After word began circulating that the Department of Justice (DOJ) was investigating Martha Stewart regarding the “timing†of the sale of her stockholdings in ImClone (a company managed by her friend and associate, Sam Waskal), the price of Martha Stewart Omnimedia, Inc. shares began to drop precipitously. Faced with falling stock prices of her company—as well as her personal reputation—-Martha Stewart (who owned approximately 63% of MSO) publicly announced that she was not involved in an insider trading scheme with respect to the ImClone sale. Shortly thereafter, the Justice Department charged Martha Stewart with securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The criminal charges, which carried a maximum of 10 years in prison and millions of dollars in fines, were eventually dismissed by the judge presiding at her trial.
What is your opinion in this matter? Do you think the DOJ was “overreaching†in its allegations of securities fraud under Sec. 10(b) and Rule 10b-5 (not the underlying insider trading allegations) as a result of Martha Stewart’s very public statements? The courts have stated that certain conduct is required for liability under Sec. 10(b) and Rule 10b-5, which the prosecution was unable to prove in this case. Explain why this was a successful defense for Martha Stewart. Do you agree? Was the “domestic diva†professing her innocence, or was she trying to influence the price of the stock of Martha Stewart Omnimedia by allegedly false and misleading statements? Can (or should) an individual who is essentially “the company†(like Martha Stewart) make any public statements regarding their personal investment decisions, knowing it may now be interpreted by the DOJ as having the ulterior motive to influence stock prices—and possibly lead to charges of securities fraud? What safeguards would you, a business manager, recommend to prevent this type of situation in your company? Discuss.