Martha Stewart Case Study 

            Martha Stewart is the founder of Martha Stewart Living, an empire now listed on the New York Stock Exchange as Martha Stewart Omnimedia.  This empire at its height consisted of television shows, three magazines, a newspaper column, a radio show, and 34 books.  Over five thousand of her products were sold at a range of sources including her web site, marthastewart.com, as well as Kmart and other specialty stores.   Martha Stewart is Kmart’s most important brand, accounting for sales of about $1.5 billion last year, or four percent of Kmart’s total sales.  Kmart has had its own problems.  Kmart declared Chapter 11 bankruptcy but emerged from bankruptcy on May 6, 2003.  On April 26, 2004, Kmart and Martha Stewart Living Omnimedia announced that their long term license agreement was extended through 2009.  On that date, Kmart also announced that they were dropping a lawsuit against Omnimedia.

             Things seemed very sunny for Martha Stewart until several years ago.  A friend of hers, Dr. Sam Waksal, founder and CEO of  ImClone, formed ImClone to develop and sell a cancer drug, Erbutix.  In December, 2001, Dr. Waksal was informed by the Food and Drug Administration that his drug would not get approval.  Before this information became public, Dr. Waksal’s family sold millions of dollars of shares of ImClone stock.  Dr. Waksal and Ms. Stewart share a friendship as well as a broker at Merrill Lynch, Mr. Bancovic. Ms. Stewart’s secretary’s phone log shows that Ms. Stewart received a phone call from the broker on December 27, 2001, one day before the FDA made public the statement that Erbutix would not be approved.  The phone log also indicates that Mr. Bancovic stated, “he thinks ImClone is going to start trading down.”  Ms. Stewart sold nearly 4,000 shares of ImClone that day, one day before the information was made public.   

            Ms. Stewart has stated that she sold her shares because of a pre-existing arrangement with Merrill Lynch to sell the shares when they fell below $60.  A Merrill Lynch trading assistant, Douglas Faneuil, initially backed up Ms. Stewart’s account, but later has stated that she sold the shares only after he told her that Dr. Waksal and his family were selling their shares.  Mr. Faneuil further stated that Ms. Stewart tried to contact Dr. Waksal that day.  Mr. Faneuil pleaded guilty to a misdemeanor and agreed to cooperate in the criminal investigation.

             Ms. Stewart’s first public statement about ImCone stock came on the CBS Early Show on June 25, 2002.  When questioned on air, Ms. Stewart responded that she wanted to “focus on my salad,” and when questioned further, she responded that she would be “exonerated of any ridiculousness.”

             In October, 2002, Dr. Waksal pleaded guilty to the crime of insider trading and other charges.  It is a federal crime to trade on inside information, or information that has not yet been made public.  He is currently serving a term of over seven years in prison. 

            On June 4, 2003, a federal grand jury in New York indicted Martha Stewart on five criminal counts of securities fraud, conspiracy, and making false statements to federal agents.  Mr. Bancovic was also indicted that day.  Both pleaded not guilty.  The Securities and Exchange Commission, in a separate civil case, accused Martha Stewart of insider trading.  Also on June 4, 2003, Martha Stewart stepped down as chairman and chief executive of her company, but she remained on the board of directors.

             On March 5, 2004, a jury found Martha Stewart guilty on four counts, including obstruction of justice and lying to investigators.  Bancovic was also found guilty of four of the five charges against him.     

            Last summer, Martha Stewart was sentenced to five months in prison plus five months home detention, plus a $30,000 fine.  While she was appealing her sentence, Martha Stewart volunteered to actually serve her five month prison sentence, and was released in March of 2005.  She is still under home detention, which allows her to leave her home forty hours per week for work, worship,  and related purposes.  Martha Stewart requested that the judge end Martha’s home detention early, because it did not give Martha sufficient time to work; the judge declined.  Her detention and accompanying ankle bracelet will be released later this summer.

             Martha Stewart will have an Apprentice show starting this fall on NBC on Wednesday nights; Donald Trump will continue his series on Thursday evenings.  While 2004 was a year of “significant challenge” for Martha Stewart Living Omnimedia, according to its CEO Susan Lyne, please write a communication strategy for Martha Stewart to deal with her stockholders about the future of the company.