Law Assignment Help writing Case study report – Martha Stewart & The case of Insider trading and its consequences

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Write a case study report for the Insider trading and its consequences??

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Introduction

A considerable number of organisations tend to disappear eventually. The global financial crisis was an explanation for how major firm could fail and become bankrupt including the financial institutions, global businesses and industrial corporations (Samuel, 2012). Organisational crisis or failure is not only depicted by bankruptcy but any phenomenon that causes and dramatic fall in the case of market value and the grace that were enjoyed by them. Organisational failure occurs due to various reasons and the major reasons for them are culture, leadership, change and growth (Probst & Raish 2005). The case study discussed is of the organisational failure that was faced by Martha Stewart Omni media (MSO), which was the aftermath of lack of proper decision making from the leader of the firm who was Martha Stewart.

The Case

Martha Stewart made a place for herself in the business world through the publication of the book ‘Entertaining’. By 1997 she became the chairperson, president and CEO of Martha Stewart Living Omni media and this company was also listed in NSE (New York Stock Exchange) with a ticker symbols from 1999. She was the leader of the company and her face and personality were used to make connections between the various businesses including the magazines, radio channels and TV shows. She had investments in Imclone and stock that came up to 3928 shares coming up to a cost of $228,000. She sold them just a day before the day when U.S. food and Drug Administration rejected the sanction of Erbitux that was an anti-cancer drug that was produced by ImClone. She saved a humungous amount of US$ 45,000 US$ because of this act. She rejected the advanced knowledge of any insider information as a reason for selling the shares. Her indecision and he pleading innocence didn’t work along with MSO and the company fell down from grace leading to a great deal of reduction in the case of share value and the stakeholders and shareholders bared loss. Though securities fraud case was dismissed from at a later stage, charges on Obstruction of justice, charges of conspiracy and making false statements remained. Later on she settled a five year long legal battle by compromising with the securities and paying them an amount of 195,000 US$ (Cheng 2011).

The judge had thrown on Marta Stewart one of the most serious charges against her and it was securities fraud. No evidence was found out against Martha Stewart in the case of insider trading by the prosecutors of the case. She was imprisoned because of the status and conviction she held in lying to the federal investigators that and revealed that no one is above the law and disregarded her status as Americas best known hostess and stuck to the facts of the case (N.A, 2004). The CEO of Imclone Waskal and Martha Stewart has a common broker who intimated Stewart when Waskal liquefied all his shares and urged her to sell her shares. Though she acquitted of the charges the behaviour that was depicted by Martha was completely unethical in nature. She also tried to mislead the government in to the believing that there was a contract between her and the broker to sell the shares if the value of the share was lower than $60. comparing to the scenario it can be seen that the actions depicted by Stewart is the same as the ones depicted by top executives in Enron who liquefied the shares their intention was one’s own benefit. In the eyes of the public the major reason for Stewart to suffer imprisonment is her Arrogance (Hoffman 2007).

The context of the case

The issue surfaced in June 2002 and until then Stewarts private life was not open to the customers.  On June 2002, Sam Waskal was arrested for ‘nine criminal counts of conspiracy, security fraud and perjury, and then freed on $10 million bail. Two different brokers had stopped the sales from happening because it was not ethical while Sam tried selling of his other shares of the company. The case between even more complicated a Martha Stewart denied any wrongdoing from her side. She claimed that her transaction was according to the law and didn’t call Waskal after selling the shares. when the news was out the public was also disturbed and she was asked embarrassing question while on a TV show to which she denied answering saying that ‘I am here to make my salad’. Her Broker Peter Bacanovic was also scrutinized and he was not ready to give his phone records to house energy and commerce commission. He was also pleaded guilty for accepting gifts from the superiors for keeping quiet. Eaksan was proved guilty for six among the nine charges, but kept Martha Stewart away from trouble. The prices rose again by Oct 15th as the investors somehow ceased associating Martha with MSO. This was because of the effectiveness of the steps that were taken (Brooks & Dunn 2009).

The Reasons for failure

‘Martha was found guilty by the Manhattan Jury for four felony counts including conspiracy, obstruction of an investigation, and two counts of making false statements to federal investigators’ (Jennings 2012). It is very important to get in touch with media and let the stakeholders be updated of the events when there is and an issue that concerns public’s view on an organisation (Coops 2007). Insider trading is a very selfish motive to be adapted by the sellers of the share and the loss will be felt by many who are not good investors. Brand equity is a very important asset for any company and the firm had to face the aftermath of defining the brand image under one individual. It is also very difficult to gain the public confidence and trust back by the brand once it is lost. The strategy that was adapted by Martha Stewart to face the issue was also not correct initially. She rejected the mistake that was committed by her. The public considered of her often like a domestic goddess. But irrespective of this Stewart chose to ignore the public opinion (Ferrell, Fraedrich and Errel 2009). This also means that Stewart was irresponsible towards the customers and the shareholders and didn’t fulfil the responsibility that was entrusted on her. The company has a higher level of dependency on Martha Stewart than many other companies have on their CEO’s. She is face of the company to a certain extent that she was taken for the personality of the company. Security brokers are knowledgeable about a lot of information and he/she is supposed to keep complete confidentiality about the details because of multiple investors are dependent on him. In short the importance of ethics and laws cannot be minuscule. The tolerance level for America to these scandals was also not very high. The public relations and the legal department of her company were considerably very weak.

The Consequences

One of the major consequences was to be shared by the stake holders and shareholders in the firm. The following image depicts the losses that were shared by the firm.

Source: (Cheng, 2011)

The chart given here represents the stock price of MSO and it can be clearly seen that the stock price went down by 6.72 dollars from her action and then steadily improved because for the various efforts that were taken by their team. There was also a time where the stock price fell to a minimum of 6.32$ in an afternoon trading. The changes in the stock prices were also represented on net income and revenue of the organisation which kept on reducing for years even after the scandal appeared on on media. Following is the chart of net income and revenue of MSO

Source: (Cheng 2011)

The shareholders confidence in investing is lost when a company falls in its share pricing and the case is not different in the case of MSO. Her product sale also suffered a loss because of this. The image of the brand was affected. The brand was Martha Stewart and shareholders were all concerned that without Martha the company will be a shell. This would mean that the stakeholders of the firm also suffered to a greater extent. The major stake holders of the firm were MSO employees and the shareholders, the customers who were using products of the brand MSO. Kmart Corporation, competitors of MSO, The media outlasts and investing public. Also the scandal had occurred at an inconvenient time because the show’s ratings were declining, and the internet operations that were undertaken by the company were experiencing losses. The losses were equally experienced by all the divisions in her company.

Martha Stewart the leader and her response strategies

She failed as the leader of an organisation when she lost her reputation and got involved in insider trading. One of the major factors that should be noticed here is that Stewart was not only the leader to MSO; she held a sombre role in holding image of the company as she was the face of the company. The steps that were taken by her were not very pleasing and the public interpreted it as arrogance. Business decisions take by a leader in her/his life is very important as it makes an impact on the various organisational decisions. Various strategies were adopted by her as a leader of which some where accepted and some rejected.

When the story was broken to the public by the Wall Street Journal the strategy adapted by her lawyer was to differentiate Stewart and Waskal. She denies he mistake when Waskal was arrested and charged. She chose to play innocent. Various concerns that were raised were tried to be cleared with her support. This strategy is the corrective action and was adapted by the new lawyer that was appointed by her. Another attempt was made by Stewart to differentiate as she asked the customers to consider her and the company differently. Three months later Martha resigned from the board of NYSE. This was also a corrective action that was taken by her. Almost a year later all the strategies were used together defining that she was the target of these actions because of her fame. She shifted the blame from her and accused her attackers by taking this strategy (Cheng 2011).

Martha also resigned from her position as the CEO of the firm and this was a corrective action taken for the purpose of enhancing differentiation between her and her firm. A website was launched by her in whom she proclaimed her innocence and decides to continue her fight to gain justice and to prove herself innocent. Stewart was convicted and she still chose to remain innocent. It was very much necessary for Martha to remain a part of the firm as her name was associated with the brand. Yet another corrective action and differentiation was done by her resigning her post as the director of the company to chief creative officer. Martha asks for forgiveness in July 2004 to the judge and to think of the good things she has done. The strategy that was adopted by her here was bolstering and apologising. She was sent to prison for 5 months. She started rebuilding her public prominence once she was out of the prison and also did a corrective action of paying $195,000 to settle the civil claims. Apart from the various strategies that were adopted by her, public support also played a pivotal role in the case of Martha’s revival (Cheng 2011).

Theoretical application

As the CEO who is responsible and accountable to the stakeholders and shareholders of the firm. According to the stakeholder theory of the modern corporation, the objective of the managers is to not only maximise the profit of the firm and the shareholders but also to balance the amount of profit or loss of the stakeholders. On this basis, Martha Steward has gone against the theory and to maximise her profits (Evan & Edward 2002). It can also be said that in this case she considered the benefit of all her stakeholders in general and no the ones who were into investing individually. The egoism philosophy can be easily applied to the behaviour that is adapted by Martha Stewart. In other words it can also be said that in the case of cognitive moral development she was in the second stage of Kohlberg’s model which is why she took a decision of selling the shares. She was concerned of her benefits and was least bothered. It can also be said that there is certain populism and envy that was involved in the press coverage and prosecution of Martha Stewart. At a particular point of time, it could be deeply felt that the prosecutors were taking her case because she was rich, arrogant and famous. This action could also be referred to as ‘Witch Hunt’. There are also many economists who supported her saying that she was punished for outsider trading as she couldn’t be punished for insider trading. In this scenario she is also a ‘political prisoner’ who was arrested because she was powerful and the prosecutors wanted her to suffer. Insider training was not much considered a sin at that point of time (McGee, R. W 2007). But irrespective of all the explanations, the strategy that was adopted by her to handle the situation was not favourable.

Recommendations and Learning’s

One of the major lessons that were conveyed through the organisational failure of MSO is that it is not advisable for a company to be completely reliant on a single individual to make their brand image. The chances are high that the organisation will receive a major blow on terms of progress when it happens. Brand image should be the one common people or the customers should relate to. In this scenario what was applicable was to differentiate the firm from the individual who represented it. Though the strategy was adopted the public relations department acted late.

A firm is accountable to the shareholders and stakeholders. This is one of the reasons why clarifications should be given to the public in case demanded especially in the case of a central issue like this. The strategy that was adopted by Martha Stewart of remaining silent is not a golden rule. This allows and gives credibility to the accusers and accusations that are applied on her. The strategy to have applied here was to answer the queries of the public patiently. The importance of transparency and open communication cannot be over emphasised. The stake holder perception is very important for the survival of any company as the firm will cease to exist without their support.

Profitability and sustainability should equally be in the minds of the managers while they are representing a firm. This would mean that the decision of selling the shares were not sustainable in nature as business women as experienced as her would have realised that there are chances for investigation in the future and that will impact the company adversely. She shouldn’t have sold the shares on the basis of insider information, mainly because cancellation of license was unpredictable to the outsiders and would have been taken for a mistake.

Image restoration is a lengthy and tedious process and there are chances that it may not be successful. This would mean that one should take extra care to ensure that the firm is never shadowed. Steward should keep distance from the management affairs. In case she is involved she should be monitored for her action. Allowing governmental agencies to do this will help is restoring faith to the customers.

Conclusion

The organisational failure and recovery of MSO is an example that depicts the importance of business ethics even in the tiniest affairs and decisions that are taken by the managers on a daily basis. They also prove that through using adequate strategies they can renter and nurture consumer confidence in their firm. But the loss of time and resources utilized for restoring the brand can never be regained.

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