Solved: 1 Why did MSO s stock price decline due to Martha

1. Why did MSO’s stock price decline due to Martha Stewart’s loss of reputation?
2. Who is Martha Stewart’s target market?
3. What qualities were associated with the Martha Stewart brand, before the controversy?
Which of these were affected by the accusations of insider trading, and how? How would you
find out for sure?
4. What level of sales and profits would MSO have reached if Martha’s reputation had not been
harmed? Refer to SEC or MSO websites for information on financial trends.
5. What range would the stock price have been in at the end of 2002 based on your estimates?
6. Martha’s overall net worth was huge relative to her investment in ImClone. Assuming she did
nothave inside information, was there any way she could have avoided the appearance of
having it?
7. How could Martha have handled this crisis better?
8. Why is insider trading considered harmful? Should insider trading be banned if it assists in
moving a stock price to a new equilibrium quickly, so that non-insiders are trading at appropriate
prices sooner?
9. If you wished to sell an investment in a company where one of your friends is an insider, or
even a significant employee, should you call your friend to advise him you are about to sell?
Why, or why not?

In June 2002, Martha Stewart began to wrestle with allegations that she had improperly used
inside information to sell a stock investment to an unsuspecting investing public. That was when
her personal friend Sam Waksal was defending himself against Securities and Exchange
Commission (SEC) allegations that he had tipped off his family members so they could sell their
shares of ImClone Systems Inc. (ImClone) just before other investors learned that ImClone’s
fortunes were about to take a dive. Observers presumed that Martha was also tipped off and,
even though she proclaimed her innocence, the rumors would not go away.

ANSWER
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