Ethics and Martha Stewart's Indictment

There has been much media coverage of the circumstances surrounding the indictment of Martha Stewart on charges of securities fraud and obstruction of justice as well as her subsequent conviction and prison term. When one considers her position as the CEO of a multi-million dollar corporation, her actions in relation to the criminal case have numerous ethical implications in the business world. This paper analyzes those actions in order to answer the question: Did Ms. Stewart handle the indictment responsibly?

When considering this case, there are really two distinct parts to the ethical considerations surrounding it. The first part consists of those actions relating to her sale of about 4000 shares in ImClone Systems the day prior to the stock experiencing a significant decline. Ms. Stewart was informed by her broker the day prior that the owner of the company was trying to sell off his own shares. The day after she sold, the Food and Drug Administration (FDA) refused to approve ImClone's new cancer drug and the company's stock plummeted (Associated Press 2006). Had Stewart waited to sell, she could have potentially lost over $50,000 had she waited to sell.

The ethical implications here involve the concept of insider trading. If one considers this from a purely utilitarian point of view, her actions make sense and seem justified. She was informed that a company she had a stake in was about to lose value so she sold it before it did. If you have a piece of information concerning a certain investment that you own, who wouldn't act on it? No one might be hurt from this action and it of course saved her a great deal of money. From a utilitarian perspective, this really is the same thing as someone telling you something bad is going to happen and then actions are taken to prevent it or at least mitigate its adverse effects. From this standpoint alone, the legality of insider trading seems questionable. As Macham quoted from the Wall Street Journal in an editorial, "Presumably a scrap of paper could blow into your pocket and if it contained material nonpublic information, you could be charged with insider trading for acting on it" (2004, para. 6). The more important consideration in this argument, however, deals with the deontological aspects. Most importantly, the contractual rights of those engaging in securities trading apply in this case. Insider trading is specifically prohibited by both by the Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE), where the stock in question was traded. In addition, Merrill Lynch (the broker through which Stewart bought and sold stocks) had a company policy advising employees and clients of their responsibilities under federal securities law not to use nonpublic information when purchasing or selling securities ("USA v. Stewart," p. 4). Stewart obviously had knowledge of these laws and policies when she sold the stock on the advice of her broker. She also had the knowledge that her broker knew the owners of ImClone were trying to sell their shares in the company based on their new drug not being approved by the FDA. There can be no doubt that she understood the possible ramifications of acting on that knowledge. In fact, at the time of these actions and her subsequent indictment, Stewart was serving on the board of directors of the NYSE.

From an ethics standpoint, in the securities fraud aspect of this case the two different theories in normative ethics might seem to be at odds with each other. On one side you have the utilitarian view that Stewart's actions maximized the amount of good for those involved. She stood to lose a fair amount of money if she did not sell her stock in ImClone. There really was no unhappiness to consider in this aspect of the case because the decision only affected her. No one else would be adversely affected whether she sold the stock or not. On the other side is the deontological view that Stewart had a contractual duty to not engage in insider trading. That duty stemmed from laws and policies intended to help establish a "level playing field" in the securities trading realmÐ'--basically to prevent any person or organization from gaining an unfair advantage over another. In this aspect of the case, I believe the negative contractual duty or obligation to not engage in insider trading outweighs the utilitarian aspect of greatest gain for oneself.

As alluded to in the beginning of this paper, the second ethical aspect of this case involves Ms. Stewart's actions after the sale of her ImClone stock and during the ensuing SEC and federal investigations. Unlike the previous ethical discussion, there seems to be very little support that Stewart's actions after the indictment could be considered ethical no matter which normative theory one considers. When questioned by federal officials about her interactions with her broker during the time of the stock sale, she stated that she already had a preexisting agreement to sell her ImClone stock when it began trading below $60 per share, which coincidentally occurred the day the stock was sold ("USA v. Stewart," p. 8). In fact, after the indictment Stewart's broker modified documents to make it appear like this agreement existed. Furthermore, Stewart told investigators that during a discussion on the day of the sale her broker advised her that ImClone shares had dropped below $60 and that she should sell. In reality, the two never spoke that dayÐ'--Stewart spoke only with her broker's assistant who relayed the information that ImClone's owner was unloading all of his stock in the company based on the FDA's impending rejection of its new cancer drug ("USA v. Stewart," p. 11). Most incriminating of all, following a lengthy conversation with her attorney, Stewart allegedly changed her phone message log to make it appear she did not discuss the sale of the stock with her broker or the supposed insider information. She thought better of this decision and changed the log back to its original wording, but then testified to authorities that she had no recollection of this act ("USA v. Stewart," p. 12).

The two sides of the utilitarian argument are either to cover up her