The Martha Stewart insider case


The Martha Stewart insider case was a high profile court case that captured media attention. It was also one that was filled with great ambiguity as it relates to penal aspect and determination of being guilty or innocent

This assignment seeks to apply the evidence from the case study incorporated with existing academic investigation to discuss the central moral and ethical issues surrounding the case as it relates its associations to business and societal ethics. In addition, the greater issue of insider trading will be examined and moral foundations for the issue will be established and discussed. Furthermore, an analysis of whether or not, Martha Stewart receive adequate punishment, alongside those who would be in cahoots relating to the insider trading such as Peter Bacanovic and his junior associate, Douglas Faneuil from Merrill Lynch. Finally, the paper will conclude with an assessment of which is more important as it pertains to ethics and the law.

Insider Trading

For one to examine critically the circumstances Stewart encountered it would be practical to examine the transpiration of conviction on offences such as insider trading and the penalty associated with such a misdemeanour.

In relation to the case of Martha Stewart, insider trading was clearly evident in Martha Stewart’s instance. Martha had been a shareholder of the biopharmaceutical company ImClone System Incorporated. ImClone focused much on advance oncology care and had designed a new drug called Erbitux for which would have a treatment for patients with colon cancer. However, the licensing application had been rejected and would have resulted in ImClone’s share price plummeting. Merrill, Lynch's senior broker, Peter Bacanovic had informed Martha about the drastic market change impending of the ImClone’s share price through his assistant Douglas Faneuil. Mr Faneuil had indicated that the Waksals had sold off all their securities from ImClone. Sam Waksal, the CEO of ImClone had made a call to Bacanovic, who was also his broker and dumped his company share in order to avoid financial losses. Subsequently, Ms Stewart sold all her securities which totalled 3928.

According to Investopedia, insider trading can be either illegal or legal depending upon the nature and timeframe in which the insider makes the trade. Insider trading refers to the buying and selling of securities by an individual that has obtained non-public material information, that is having special knowledge is being partial to other investors who do not have access, for example, divulging of information that will impact of a company’s share price of even market value once released. It is seen also as a breach of a fiduciary duty or relationship of confidence and trust. Directors, brokers and even family member can be penalized for such an act. Martha Stewart had no real obligations to other shareholders of ImClone as she was not in an official position within the company. Therefore, it is a clear indication that there was no breach of fiduciary duty really in this situation. However, Martha Stewart did commit insider trading, since she possessed material information about the company's financial instability in addition to being deceptive to authorities of what knowledge she was given; continuously fabricating a story that they had had a pre-existing agreement to sell shares if the stock price fell to $60. In addition, the possibility had existed that she might not have been convicted of insider trading by SEC.

Martha Stewart would have had some kind of knowledge on the ethics surrounding trading of stock being a CEO but one could argue that she was not cognizant of dynamics surrounding the offence in her situation when she sold off her shares. Amidst, to her overwhelming job she may not have even given it much thought. Her ideal concerns were the potential losses she would have incurred as a result of a decline in share price. Subsequently, the ImClone stock fell by 60% due to the regulators’ rejection of the company's application for a key cancer drug.

Ethics can be defined as a theory of moral principles or as it pertains to professionals, a guided philosophy. Normative ethics is a part of moral philosophy, or ethics, concerned with criteria of what is morally right and wrong. It includes the formulation of moral rules that have direct implications for what human actions, institutions, and ways of life should be like. This branch of ethics is sub divided into two moral theory and applied ethics.  Moral values are also called virtues which are character traits developed by simulating those influential figures in one’s life. Moral values have to do with an internal state of beliefs which result in a particular external behaviour.  For instance, Martha Stewart displaying her morality lies when lying to the US authorities even though this was obviously illegal and unethical. Her action can also be analysed through egoism philosophy where right or acceptable behavior defined in terms of consequences to the individual, regarding maximizing self-interest. She thought that it was fair and acceptable to avoid personal losses, while she did not bother to warn the shareholders about the upcoming losses.

To elaborate more on the case of ethics, Martha Stewart would have defrauded and misled her shareholder as they had been given falsifying information about the amount of shares she would have sold having. She had also sold stocks of Martha Stewart Living Omnimedia as a means of protective measures towards the public charges the government would have brought against her. Martha, along with her broker Peter Bacanovic and Sam Waksal actions would have had a grave impact on the company’s market share causing losses to other investors in the ImClone company. Furthermore, the loss would have been probably less substantial if the crime of insider trading had not taken place.These actions indicate unethical behavior and define the lack of integrity that made Ms. Stewart strongly and was compared to the Enron CEO and other top level management as they were guilty of the same crime.

According to (J F.Steiner, 2009), in civil cases, courts may assess damages for harm done to others by a corporation. Two types of damages evaluated are compensatory and punitive damages. Compensatory damages are payments awarded to redress concrete losses suffered by injured parties (J F.Steiner, 2009) while punitive damages are those in excess of a wronged party actual losses are awarded to punish corporations and to deter repetition of such an act (J F.Steiner, 2009) . Therefore she was legally responsible to compensate investors from Martha Stewart Living Omnimedia as well as ImClone. The media coverage of Martha Stewart’s actions had negatively affected her company’s stock as well as her misleading investors by making false statements related to the government inquiry into Ms. Stewart’s suspicious stock trading. As a result stockholders suffered losses money because of the scandal, even though, the material information was not directly connected to her company, her misconduct of securities fraud would have indirectly impactful. One would also agree that at the time she bluntly did not care about the shareholders bearing losses as long as she was a part of the imminent demise. Martha and other executives had to disburse 5 million dollars in compensatory damages to its shareholders.

On the other hand, Ms. Stewart did not have an obligation to ImClone investors necessarily but punitive damages, however little should have been made to other ImClone investors because she possessed an unfair disadvantage not to mention that by withdrawing could have been impactful although there was no definitive evidence to indicate that the losses would have been less significant if a public announcement was just made.

With regards to Faneuil, Bacanovic and the other two defendants they would have indirectly liable because they had breached organization ethics in that they both acted irresponsibly illegal. Bacanovic and Faneuil breached Merrill Lynch’s ethics in the form of company policy; Merrill Lynch also distributed policies advising its employees, of their responsibilities under the federal securities laws. Bacanovic had coerced Faneuil into sharing client information with another {Martha Stewart} and as a resulted in the indirect initiation of security fraud on ImClone resulting in the decline in the market value and in turn losses to investors especially those with a significant quantum. Therefore both individuals should have been fines with punitive damages, that is, the disgorging of losses incurred to shareholders and civil fines which had been the end result. The two other defendants, would also been guilty of damages to investor because they knowingly engage in the activities of insider trading and benefited which was unethical and illegal.

Again when discussing the case of ethics regarding Martha Stewart case study, we could also assess Merrill Lynch’s ethics. With regards to all suspicious activities, from Dec 26-28, management of Merrill Lynch had reported the uncanny movement of securities at ImClone. Merrill Lynch was accurate with their approach as the company had had a policy which entails some degree ethics so as to protect the rights of client primarily his/her personal information.

It states that, Merrill Lynch's client information privacy policy provides

Employees may not discuss the business affairs of any client with any other employee, except on a strict need-to-know basis.

We do not release client information, except upon a client's authorization or when permitted or required by law.

The policy prohibiting disclosure of client orders stated, in pertinent part: Information on client orders may not be disclosed to any other person for other than bona fide business purposes, or used as the basis of any solicitation.

You should not "piggyback;" that is, enter transactions after a client's trades to take advantage of perceived expertise or knowledge on the part of the client. If the client's successful trading pattern arose from an improper element such as inside information, you (and the Firm) could be subject to a regulatory or criminal investigation or proceeding (S.E.C v Martha Stewart v Peter Bacanovic)

Based upon this policy, it indicates that they practice concepts of the theory of moral unity which conceptualizes that business actions are judged by the ethical standards of society. Moreover if they had not commence investigation the company could have been accused of unethical conduct like conspiracy perjury of failing to report suspected illegal activity. Furthermore, it would be a breach of trust and professional ethics.

If the Merrill Lynch had done otherwise, it would have had a substantial impact, on being known as, a reputable and trustworthy company. Clients would feel oblige to withdraw their accounts and seeking others to do their financial management. Law and civil suits could be brought against them. Finally the actually company could be fines heavily and restrict them from their daily operation.

Indictment & Verdict of Martha Stewart & Other Parties

Based on the charges, which included insider trading, conspiracy, obstruction of justice and making false statements on would determine if what it fair, in reference to Martha Stewart. The facts had been presented by the US attorneys and the Securities Exchange Commission because they felt that the crimes of Martha Stewart were considered to be serious white collar crimes.

According to the Securities and Exchange Act, Martha Stewart was found to have violated Section17 Rule 10 (b) (5) of the Securities and Exchange Commission’s Act she had been deemed to intentionally perform an inside trade directly or indirectly, singly or in concert, by the use of the means or instruments of transportation or communication in, or the means or instrumentalities of, interstate commerce, or by use of the mails, or of any facility of any national securities exchange, in the offer or sale, and in connection with the purchase or sale, of ImClone securities: (a) employed devices, schemes, or artifices to defraud; (b) obtained money or property by means of, or otherwise made, untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and (c) engaged in transactions, acts, practices and courses of business which operated or would have operated as a fraud or deceit upon purchasers of ImClone securities and upon other person (S.E.C v Martha Stewart v Peter Bacanovic). The court had operated on the facts presented in the case brought against Martha Stewart, assessing the case in contravention with the law. Furthermore, her position as a former director of NYSE, and working as a security broker from 1968 to 1973. One could argue that such factors had led both US attorneys and SEC in pursuing their respective cases. Stewart along with Waksal was also under investigation by the FBI.

The indictment against Stewart was also based on evidence of possible cover up, in conjunction with Peter Bacanovic where they would have entered into an unlawful conspiracy to obstruct investigations.

The jury’s, eight women and four men, verdict that she was guilty beyond a reasonable doubt of the conspiracy and obstruction of justice charges was practical and just, some may argue. The jury deliberated for 14 hours over three days .On 5th the jurors had announced verdicts of Martha Stewart and Peter Bacanovic find each party guilty on four counts of lying and conspiring to lie to conceal the fact that she had been tipped with insider information. However, one can not necessarily say beyond a reasonable doubt because no tangible evidence was given to qualify such. One could agree it could be mere speculator and circumstantial even though she had deviated from the truth. Finally the verdict was practical and unavoidable because element of lying was very much evident especially with regard to her many public releases in addition to her obvious involvement in the entire controversy.

In conclusion, Truth is attainable in business and many accomplish it through honesty and integrity.Unfortunately, there are many commit fraud in the business world. It is important that everyone should know business ethics that is the study of good and evil, right and wrong, and just and unjust actions in business.A mass of principles,

values, norms and thoughts concerned with what conduct ought to be exists to guide them.In this case, if Martha Stewart were perhaps better trained in the field of ethics, she may have never suffered the terrible trial like this.


Overall one must seek to analyse the importance of both elements law and ethics; whether it is better to uphold one’s ethics or is it more beneficial to obey the law. Generally law and ethics often overlap, therefore striking a balance is essential when making the correct decisions. Law can be demarcated as a consistent set of universal rules that are generally accepted and often enforced. Very often it is held the business is not bound by any ethics other than abiding by the law.

In business one will uphold the law more so than one’s ethics because everything ethical is not always legal. Even though law embodies ethics and mandate ethical conduct the two are far from co existent. Ethical values and legal principles are still however somewhat closely related but ethical obligations often exceed the law. In some cases legislation must be passed in order to make an ethical perspective the broadened norm.

In my opinion, it would be practical, to assess the basis of the circumstance in question. If choosing to obey the law means giving oneself an opportunity to challenge the law through legal and/or political means, for the sake of one’s ethical beliefs; then that's what one should do so. However, if making a stand for my ethical values outweighs any personal benefit for upholding the law, or it makes a significantly greater impact to stick by my ethics, then that's what one should execute.

Moreover, the Martha Stewart case illustrate where the law had exceeded ethics. It showed how Bacanovic was unethical and unjust, in what instances did he do so. It indicated Faneuil improprieties as an agent as well as Bacanovic. Discussions surrounding Martha Stewart would captured the essence of which element is more important depend on the pros and cons or when the two meet in equilibrium. In many instances each on these defendants breached both in cohesion.