MARTHA STEWART AND THE IMCLONE SCANDAL

no. 1-0083

Martha Stewart and the ImClone Scandal

On January 20, 2004, jury selection launched the trial of Martha Stewart, Chief Creative Officer and former
Chief Executive Officer and Chairman of the Board of Martha Stewart Living Omnimedia (MSO). Nine
charges filed by the Federal Grand Jury in New York and the SEC relate to Stewart’s personal sale of
$228,000 in ImClone Systems, Inc. stock on December 27, 2001, one day before regulators rejected the
biotech company’s cancer drug (Erbitux) and sent its stock tumbling. Communications records show that
Stewart placed an 11-minute cellphone call to her assistant at 1:31 P.M. EST on December 27 to check her
messages. The call was registered moments after Stewart’s chartered private jet touched down in San
Antonio, Texas en route to a vacation in San Jose del Cabo in Mexico. At approximately 1:41 P.M., these
records show Stewart being connected with someone at her brokerage firm, Merrill Lynch, in response to a
message left by Stewart’s stockbroker, Peter Bacanovic, at 10:00 A.M. that day. At 1:43 P.M.,
Bacanovic’s assistant Douglas Faneuil executed the trade, selling Stewart’s entire holding of ImClone
shares at $58 per share. The timing of the stock sale netted a $40,000 savings for Stewart, which she
described on a January 2004 Larry King Live interview as “miniscule, really, about .006 percent of my net
worth.”

ImClone’s chief executive, Samuel Waskal, pleaded guilty to bank fraud, obstruction of justice, perjury,
conspiracy, and insider trading of nearly $12 million in ImClone stock on this same day. Waksal was
found guilty of all charges on June 13, 2003, and is now serving seven years in prison.1

Stewart’s stock broker Peter Bacanovic pleads innocent to insider trading charges in the same trial as
Stewart.2 In addition to tipping off Stewart, Bacanovic also allegedly helped Waksal’s daughter Aliza sell
$2.5 million in ImClone stock on that same day.

The Charges, the Evidence

Nine counts have been filed against Stewart, once a stock broker herself, who now faces up to thirty years
in prison if convicted. Significant in its seriousness and the novelty of its application of securities law is
the charge of securities fraud filed against Stewart. This charge carries with it a prison term of as many as
ten years. Prosecution states that Stewart lied to investigators during their investigation, declaring herself
innocent of insider trading in ImClone stock by virtue of a standing verbal stop-loss order for trading
ImClone stock in the event that it dipped below $60 – an order Stewart claims she had in place with
Bacanovic since November 2001. Feds charge that this statement was deliberately made to try to prop up
stock in the company Stewart controls, Martha Stewart Living Omnimedia (MSO). Additional charges
include obstruction of justice, which carries a maximum prison term of five years, conspiracy, and making
false statements.

Stewart’s lawyers argue in court papers that Stewart’s statements and claims of innocence were irrelevant
because (a) there existed numerous news reports detailing the investigation, and (b) Stewart’s comments
“added nothing significant to the total mix of information.” They also argue that the securities fraud charge

1
    Waksal, 55, once dated Stewart’s daughter Alexis.
2
  Peter Bacanovic, long-standing close friend of Stewart’s only daughter Alexis, and later Stewart herself, joined Merrill Lynch as a
stock broker in 1993 after working for two years as a Marketing Director at ImClone Systems Inc.
This case was prepared by Professor Susan Fournier on January 26, 2004 for use in her Strategic Brand management
course at Tuck School of Business at Dartmouth College.

© 2004 Trustees of Dartmouth College. All rights reserved. For permission to reprint, contact the Tuck School of Business
at 603-646-3176.

Martha Stewart and the ImClone Scandal                                                               no. 1-0083

violates Stewart’s right to free speech. Expectations are that the legal team will also argue that Stewart is
being prosecuted for being who she is, not because of what she did.

Evidence against Stewart in large part involves challenges to her claims of the pre-existing stop-loss order
for ImClone shares. No formal stop-loss order was ever recorded: shares of ImClone indeed dipped below
the alleged stop-loss price of $60 in the period since Stewart claims having affected that order, and none of
Stewart’s ImClone stocks were automatically sold. Bacanovic’s hand-scribbled notation of “stop loss
order… @$60” on Stewart’s Merrill Lynch worksheet is written in a different ink than other notations on
that page. Bacanovic’s assistant, Douglas Faneuil, has pleased guilty to a misdemeanor charge of
misleading investigators about the content of his phone call with Stewart on December 27: he is expected to
testify that Bacanovic made him lie to corroborate Stewart’s alibi, and that he himself informed Stewart
that Waksal was trying to dump his stock that fateful day. Feds also claim that four days before Stewart
met with them, she altered her secretary’s phone log, changing the entry for December 27, 2001 to read
“Peter Bacanovic re: ImClone,” rather than the actual message “Peter Bacanovic thinks ImClone is going to
start trading downward.” Also, in a letter to congressional investigators, Stewart’s lawyers say she talked
with Bacanovic himself from the tarmac on December 27, though Bacanovic was on vacation in Miami that
day.

Select interpersonal communications and coincidences also raise questions for the defense. Phone records
register a call from Stewart to Waksal at 1:43pm on December 27, with a message on Waksal’s phone log
that reads: “something is going on at ImClone and Martha wants to know what.” Also of note: on the plane
to Mexico with Stewart was Mariana Pasternak, Stewart’s close personal friend, whose ex-husband Bart
sold 10,000 shares of ImClone before news of the FDA rejection of Erbitux was made public.

The Investigation, the Indictment, and Effects on the Value of MSO

News of the Federal investigation into Stewart’s ImClone trading activity broke June 6, 2002. MSO stock
traded at $19.23 the day before this information was published, and $15.96 immediately thereafter. "We
don't think that the stock market reaction rightly reflects consumer reaction or our business fundamentals,"
said Sharon Patrick, president of Martha Stewart Living Omnimedia at that time.

On June 12, Stewart released a statement asserting that she had no insider information, and that her stock
sale was “entirely proper and lawful.” MSO stock prices rose and fell marginally throughout the week,
hovering around the $16 mark.

On June 25, Stewart made her regularly scheduled live appearance on CBS’s The Early Show, this time
discussing how to prepare appetizing summer salads. Jane Clayson, the show’s anchor woman, posed a
direct question to Stewart regarding her involvement in the ImClone scandal. As reported in the press,
Stewart “continued to chop her cabbage vigorously,” “in between gestures made with the knife in her
hand.” “I just want to focus on my salad,” she replied curtly, adding that she trusted she would soon “be
exonerated for any ridiculousness.” In subsequent discussions, CBS News would not agree to forego
further questioning about the ImClone matter, and Stewart suspended her association with the program.
MSO stock fell to $10.4 the following day.

By late July, MSO stock had fallen to 52% of its pre-scandal value. MSO stock closed at $6.78 on August
8, 2002, an all-time low since her company went public in October 1999 and garnered $36 per share in that
day’s trade. Stewart hired PR strategists Brunswick Group the weekend of August 9.

Tuck School of Business at Dartmouth                                                                            2

Martha Stewart and the ImClone Scandal                                                                                 no. 1-0083

On August 22, Howard Rosen, an MSO shareholder sued Martha Stewart and several of her top business
executives for selling their own MSO stock before the investigation of her ImClone sale became public.3 A
class action suit was also filed that month on behalf of another MSO shareholder, Conrad Hahn. Mr. Hahn
claimed that his loss from stock depreciation was a result of brand equity damage resulting from Martha
Stewart’s personal conduct. These civil charges have since been dropped, with the prosecuting law firm
noting that “it wasn’t necessary to keep them in as defendants at this particular time.”

On October 9, 2002, Martha Stewart resigned her seat on the New York Stock Exchange’s Board of
Directors on news that Bacanovic’s assistant would help prosecutors in the investigation. Shares in MSO
plunged to a low of $5.26, a new all-time low versus MSO’s post-IPO high of $23.15 in July 2001.

In the ensuing months, Stewart allowed only one formal contact with the press, this in the form of a January
2003 lunchtime interview at her Connecticut home with Jeffrey Toobin of the New Yorker magazine.
Stewart, who controls more than 60% of the company’s stock, estimated in the interview that she had
incurred losses approximating $400 million due to the decline in value of her more than 30 million shares
in MSO along with legal fees and lost business opportunities. Describing her reaction to what The Wall
Street Journal called the schadenfreude-- the palm-rubbing glee with which the public watched the
tycooness being taken down -- Stewart had this to say:
“It’s puzzling to me. Puzzling and also confusing, because my public image has been one of
trustworthiness, of being a fine, fine editor, a fine purveyor of historical and contemporary information for
the homemaker. My business is about homemaking. And that I have been turned into or vilified openly as
something other than what I really am is confusing. I mean, we have produced a lot of good stuff for a lot
of good people. And, to be maligned for that is kind of weird.”

During this time of relative quiet in the press, and minimal appearances of Stewart in the public eye, shares
of MSO ebbed and flowed, seeming to stabilize around the $8 mark from January – April, and rising to $12
in May.

On June 4, 2003, five indictments for securities fraud, conspiracy, perjury, and obstruction of justice were
handed down by the Federal Grand Jury in New York on June 4, 2003; the SEC filed four additional
charges. MSO stock declined 15% on the news, dropping to $9.52 in composite trading. Stewart stepped
down as Chief Executive Officer and Chairwoman of the Board of Directors hours after declaring her
innocence against these charges, taking a role in a newly-crafted position as Chief Creative Officer. “I love
this company, its people, and everything it stands for, and I am stepping aside as Chairman and CEO
because it is the right thing to do. This will enable the company to continue to build the confidence and
love of its readers, viewers, customers, and strategic partners, without the distraction of my personal legal
issues,” Stewart explained.

Brand strength scores for Martha Stewart the person, and Martha Stewart Living the brand, as measured
using Y&R’s AssetValuator model,4 are provided in Exhibit 1. Scores are provided for both the pre- and
post-scandal period.

After the Indictments: Martha Talks
Coincident with the indictments, Stewart’s PR firm launched MarthaTalks.com, a personal website in
which Stewart posted an open letter “to her friends and loyal supporters” (See Exhibit 2), a legally-savvy

3
  Chief Operating Officer Sharon Patrick and MSO general counsel Gregory Blatt reportedly sold a total of $5.5 million in MSO
shares prior to public disclosure of the ImClone investigation.
4
  Y&R’s BAV model decomposes a brand’s strength to include four components: differentiation, relevance, knowledge and esteem.
The BAV is known for its compelling validation history, and valuable diagnostic frame.

Tuck School of Business at Dartmouth                                                                                            3

Martha Stewart and the ImClone Scandal                                                                no. 1-0083

segment on facts of the case titled “Setting the Record Straight,” and links to various press articles,
editorials, and consumer letters that had been supportive of Martha during the scandal.

Stewart’s first interview since being indicted on Federal and SEC charges took place in November 2003 in
the ABCNews’ 20/20 program with Barbara Walters. When asked whether Stewart felt that her
prosecution was an attempt to make an example of her, Stewart replied:
“Well, I certainly have become a well known and visible symbol of a successful woman. That I am being
persecuted, prosecuted for being such, I don’t know if I could really say that… But I think that we are in a
difficult time in corporate America where business is under great scrutiny. That something in my personal
life has become a focus of my corporate life is wrong and unfair and hurtful.”
Reflecting on the cabbage incident on CBS’ The Early Show, Stewart offered this: “To tell you the truth, I
have not been able to chop cabbage since. No more coleslaw for me.”

In December 2003, Home & Garden Television (HGTV) announced that effective with the expiration of its
contract with Martha Stewart Living Omnimedia on December 26, 2003, Martha Stewart programming
would no longer air on the cable network. Under the two-year agreement, HGTV had produced two daily
half-hour series, from Martha’s Home and from Martha’s Kitchen, as well as three one-hour specials using
material from the nationally-syndicated Martha Stewart Living television show.

Posting negative Q4 2003 results, MSO’s Chief Financial Officer warned of continued red ink in quarters
ahead, noting failed marketing ventures, lower-than-expected new product acceptance rates, declining
magazine advertising revenues (some stemming from the loss of select advertising clients including Pfizer),
and increased costs for public relations, brand counsel, and research.

Exhibit 3 includes a time line of MSO stock performance from the break of the scandal to the trial date, as
well as a graph of company earnings reported during this time. On January 22, 2004, two days into the
jury selection that would launch the Stewart/Bacanovic trial, MSO stock stood at $12.32, roughly 64% of
its pre-scandal value.

“I’m scared,” Stewart had concluded in her 20/20 interview. “The last place I would ever want to go is
prison.” (Examples of consumer-generated parodies of Stewart’s prospective jail term are provided in
Exhibit 4).

Tuck School of Business at Dartmouth                                                                           4

no. 1-0083

                                                REFERENCES

Carr, David (2002), “Reassessing Martha Stewart, the Brand,” The New York Times, June 20, p. B1.

“Golden Triangle: The Pasternak, Waksal, and Stewart Web” (2002), Reuters, June 25.

Grossman, Jennifer (2002), “Martha Envy,” The Wall Street Journal, June 21, p. A8.

Hayes, Constance L. (2002), “Company Says Stewart’s Woes are Taking Toll, The New York Times, July
25, p. 1.

Hayes, Constance L. (2003), “Martha Stewart Company Posts First Loss and Blames Inquiry,” The New
York Times, March 5, p. D6.

Hayes, Constance L. and Patrick McGeehan (2002), “A Closer Look at Martha Stewart’s Trade,” The New
York Times, July 15, p. C1, C9.

“Heat is on Martha Stewart,” (2002), CBS.marketwatch.com, June 12.

“HGTV and Martha Stewart Living Sign Programming Agreement” (2001),
http://www.writenews.com/2001/071801_hgtv_mso.html, July 18.

“HGTV Contact Us: Martha Stewart Living” (2004), http://www.hgtv.ca/contact.asp , January 23.

“I Am Innocent: Martha Stewart Talks about Stock Trading Scandal with Barbara Walters” (2003),
ABCNEWS.com, November 5.

Levine, Greg (2002), “Faces in the News,” http://www.forbes.com/2002/06/25/0625faces_amprint.html,
June 25.

Madore, James T. (2003), “Martha Stewart’s Company Should Move Away from Namesake, Experts Say,”
Milwaukee Journal Sentinel, June 19, p. B1.

“Martha Indicted: Grand Jury Returns Nine Count Indictment; Stewart Charged along with Former
Broker,” (2003), http://money.cnn.com/2003/06/04/news/martha_indict, June 4.

 “Martha Stewart Living Omnimedia Puts into Effect Senior Management and Governance Changes”
(2003), PR Newswire, June 4.

“Martha Stewart Sued by Investors,” (2002), http://news.bbc.co.uk, August 22.

Naughton, Keith and Barney Gimbel (2004), “Martha’s Makeover,” Newsweek, January 19, p.42.

O’Rourke, James S. (2003), “Martha Stewart Living Omnimedia, Inc.: An Accusation of Insider Trading,”
working paper at the University of Notre Dame.

“Panel Says Stewart Files were Edited,” (2002), nytimes.com, August 22.

This case was prepared by Professor Susan Fournier on January 26, 2004 for use in her Strategic Brand management
course at Tuck School of Business at Dartmouth College.

© 2004 Trustees of Dartmouth College. All rights reserved. For permission to reprint, contact the Tuck School of Business
at 603-646-3176.

Martha Stewart and the ImClone Scandal                                                          no. 1-0083

Pollack, Andrew (2002), “Stewart, Icahn, and Others Invested in Venture Fund,” The New York Times, July
2, p. C3.

Rose, Matthew (2002), “Martha Stewart: Project for July is Image Repair,” The Wall Street Journal, July 2,
p. B1, B4.

Scannell, Kara (2003), “Martha Stewart Loses a Round in Court Case,” The Wall Street Journal, November
19, p. D1.

Scannell, Kara and Matthew Rose (2004), “In Stewart Case, Analysts Face Trial by Proxy,” The Wall
Street Journal, January

Tuck School of Business at Dartmouth                                                                     6

EXHIBIT 1
          Brand Strength Scores as Measured using Y&R Brand AssetValuator

                           Differentiation   Relevance     Esteem      Knowledge

           Q1-Q2/2002            90             57           50             84

Martha
Stewart    Q3-Q4/2002            86             27            9             80

           Q1-Q2/2003            86             32           13             84

           Q1-Q2/2002            93             50           42             66
Martha
Stewart
Living     Q3-Q4/2002            91             30           15             64

           Q1-Q2/2003            68             19           10             59

Source: Y&R Brand AssetValuator, January 2004

                                                                                 7

EXHIBIT 2
                        “An Open Letter,” from MarthaTalks.com

         An Open Letter From Martha Stewart

         To My Friends and Loyal Supporters,

         After more than a year, the government has decided to bring charges
         against me for matters that are personal and entirely unrelated to the
         business of Martha Stewart Living Omnimedia. I want you to know that I
         am innocent - and that I will fight to clear my name.

         I simply returned a call from my stockbroker. Based in large part on prior
         discussions with my broker about price, I authorized a sale of my
         remaining shares in a biotech company called ImClone. I later denied any
         wrongdoing in public statements and in voluntary interviews with
         prosecutors. The government's attempt to criminalize these actions makes
         no sense to me.

         I am confident I will be exonerated of these baseless charges, but a trial
         unfortunately won't take place for months. I want to thank you for your
         extraordinary support during the past year - I appreciate it more than you
         will ever know.

         For more information, please visit the special website I have established
         for you at www.marthatalks.com. I will do my best to post current
         information about the case, and you will be able to contact me there at
         martha@marthatalks.com. I look forward to hearing from you.

         Sincerely,

         Martha Stewart

This is a personal statement from Martha Stewart. It is not issued by or on behalf of
Martha Stewart Living Omnimedia, Inc.

Source: http://www.marthatalks.com, June 12, 2003

                                                                                        8

EXHIBIT 3
                                         MSO STOCK PRICE AND NET INCOME PERFORMANCE1

1
    Sources: Yahoofinance.com and Scannel and Rose (2004)
                                                                                       9

EXHIBIT 4
Example Parodies from the ImClone/Martha Stewart Scandal

                                                           10