In the aftermath of the Enron scandal, corporate America had to strengthen various mechanisms needed to detect fraud and prevent the negative impact of insider trading as well as unethical practices that will make investors wary of placing money in the stock market. If investors will shy away from investing in U.S. companies the consequences can be more than the loss of profit but also the slowing down of the economy and then a chain reaction of events resulting in the loss of jobs and economic depression. While the problems resulted from Enron’s insider trading scandal were still fresh in the collective thoughts of investors Martha Stewart was charged with securities fraud (Crane & Matten, 2007). There are those who argue that punishment for her crimes were too harsh and the double-standard was due to her celebrity status. On the other hand there are many who said that time spent in prison was a just punishment not because she is Martha Stewart but simply because she violated the laws of the land.
Ethical Issues
There is only one major ethical issue here and it is insider trading. Then there are also the secondary issues of obstructing justice and making false statements to government officials (Ali & Gregoriou, 2009). When it comes to trading using insider information, the guilty party used information that the public will have no way of accessing on their own. They will definitely have a great advantage when it comes to buying and selling stock. This means that they could not transact using this knowledge unless it has been revealed to the public.
In other types of businesses inside information is highly coveted and there is nothing wrong with having access to critical information ahead of time and well before the competition is able to know the same. But in the stock market, money is made through the purchase of stocks, retaining ownership as long as it is deemed practical to do so and then selling it when the need arises. It is the timing of the buying and selling that also determines the value of the stock and not just the overall profitability of the company that the stock certificate purportedly represents. Those who are on the inside and have access to these types of data must be barred from selling and buying the stocks of their own company or the stocks of their employer.
It has to be clarified that the nature of the stock market is based on the idea that the stocks is publicly traded. This means that those who do not have an intimate knowledge of the company can invest, buy stocks and in theory become a part-owner of the said corporation. It is therefore important for investors to have the same access as others when it comes to information that will help them decide whether it is time to buy or sell their stocks. Obviously they could not compete with those who are working within the company, especially the corporate leaders who are knowledgeable about the inherent strengths and weakness of the company. The rule on insider trading can be explained as a means of controlling the panic buying and selling of stocks based on information coming from within the company. This is because insider information can trigger the dumping of stocks and before the average investor can react the value of the said stock has plummeted significantly and therefore they are competing in a non-level playing field so to speak.
White-Collar Crime
There is a query that surfaced after a judge sentenced Martha Stewart to spend time behind bars and this is with regards to the severity of the sentence meted against her. For the average person, prison time is no laughing matter but for a multi-millionaire accustomed to a life of servants, mansions, expensive cars, and the perks that comes with being a money-maker, to be incarcerated is the lowest point in life. Thus, the question echoes all throughout the Martha Stewart debacle a few years ago whether she committed a serious crime or was she merely a victim of circumstances, specifically the scapegoat for the Enron mess that the Federal Government was unable to prevent and detect on time. In order to silence the supporters who kept on whining about the supposedly heavy-handed way of handling the case, it would be best to show them through the point of view of white-collar crime.
One of the most relevant feature of white-collar crime when used in the context of the Martha Stewart insider trading scandal is the one that highlights the fact that it is the breaking of laws by those who are rich, famous and those who are in high-powered positions in the corporate world or in politics. According to one commentary white-collar crime is “…a crime committed by a person of respectability and high social status in the course of his occupation” (Salinger, 2005). The combination of respectability and high social status is the reason why many were able to get away with it and at the same time explain why they were tempted to do it. Moreover, due to their status they were able to have access to resources and tools that allowed them to commit the crime virtually undetected. This is the reason why they must be punished in order to demonstrate that the law does not show partiality to the rich, famous, and powerful.
Media Coverage
The kind of media coverage that Martha Stewart experienced was excessive when compared to usual suspects. But Stewart is no ordinary person. She is a celebrity who made millions selling the idea that she is a person that the public can trust. She became a multi-millionaire by teaching people how to be prudent in their ways especially when it comes to their homes, the things that they purchase and how to increase their capability to make a better life. Martha Stewart may not be as popular as Ophra Winfrey but without a doubt she is an influential person. She owes her popularity and wealth to her legion of fans and therefore they have the right to know what she did wrong. From this point of view the media coverage of the Martha Stewart case was not excessive.
While it is true that that the public had the right to know about the details of the case it can also be said that media coverage was continuous and it was difficult to say if the judge, jury, and government officials who were responsible for handling her legal problems were not influenced by the information that they received from the media. In this regard it can be argued that Martha Stewart could never get a fair hearing on her case especially when it comes to sentencing. It is one thing to discuss whether she was guilty or not and quite another to talk about the appropriate punishment. Thus, Martha Stewart was guilty not because of trial by publicity but a clear violations of the law. But the punishment that she received is debatable. Supporters can claim that five months behind bars should be reduced considering that she had to endure another five months of home confinement.
Critics will argue on the other hand that Martha Stewart had to be punished for what she had done considering that she deliberately violated SEC rules. First of all, Stewart did not make a mistake when she sold her ImClone stocks and then later stocks of her own company, the Martha Stewart Living Omnimedia Inc. This is because Ms. Stewart was no stranger to the stock trading game for she was a former stock broker (Price, 2007). Secondly, there is evidence to show that she was guilty of insider trading against her own company. Even if charges were dropped later on with regards to securities fraud, the mere fact that there is suspicion of wrongdoing with regards to her dealings with her own company, it is enough to bring the full force of the law on her head.
Present & Future
Jeff Swystun, a brand consultant warned against the negative impact of the guilty verdict (Carroll & Bucholtz, 2006). This is easy to understand because the stock market is oftentimes not driven by rational decisions but by fear and greed. If the public is anxious of the future of the Martha Stewart Living Omnimedia Inc., stocks, then they can trigger a dumping of stocks due to the bad publicity of the trial and the perception that Martha Stewart is no longer in control of her company. But at the same time investors and traders can also adopt a wait-and-see attitude and based on the strong performance of the company in recent years will opt not to sell but to retain ownership of the said stock certificates. It was revealed later on that they were right in holding on to their stocks and did not participate in any panic selling.
Even in the middle of the trial and the immediate aftermath it was clear that many of her supporters did not leave her (Carroll & Bucholtz, 2006). In fact, upon hearing the news of Stewart’s relatively lenient sentence her company’s stock rose 37% (Carroll & Bucholtz, 2006). Moreover, Kmart Holding Corp. extended its business partnership with Stewart’s company for another two years even after hearing the guilty court verdict (Carroll & Bucholtz, 2006). Based on this information alone it is easy to predict a bright future for the company. It is not wise to heed the advice of Swystun because of the many die-hard supporters of Stewart who are willing to stand by their heroine. Moreover, it would be difficult for Stewart to dissociate with a company that bears her name. It would be better for her to hold her head up high and brave the storm.
While it is true that Stewart was able to survive what can be considered as the toughest test of her life, she was not able to go through it unscathed. Her image and her company took a hit (McCusker, 2005). Her company was once valued as high as US$1 billion but after the scandal its value was cut by more than US$140 million (McCusker, 2005). Aside from that her activities can now be monitored by those who want to bring her down. Suspicious activities with regards to insider trading will immediately raise red flags and it would be harder for Stewart to erect a wall of defense knowing that she was once found guilty of obstruction of justice and making false statements to government officials.
Conclusion
The rise and fall of Martha Stewart and her company should serve as a lesson for those who want to live the American dream. She was a highly respected individual but was made to suffer the humiliation of serving a considerable length of time behind bars like a common criminal. She had to endure mental and emotional torture during five months in prison. All her power and wealth she cannot bring with her behind bars. It was all because of the fact that Stewart was brazen enough to bend the rule against insider trading. Unfortunately for her the Enron scandal was still fresh in the minds of the people and government officials and therefore it was hard for her to wiggle her way out of that predicament.
One of the most important things to consider is that the company was named after her. It would be very had to dissociate herself from the company that she built. It would be wiser to initiate damage control and to turn things around. Instead of saying that Stewart violated SEC rules, the company can show the whole world that Martha Stewart was tested and went through fire without resorting to self-destructive behavior. Her image must be reconstructed according to this new development. The company could no longer market her as a person without flaws but someone who was able to experience life in the same manner as the average person and this has made Stewart a much better person.
References
Ali, P. & G. Gregoriou. (2009). Insider Trading: Global Development Analysis. FL: CRC Press.
Carroll & Bucholtz. (2006). Case 5: Martha Stewart: Free Trading or Insider Trading? In Cases.
Crane, A. & D. Matten. (2007). Business Ethics. New York: Oxford University Press.
McCusker, G. (2005). Public Relations Disasters: Talespin – Inside Stories and Lessons Learnt. PA: Kogan Page.
Price, J. (2007). Martha Stewart: A Biography. Westport, CT: Greenwood Press.
Salinger, L. (2005). Encyclopedia of White-Collar and Corporate Crime. CA: Sage Publications.