion you participated in in Module Five and be sure to incorporate the insight you gained from participating in the activity. Specifically, your Milestone Three System Flaws and Repercussions analysis should: Analyze personal or professional pressures that might have contributed to ethics breakdown, supporting response with case evidence and relevant research Analyze opportunities that allowed for illegal/unethical behavior with little risk of detection or consequences, supporting response with case evidence and relevant research Analyze rationalizations that might have led those behaving improperly to believe that actions were justified, supporting response with case evidence and relevant research Assess dollar and qualitative financial impact of crisis on the company, supporting response with evidence from case study Evaluate the company's compliance with implicit expectations of corporate social responsibility and impact on business sustainability, supporting response with case details and relevant research Evaluate social costs of the firm's improper actions and their effect on public support for explicit corporate social responsibility policies, supporting response with concrete examples from the case and relevant research Guidelines for Submission: Your submission should be 2-3 pages long (not including references), double-spaced, 12-point Times New Roman font and should use the most recent edition of APA formatting for references. Instructor Feedback: This activity uses an integrated rubric in Blackboard. Students can view instructor feedback in the Grade Center. For more information, review these instructions. Critical Elements Analysis: System Flaws: Pressures Exemplary (100%) Meets \"Proficient\" criteria, and response is particularly insightful, nuanced, or comprehensive Proficient (85%) Analyzes personal or professional pressures that might have contributed to ethics breakdown, supporting response with case evidence and relevant research Needs Improvement (55%) Analyzes pressures that might have contributed to ethics breakdown, supporting response with case evidence and relevant research, but analysis is cursory or illogical or contains inaccuracies Not Evident (0%) Does not analyze personal or professional pressures that might have contributed to ethics breakdown Value 15 Analysis: System Flaws: Opportunities Meets \"Proficient\" criteria, and response is particularly insightful, nuanced, and/or comprehensive Analyzes opportunities that allowed for illegal/unethical behavior with little risk of detection or consequences, supporting response with case evidence and relevant research Analysis: System Flaws: Rationalizations Meets \"Proficient\" criteria, and response is particularly insightful, nuanced, and/or comprehensive Analyzes rationalizations that might have led those behaving improperly to believe actions were justified, supporting response with case evidence and relevant research Analysis: Repercussions: Firm Meets \"Proficient\" criteria, and response is especially insightful and well supported in making connections between types of losses and their overall financial impact on the company Meets \"Proficient\" criteria, and response demonstrates keen insight into multiple aspects of corporate social responsibility and how it impacts a company financially over the long term Assesses dollar and qualitative financial impact of crisis on the company, supporting response with evidence from case study Analysis: Repercussions: Sustainability Evaluates company's compliance with implicit expectations of corporate social responsibility and impact on business sustainability, supporting response with case details and relevant research Analyzes opportunities that allowed for illegal/unethical behavior with little risk of detection or consequences, supporting response with case evidence and relevant research, but analysis is cursory or illogical or contains inaccuracies Analyzes rationalizations that might have led those behaving improperly to believe actions were justified, supporting response with case evidence and relevant research, but analysis is cursory or illogical or contains inaccuracies Assesses dollar and qualitative financial impact of crisis on company, supporting response with case evidence, but response is cursory or contains inaccuracies, or evidence is inconsistent with claims Evaluates company's compliance with implicit expectations of corporate social responsibility and impact on business sustainability, supporting response with case details and research, but response is cursory or illogical or contains inaccuracies Does not analyze opportunities that allowed for illegal/unethical behavior with little risk of detection or significant consequences 15 Does not analyze rationalizations that might have led those behaving improperly to believe actions were justified 15 Does not assess dollar and qualitative financial impact of crisis on company 15 Does not evaluate company's compliance with corporate social responsibility obligations and the consequent impact on business sustainability 15 Analysis: Repercussions: Society Meets \"Proficient\" criteria and demonstrates keen insight into the multiple ramifications of firm-level behaviors for the broader community in which it operates Evaluates social costs of firm's improper actions and effect on public support for explicit corporate social responsibility policies, supporting response with concrete examples from case and relevant research Articulation of Response Submission is free of errors related to citations, grammar, spelling, syntax, and organization and is presented in a professional and easy-toread format Submission has no major errors related to citations, grammar, spelling, syntax, or organization Evaluates social costs of firm's improper actions and effect on public support for explicit corporate social responsibility policies, supported by examples and relevant research, but response is cursory or illogical or contains inaccuracies Submission has major errors related to citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas Does not evaluate social costs of firm's improper actions and effect on public support for companies that adopt explicit corporate social responsibility policies 15 Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas 10 Total 100% For the exclusive use of A. Zmiyov, 2016. 9-305-034 REV: JANUARY 26, 2006 LYNN SHARP PAINE CHRISTOPHER M. BRUNER Martha Stewart (A) It's sort of the American way to go up and down the ladder, maybe several times in a lifetime. And I've had a real long up. . . . And now I've had a long way down. Martha Stewart1 Martha Stewart was en route to Mexico for vacation on December 27, 2001, when she received word from her assistant, Ann Armstrong, that her stockbroker was trying to reach her.2 As Armstrong had noted in her telephone log, \"Peter Bacanovic thinks ImClone is going to start trading downward.\" Armstrong connected Stewart with Bacanovic's office at Merrill Lynch in New York, where she reached Douglas Faneuil, Bacanovic's 27-year-old assistant.3 As directed by Bacanovic, who was also on vacation at the time, Faneuil relayed to Stewart that \"we have no news on the company, but Peter thought you might like to act on the information that Sam Waksal [ImClone's founder and CEO, also a client of Bacanovic] was trying to sell all of his shares\" held by Merrill. Stewart, a longtime friend of Waksal and investor in ImClone, immediately instructed Faneuil to sell her ImClone holdings3,928 shares then trading at $58 per share.4 The sale, which represented about 0.03% of Stewart's assets and a tiny portion of the more than 7 million ImClone shares traded that day,5 netted Stewart about $228,000. In an effort to find out what was going on with ImClone, she also put in a call to Waksal's office but was only able to reach his assistant, Emily Perret. Her business completed, Stewart returned to holiday mode. Later, she recounted the ImClone stock situation to her friend Mariana Pasternak, commenting, as Pasternak would later recall, \"Isn't it nice to have brokers who tell you those things?\" The next day, ImClone publicly announced (after the close of trading) that the U.S. Food and Drug Administration (FDA) had rejected the company's application for approval of Erbitux, a drug for fighting colon cancer. By the close of the next trading day, ImClone's stock had tumbled to $46.6 (See Exhibit 1.) Stewart's Background Having worked as a stockbroker from 1968 to 1973, Stewart was well versed in the brokerage business, but for Stewart, those days were a far cry from the celebrity status she now enjoyed as CEO of Martha Stewart Living Omnimedia, Inc. (MSLO), the publicly traded company she had founded, and as a director of the New York Stock Exchange and Revlon.7 ________________________________________________________________________________________________________________ Professor Lynn Sharp Paine and Research Associate Christopher M. Bruner, J.D., prepared this case. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright 2004 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Harvard Business School. This document is authorized for use only by Artur Zmiyov in FIN-341 Financial Regulation and Ethics 16EW1 taught by Lindsay Conole, Southern New Hampshire University from August 2016 to December 2016. For the exclusive use of A. Zmiyov, 2016. 305-034 Martha Stewart (A) Upon leaving Wall Street in 1973 Stewart began her catering business, a foundation upon which she would build the product defining all of her subsequent business venturesherself. In 1982 she published her first book, Entertaining, and in 1987 became a consultant and spokeswoman for Kmart. Her magazine, Martha Stewart Living, came out in 1991, followed by a television series of the same name in 1993. A mail-order catalog followed in 1995. In October 1999, after various transactions to consolidate her businesses under a single entity, MSLO went public, selling over 8 million shares of stock at an offering price of $18, for proceeds of $132.3 million.8 As Jeffrey Toobin wrote in The New Yorker, \"[u]nlike most of the famous C.E.O.s of the period, she built her company . . . from scratch, and, unlike virtually anyone else, she herself was in many ways its singular product.\"9 MSLO, which by year-end 2001 had annual revenue of over $295 million and approximately 600 employees, was \"an integrated content and commerce company that create[d] 'how-to' content and domestic merchandise for homemakers and other consumers.\"10 The company's productsgenerally leveraging Stewart's namespanned categories including home decorating, cooking and entertaining, gardening, crafts, holidays, domestic maintenance, weddings, and babies and kids. Content and merchandise were sold through four business segments: Publishing, Television, Merchandising, and Internet/Direct Commerce.11 The MSLO Board of Directors consisted of Stewart and five others: Arthur C. Martinez (former chairman and CEO of Sears Roebuck and Co.); Darla D. Moore (partner of Rainwater, Inc., a private investment firm, and former managing director of Chase Bank); Sharon L. Patrick (MSLO's president and then-chief operating officer); Naomi O. Seligman (cofounder and senior partner of Cassius Advisers, an e-commerce consultancy); and Jeffrey W. Ubben (founder and managing partner of ValueAct Capital Partners, L.P., an investment partnership).12 As MSLO had stated in its public offering disclosures, the company was \"highly dependent upon [its] founder,\" who remained \"the personification of [its] brands\"; notwithstanding a strategic effort to reduce such dependence, \"Martha Stewart, as well as her name . . . are integral to our marketing efforts and form the core of our brand name. Our continued success and the value of our brand name therefore depends, to a large degree, on the reputation of Martha Stewart.\"13 Due in part to MSLO's success, Stewart became a mainstream \"social, cultural, and media force in the United States,\" if an enigmatic one. She was described both as \"thoroughly modern\" and as a \"traditionalist,\" as \"both feminist and antifeminista substantial and powerful public company founder and director . . . and a domestic diva, touting conventional female roles in society and the family.\"14 As the investigation into her ImClone trade unfolded, however, she became (perhaps predictably) fodder for late-night satire (Conan O'Brien quoting her as saying that \"'a subpoena should be served with a nice appetizer'\").15 The ImClone Connection The nexus among Stewart, Bacanovic, and Waksal was Stewart's daughter Alexis. Bacanovic and Alexis became friends when he was a student at Columbia and she at Barnard.16 Waksal, closer to Stewart's age, had dated Alexis when she was 22, and it was Alexis who introduced them.17 Stewart and Waksal subsequently became \"close friends who traveled together and spoke often.\"18 Alexis also introduced Bacanovic and Waksal, for whom Bacanovic worked at ImClone in a marketing position before becoming a broker at Merrill Lynch.19 Stewart was thought to have initially invested in ImClone in 1999 as \"a gesture of support for her friend,\" Waksal, who had helped her negotiate \"an advantageous split\" with Time Warner (her publisher) in 1997.20 Founded in 1984, ImClone was \"a biopharmaceutical company whose mission [was] to advance oncology care by developing a portfolio of targeted biologic treatments\" aimed at \"a 2 This document is authorized for use only by Artur Zmiyov in FIN-341 Financial Regulation and Ethics 16EW1 taught by Lindsay Conole, Southern New Hampshire University from August 2016 to December 2016. For the exclusive use of A. Zmiyov, 2016. Martha Stewart (A) 305-034 variety of cancers.\"21 When Bristol-Myers Squibb launched a tender offer for ImClone at $70 per share in late 2001, Stewart tendered all of her shares, but the offer was oversubscribed, and consequently she was \"able to sell only about 20% of [her] shares.\"22 In 2001 Stewart had several brokerage accounts and, according to sources close to her, had consolidated them into the Merrill Lynch account with the intention of selling most of those investments and \"turn[ing] the bulk of her fortune over to a professional money manager,\" who would not need personal approval of each transaction as brokers do.23 Her holdings in the consolidated Merrill Lynch account \"totalled just four-tenths of one percent of her personal wealth, which remained concentrated in stock in her company and in real-estate holdings.\"24 By late 2001, while Stewart's company was doing quite well, ImClone's future was less certain. The company had a $2 billion investment and marketing deal with Bristol-Myers Squibb25 but had \"few sources of current revenue\" and had effectively \"bet its future on Erbitux.\"26 ImClone had completed its application to the FDA on October 31, and it had been reported that the FDA would determine by the end of the year whether the application would be accepted for filing.27 Federal Officials Come Calling As Faneuil would later recall, within days of the announcement of the FDA's rejection of Erbitux, questions began to arise within Merrill Lynch regarding preannouncement trades.28 When a supervisor approached him about it, Faneuil called Bacanovic (still on vacation), who told him that Stewart's shares were sold pursuant to a \"tax-loss selling plan\" in place since early December. When Faneuil learned that her shares had actually been sold at a profit, however, he raised the question again, and this time Bacanovic told him that she sold pursuant to an agreement they had to sell if the price fell below $60, the first time such an agreement had been mentioned to Faneuil. At several points during the first half of 2002 Bacanovic reiterated this explanation, on one occasion telling Faneuil that \"'I've spoken with Martha. I've met with her. And everyone's telling the same story. Everyone's telling the same story. This was a $60 stop-loss order. That was the reason for her sale. We're all on the same page, and it's the truth. It's the true story. Everyone's telling the same story.'\" The Securities and Exchange Commission (SEC), the FBI, and the U.S. Attorney's Office for the Southern District of New York launched investigations into sales of ImClone stock shortly after the Erbitux announcement, and Stewart and Bacanovic were each questioned twice by federal investigators over the coming months.29 Stewart had been traveling through much of January 2002 and had not spent much time discussing the matter with her lawyer John Savarese (of Wachtell, Lipton, Rosen & Katz, the law firm that had taken her company public in 1999), but they had agreed to meet with prosecutors on February 4.30 Stewart and Savarese spoke by phone on January 31, after which Stewart asked her assistant Armstrong to call up her message log, sat down at Armstrong's desk, and \"deleted the [December 27] message from Bacanovic, changing it to: 'Peter Bacanovic re imclone.'\"31 Stewart then \"stood up and told Armstrong to 'put it back the way it was.'\"32 Stewart, evidently thinking that prosecutors simply wanted to know whether she had been tipped by Waksal, then left for another trip to Germany, arriving back shortly before her interview on February 4 and leaving virtually no time for preparation with Savarese.33 The interview could have been delayed, but as an unnamed source close to the defense later stated, there was strong pressure from Stewart to \"'go in there and show she had nothing to hide'\"; an unnamed lawyer from the defense team further commented, \"'It's not easy telling someone like Martha Stewart to take the Fifth. . . . She would have gone ballistic.'\"34 3 This document is authorized for use only by Artur Zmiyov in FIN-341 Financial Regulation and Ethics 16EW1 taught by Lindsay Conole, Southern New Hampshire University from August 2016 to December 2016. For the exclusive use of A. Zmiyov, 2016. 305-034 Martha Stewart (A) In the February 4 interview, Stewart told federal investigators that she spoke to Bacanovic on December 27, instructing him to sell once he told her that the price had fallen below $60, that she had sold at that point to avoid being bothered while on vacation, and that she did not know if there was a message from Bacanovic on that day in her assistant's phone log.35 Later, in an April 10 phone interview, Stewart told federal investigators that she did not recall whether she had spoken with Bacanovic about Waksal on December 27 and did not recall being informed of stock sales by the Waksals, reiterating the previous explanation of her ImClone sale.36 Matters Go Public The Energy and Commerce Committee of the U.S. House of Representatives, which began investigating events surrounding the Erbitux FDA application in January 2002, decided to look into whether friends and relatives of Waksal had sold ImClone stock prior to the FDA's decision.37 Information provided to the House Committee by ImClone disclosed Stewart's involvement,38 and the June 7, 2002, public revelation of her sale appears to have originated with a press leak from the House Committee.39 During the weeks that followed, Stewart publicly asserted on various occasions that her ImClone sale had been lawful, including through counsel on June 7, in a press release on June 12, and in another press release on June 18 (which she also read the next day at a meeting of securities professionals), repeating the stop-loss explanation and stating that she had had no inside information.40 MSLO's stock price fell through June, from $19.01 on June 6 to $12.55 on June 24 (aside from \"brief resurgences\" on June 13 and June 19).41 Stewart turned down requests to meet voluntarily with congressional investigators, submitting records and communicating with the House Committee through counsel.42 In September, Billy Tauzin (R-LA), chair of the House Committee, and other representatives sent a letter to Attorney General John Ashcroft requesting that the Department of Justice investigate whether Stewart \"knowingly caused materially false representations to be made\" to the House Committee in connection with the ImClone investigation43 and saying that their investigations left them \"deeply skeptical of Ms. Stewart's accounts.\"44 Meanwhile, on June 13 the FBI arrested Waksal on insider trading charges, and on June 21 Bacanovic was suspended from Merrill Lynch.45 Faneuil began cooperating with the government on June 20, stating that \"he, not Bacanovic, had spoken to Stewart on December 27; that he had informed Stewart of the Waksals' trading instructions; and that he did not know of any agreement between Stewart and Bacanovic to sell\" at $60.46 He also stated that Bacanovic had \"offered him an extra week of vacation and a plane ticket\" to mislead federal investigators about the sale.47 In October 2002, Faneuil pled guilty to a misdemeanor charge of receiving payment for not informing the government of violations of federal securities laws, upon which he and Bacanovic were fired by Merrill Lynch.48 Following public revelation of her ImClone sale, \"leaks from Congress kept the Stewart story in the newsespecially the tabloids, which saw Stewart as a perfect subject.\"49 At the behest of her lawyers, Stewart ended her cooking appearances on CBS's Early Show because the network declined to provide assurances that she would not be asked about her legal troubles.50 (This followed an appearance on June 25 in which Stewart was asked about the matter, replyingwhile chopping a head of cabbage\"'I think this will all be resolved in the very near future and I will be exonerated of any ridiculousness. . . . I want to focus on my salad, because that's why we're here.'\")51 On October 3, Stewart resigned from the Board of the New York Stock Exchange,52 a post she had assumed earlier that year on June 6,53 just a day before the story of her ImClone trade broke. While the resignation 4 This document is authorized for use only by Artur Zmiyov in FIN-341 Financial Regulation and Ethics 16EW1 taught by Lindsay Conole, Southern New Hampshire University from August 2016 to December 2016. For the exclusive use of A. Zmiyov, 2016. Martha Stewart (A) 305-034 was nominally voluntary, inside sources \"said she was effectively shoved out the door\" in light of Faneuil's plea deal.54 On the news of her resignation, MSLO's stock \"plunged to an all-time low of $6.21\" per share.55 The Charges By early 2003, \"prosecutors were talking to Douglas Faneuil and weighing the question of whether to indict Stewart.\"56 During the spring, with an indictment on the horizon, her lawyers entered plea negotiations. On June 1, Stewart sat in the New York offices of Wachtell Lipton to evaluate a potential deal under which she would plead guilty \"to a single felony: making a false statement to federal agents. The agreed-upon sentencing guidelines would make probation or house arrest likely, although there was no guarantee that Stewart would avoid prison.\" Cooperation with federal prosecutors was not part of the deal, nor was a \"profferan advance previewof what she was going to say.\" In a teleconference, prosecutors \"narrowed the issues down to this: Would Stewart admit that she had lied to the investigators? In the end, late Sunday night, Stewart decided that she couldn't do it.\" As related by Toobin, \"the prosecutors were no more pleased than Stewart's team\" that the case had come to this. \"But the prosecutors felt that they had given Stewart two chances to tell the truth, then offered her what they considered a generous plea bargain. 'We had no desire to prosecute this woman,' one investigator in the case told [Toobin]. 'But this was fairly egregious lying, worse than just asserting her innocence. She concocted a whole story, and we had to follow up to confirm or dispel it.'\" The next morning Stewart and her team met again at the offices of Robert Morvillo, a white-collar defense lawyer who had joined the team, to reevaluate the deal. Her lawyers all told her that \"she would never get a better deal. A trial was a risk. No doubt a felony plea would complicate her role at her company, but the alternativeindictment, trial, and possible conviction of multiple felonies was far worse.\" Again Stewart refused, and she was indicted two days later. Under the nine-count indictment handed down by the grand jury, Stewart faced two counts of making false statements, one count of obstruction of justice, one count of securities fraud, and one count of conspiracy, while Bacanovic faced charges of making false statements, obstruction of justice, perjury, making and using false documents, and conspiracy.57 Specifically, Stewart was charged with lying to federal investigators during her February 4, 2002 and April 10, 2002 interviews, obstructing the SEC's investigation, attempting to defraud investors by making false statements (directly and through counsel) regarding her sale of ImClone stock with the intention of preserving her own company's stock value, and entering a conspiracy with Bacanovic to cover up the circumstances of her ImClone sale.58 Bacanovic was charged with lying to federal investigators during his January 7, 2002 interview, obstructing the SEC's investigation, lying under oath in testimony at the SEC on February 13, 2002, falsifying a worksheet by adding \"@60\" with respect to Stewart's ImClone stock, and entering a conspiracy with Stewart.59 On Wednesday, June 4, 2003, Stewart surrendered to federal authorities and, in a nine-minute arraignment at a federal court in Manhattan, she and Bacanovic pled not guilty and were released without bail.60 Her lawyers seized on the absence of insider trading charges, saying in a statement that the \"predicate for the entire investigation . . . has proven to be false,\" but the SEC filed a civil suit the same day accusing Stewart and Bacanovic of insider trading based on the information she allegedly received regarding the Waksals' ImClone sales.61 5 This document is authorized for use only by Artur Zmiyov in FIN-341 Financial Regulation and Ethics 16EW1 taught by Lindsay Conole, Southern New Hampshire University from August 2016 to December 2016. For the exclusive use of A. Zmiyov, 2016. 305-034 Martha Stewart (A) Later that day, Stewart resigned as chairman and CEO of MSLO (though remaining on the board and continuing to serve as \"what the company called its 'chief creative officer'\"), citing \"'the enormous sense of responsibility I feel to our shareholders and to all those who have worked so hard to make Martha Stewart Living Omnimedia a success.'\"62 Following her indictment MSLO's stock price stood at about $10 per share, having fallen 47% over the previous year, as \"the company whose identity [was] so tied to Stewart's became unprofitable,\" losing \"millions in market value as customers defected and legal costs climbed.\"63 (See Exhibit 1 for MSLO's stock chart.) Motion to Dismiss In October 2003, Stewart made a motion to dismiss the novel charge that she had committed securities fraud under Rule 10b-5 by lying about her ImClone sale in order to preserve the value of MSLO's stock.64 Judge Miriam Goldman Cedarbaum would have to decide whether the allegations in the indictment failedas a matter of lawto amount to a crime and rule on Stewart's constitutional arguments. Stewart argued, in sum, that: The public statements that she and her legal counsel made in June 2002 regarding her sale of ImClone stock could not have been \"material\" to a reasonable investor in light of the intense press coverage and total amount of information about her in the marketplace at the time (as evidenced by a 700-page appendix including numerous news reports) The requirement that the statements be made \"in connection with\" the purchase or sale of securities was not met here, because the statements pertained to her ImClone sale, having nothing to do with MSLO's securities The securities laws, applied as the government sought, were unconstitutionally \"vague,\" providing no notice that such conduct was illegal and thus violating due process The charge violated her First Amendment right to \"speak and to defend herself on a matter of public concern,\" punishing her for declaring her innocence and chilling speech by corporate executives and their lawyers (and effectively favoring the government's speech) The government, for its part, argued that the \"materiality\" and \"in connection with\" issues were questions of fact for the jury and inappropriate for a motion to dismiss; that the \"vagueness\" claim did not stand up given the government's burden of proving intent to defraud (which Stewart could not reasonably claim not to have known was illegal); and that the First Amendment does not protect false statements or speech that is \"part of the commission of a crime.\" Judge Cedarbaum set the motion to dismiss for hearing on November 18, 2003. Resolution of this motion would effectively test the validity of this novel theory of securities fraud, which legal experts and Wall Street watchers had queried since the indictment had come down.65 In the meantime, speculation on the merits and likely disposition of the SEC's civil charges of insider trading continued.66 6 This document is authorized for use only by Artur Zmiyov in FIN-341 Financial Regulation and Ethics 16EW1 taught by Lindsay Conole, Southern New Hampshire University from August 2016 to December 2016. For the exclusive use of A. Zmiyov, 2016. Martha Stewart (A) 305-034 Stock Charts: Martha Stewart Living Omnimedia and ImClone Systems Exhibit 1 Martha Stewart Living Omnimedia Common Stock Price 10/19/1999 (IPO) - 10/31/2003 45.00 40.00 35.00 30.00 6/7/02: Public revelation of Stew art's sale 25.00 20.00 10/3/02: Stew art resigns f rom NYSE Board 15.00 10.00 5.00 6/4/03: Stew art indicted, SEC civil charges f iled 10/19/02 12/19/02 02/19/03 04/19/03 06/19/03 08/19/03 10/19/03 10/19/02 12/19/02 02/19/03 04/19/03 06/19/03 08/19/03 10/19/03 08/19/02 06/19/02 04/19/02 02/19/02 12/19/01 10/19/01 08/19/01 06/19/01 04/19/01 02/19/01 12/19/00 10/19/00 08/19/00 06/19/00 04/19/00 02/19/00 12/19/99 10/19/99 0.00 Source: Datastream ImClone Systems Common Stock Price 10/19/1999 - 10/31/2003 90.00 80.00 70.00 60.00 50.00 12/28/01: FDA rejects Erbitux application 40.00 30.00 20.00 10.00 08/19/02 06/19/02 04/19/02 02/19/02 12/19/01 10/19/01 08/19/01 06/19/01 04/19/01 02/19/01 12/19/00 10/19/00 08/19/00 06/19/00 04/19/00 02/19/00 12/19/99 10/19/99 0.00 Source: Datastream Source: Thomson Financial Datastream. 7 This document is authorized for use only by Artur Zmiyov in FIN-341 Financial Regulation and Ethics 16EW1 taught by Lindsay Conole, Southern New Hampshire University from August 2016 to December 2016. For the exclusive use of A. Zmiyov, 2016. 305-034 Martha Stewart (A) Endnotes 1 Jeffrey Toobin, \"Lunch at Martha's,\" The New http://www.newyorker.com/printable/?fact/030203fa_fact. Yorker, February 3, 2003, available at 2 Except as otherwise noted, the facts outlined below are drawn from United States v. Martha Stewart and Peter Bacanovic, 2004 U.S. Dist. LEXIS 12538 (S.D.N.Y. July 8, 2004). 3 See Toobin, \"Lunch at Martha's\"; Jeffrey Toobin, \"A Bad Thing,\" The New Yorker, March 22, 2004, available at http:/ewyorker.com/printable/?fact/040322fa_fact1. 4 United States v. Martha Stewart and Peter Bacanovic, 305 F.Supp. 2d 368, 373 (S.D.N.Y. February 27, 2004); see also Toobin, \"Lunch at Martha's.\" 5 Toobin, \"A Bad Thing.\" 6 Securities and Exchange Commission v. Martha Stewart and Peter Bacanovic, 03-CIV-4070 (NRB)(S.D.N.Y.), Litigation Release No. 18169 (June 4, 2003), available at http://www.sec.gov/litigation/litreleases/lr18169.htm. 7 See \"Timeline: Martha Stewart,\" available at http://money.cnn.com/pf/features/popups/ martha_timeline/; Martha Stewart Living Omnimedia, Inc., Definitive Proxy Statement, filed as of April 1, 2002, p. 3, available at http://www.sec.gov/Archives/edgar/data/1091801/000095012302003236/0000950123-02003236-index.htm. 8 See ibid.; Martha Stewart Living Omnimedia, Inc., Annual Report on Form 10-K for the year ended December 31, 2001, p. 3, available at http://www.sec.gov/Archives/edgar/data/1091801/000095012302003033/ 0000950123-02-003033-index.htm. Subsequent references to the \"MSLO Annual Report\" refer to the 2001 Annual Report, unless otherwise noted. 9 Toobin, \"A Bad Thing.\" 10 MSLO Annual Report, pp. 2, 3, F-8. The 2001 Annual Report lists \"approximately 610 employees\" as of March 18, 2002, up from approximately 585 the previous year. Martha Stewart Living Omnimedia, Inc., Annual Report on Form 10-K for the year ended December 31, 2000, p. 2, available at http://www.sec.gov/Archives/ edgar/data/1091801/000095012301500412/y47127e10-k405.txt. 11 MSLO Annual Report, p. 2. 12 MSLO Definitive Proxy Statement, p. 3. 13 Martha Stewart Living Omnimedia, Inc., Amended Registration Statement on Form S-1, filed as of October 18, 1999, p. 7, available at http://www.sec.gov/Archives/edgar/data/1091801/0000950123-99-009363index.html. 14 Joan MacLeod Heminway, \"Save Martha Stewart? Observations About Equal Justice In U.S. Insider Trading Regulation,\" Texas Journal of Women and the Law 12 (Spring 2003): 247, 277-278. 15 Toobin, \"Lunch at Martha's.\" 16 See generally Toobin, \"Lunch at Martha's.\" 17 \"Daughter: Jail 'wrong' for Martha,\" March 17, 2004, available at http://money.cnn.com/2004/ 03/17ews/companies/martha_alexis/. 18 Toobin, \"A Bad Thing.\" 19 Ibid.; Toobin, \"Lunch at Martha's.\" 20 Ibid. 8 This document is authorized for use only by Artur Zmiyov in FIN-341 Financial Regulation and Ethics 16EW1 taught by Lindsay Conole, Southern New Hampshire University from August 2016 to December 2016. For the exclusive use of A. Zmiyov, 2016. Martha Stewart (A) 305-034 21 ImClone Systems Incorporated, Annual Report on Form 10-K for year ended December 31, 2001, p. 1, available at http://www.sec.gov/Archives/edgar/data/765258/000095012302003290/0000950123-02-003290index.htm. 22 United States v. Martha Stewart and Peter Bacanovic, 305 F.Supp. 2d 373 (S.D.N.Y. February 27, 2004); see also Toobin, \"Lunch at Martha's\" (explaining that she actually bought 2,500 shares in 1999, which stake was raised to 5,000 in a stock split). 23 Toobin, \"Lunch at Martha's.\" 24 Ibid. 25 Josh Goldstein, \"ImClone Shares: Sale was a money mistake as well,\" Detroit Free Press, July 17, 2004, available at http://www.freep.com/cgi-bin/forms/printerfriendly.pl. 26 Toobin, \"Lunch at Martha's.\" 27 Ibid. \"FDA regulations required the agency to decide . . . whether the application was administratively and scientifically complete and could be accepted for review.\" Only once \"accepted for filing\" would the FDA \"review the application to determine whether the drug will be approved for marketing.\" Leigh-Ann M. Patterson, \"Halting the Hype: FDA and SEC Crack Down on Pre-Approval Statements,\" September 1, 2004, available at http://www.pharmexec.com/pharmexec/content/printContentPopup.jsp?id=123005. 28The following events are drawn from Faneuil's testimony. See United States v. Martha Stewart and Peter Bacanovic, 2004 U.S. Dist. LEXIS 12538, *10-*11 (S.D.N.Y. July 8, 2004). 29 United States v. Martha Stewart and Peter Bacanovic, 2004 U.S. Dist. LEXIS 12538, *2 (S.D.N.Y. July 8, 2004); see also N. Scott Fletcher and Thomas S. Leatherbury, \"Martha Stewart's Explanations of Innocence: Securities Fraud or Protected Speech,\" Communications Lawyer (Winter 2004): 4. 30 Toobin, \"A Bad Thing.\" 31 United States v. Martha Stewart and Peter Bacanovic, 2004 U.S. Dist. LEXIS 12538, *13 (S.D.N.Y. July 8, 2004) (recounting testimony of Armstrong). 32 Ibid. 33 Toobin, \"A Bad Thing.\" 34 Ibid. Note that Stewart also did not tell her lawyers that she had agreed to the interview with Jeffrey Toobin in January 2003 that formed the basis of The New Yorker article \"Lunch at Martha's,\" cited above. Toobin recalls, \"A couple of days before the article appeared, Savarese called and implored me to tell him what his client had said.\" Toobin later reflected, \"My article didn't help; rather, it let the prosecutors know that she was sticking with her original story.\" Ibid. \"I was also subpoenaed by the S.E.C. for my tape of the interview; when I declined to produce it, the agency dropped the matter.\" Ibid. Interestingly, Toobin had worked for Savarese as a summer intern in 1986. Ibid. 35 United States v. Martha Stewart and Peter Bacanovic, 2004 U.S. Dist. LEXIS 12538, *3-*4 (S.D.N.Y. July 8, 2004). Bacanovic's statements were consistent with this. Fletcher and Leatherbury, p. 4. A \"stop-loss order\" is \"a written instruction from a client to her stockbroker to sell shares when they reach or drop below a certain price.\" Ibid., p. 8, n. 15. Though no written order was in place, Stewart and Bacanovic claimed they had an understanding to this effect. Ibid., p. 4. 36 Ibid., at *5. 37 Paul Abrahams, \"House to probe ImClone drug,\" The Financial Times (U.S. Edition), January 19, 2002, p. 8; Andrew Pollack, \"Martha Stewart Said to Sell Shares Before F.D.A. Ruling,\" The New York Times, June 7, 2002, p. C4. The Committee initially looked into \"ImClone's clinical trials and its pre-approval promotional statements about Erbitux,\" and particularly \"whether ImClone had misled public investors into believing that its FDA 9 This document is authorized for use only by Artur Zmiyov in FIN-341 Financial Regulation and Ethics 16EW1 taught by Lindsay Conole, Southern New Hampshire University from August 2016 to December 2016. For the exclusive use of A. Zmiyov, 2016. 305-034 Martha Stewart (A) application was on track when it was not.\" The investigations surrounding Erbitux led to enhanced cooperation between the FDA and the SEC with respect to such preapproval promotional statements. See Patterson. 38 Pollack, p. C4. 39 See Alan Reynolds, \"Martha's Mistrial: The Insider Trading Accusation Came from a Cowardly Press Leak from a Congressional Committee,\" available at http://www.cato.org/research/articles/reynolds-040309.html (referring to an Associated Press story by Theresa Agovino dated June 7, 2002); see also Pollack, p. C4; Fletcher and Leatherbury, p. 4; Toobin, \"A Bad Thing\" (\"During the summer of 2002, leaks from Congress kept the Stewart story in the news. . . .\"). 40 United States v. Martha Stewart and Peter Bacanovic, 305 F.Supp. 2d at 373-75 (S.D.N.Y. February 27, 2004). 41 Ibid., pp. 372-373. 42 Timothy J. Burger and Leo Standora, \"Martha Mex Connection: Probers say she made cell call to Waksal; he says no way,\" Daily News (New York), September 6, 2002, p. 5. 43 Reynolds, \"Martha's Mistrial.\" 44 Toobin, \"Lunch at Martha's.\" 45 Toobin, \"A Bad Thing.\" 46 Fletcher and Leatherbury, pp. 4-5. 47 Ibid. 48 Ibid. The two had previously been on paid leave. Ibid. Faneuil had been interviewed on several occasions by federal investigators starting in January 2002. Fletcher and Leatherbury, p. 8, n. 12. 49 Toobin, \"A Bad Thing.\" 50 Ibid. 51 Ibid. 52 Tracy Connor, \"Big Board Gongs Martha: Loses NYSE post, stock at all-time low,\" Daily News (New York), October 4, 2002, p. 3. 53 \"NYSE Elects 13 to Board of Directors,\" June 6, 2002, available at http://www.nyse.com/press/ 1044027444736.html. 54 Connor, p. 3. 55 Ibid. 56 The following narrative is drawn from Toobin, \"A Bad Thing.\" 57 See Jake Ulick, \"Martha indicted, resigns,\" June 4, 2003, available at http://money.cnn.com/ 2003/06/04ews/martha_indict/?cnn=yes; United States v. Martha Stewart and Peter Bacanovic, 2004 U.S. Dist. LEXIS 12538, *51-*72 (S.D.N.Y. July 8, 2004). 58 See United States v. Martha Stewart and Peter Bacanovic, 2004 U.S. Dist. LEXIS 12538, *51-*72 (S.D.N.Y. July 8, 2004); United States v. Martha Stewart and Peter Bacanovic, 305 F.Supp. 2d at 370 (S.D.N.Y. February 27, 2004). 59 United States v. Martha Stewart and Peter Bacanovic, 2004 U.S. Dist. LEXIS 12538, *51-*72 (S.D.N.Y. July 8, 2004). 60 Ulick, \"Martha indicted, resigns.\" 10 This document is authorized for use only by Artur Zmiyov in FIN-341 Financial Regulation and Ethics 16EW1 taught by Lindsay Conole, Southern New Hampshire University from August 2016 to December 2016. For the exclusive use of A. Zmiyov, 2016. Martha Stewart (A) 305-034 61 Ibid.; see also Securities and Exchange Commission v. Martha Stewart and Peter Bacanovic, 03-CIV-4070 (NRB)(S.D.N.Y.), Litigation Release No. 18169 (June 4, 2003). In addition to the criminal and civil cases brought by the government, civil class-action cases alleging securities fraud were also brought. See Fletcher and Leatherbury, pp. 6, 8, n. 2. 62 Ulick, \"Martha indicted, resigns.\" 63 Ibid. 64 The following discussion is drawn from Fletcher and Leatherbury, pp. 5-8. 65 See, e.g., Erin McClam, \"Stewart's denial of a crime is itself a crime: Prosecutors,\" The Toronto Star, June 6, 2003, p. E02. 66 See, e.g., Stephen Bainbridge, \"The insider trading charge against Martha Stewart,\" November 7, 2003, available at http://www.professorbainbridge.com/corporation_ law_insider_trading_martha_stewart_case/. 11 This document is authorized for use only by Artur Zmiyov in FIN-341 Financial Regulation and Ethics 16EW1 taught by Lindsay Conole, Southern New Hampshire University from August 2016 to December 2016