The nike shoe investigation worksheet answer key

Ch #6

Marc Kasky versus Nike

Marc Kasky of San Francisco sees his world as a com- munity and has a long history of caring about the others in it. He got early lessons in business ethics from his father, who ran a car repair business.

The customer would bring his car in and say there’s something horribly wrong in my car: I think I need a new transmission. . . . My father would call them back an hour later and say, “Come get your car, there was a loose screw here and there; I fixed it. What does it cost? Nothing.” I saw how that affected our family. It impressed me a great deal.1

After graduating from Yale University in 1969, he volunteered to work in poor Cleveland neighbor- hoods. Moving to San Francisco, he headed a non- profit center for foundations that funded schools. He involved himself in civic and environmental causes. He also became an avid jogger and ran marathons.

Over the years Kasky wore many pairs of Nike shoes and considered them a “good product.”2 But he stopped buying them in the mid-1990s after reading stories about working conditions in overseas factories where they were made. By then Nike, Inc., had be- come the main focus of the anti-sweatshop cause, ac- cused of exploiting low-wage workers who made its shoes and clothing. The more Kasky read about Nike, the more convinced he was that it was not only vic- timizing workers, but lying about it too. Kasky sought the help of an old friend, Alan Caplan, an at- torney who had achieved fame in progressive circles by bringing the suit that forced R. J. Reynolds to stop using Joe Camel in its ads.

With Caplan’s help, Kasky sued Nike in 1998 for false advertising, alleging it had made untrue state- ments about its labor practices. This was not Kasky’s first lawsuit. Previously, he had sued Perrier over its claim to be “spring water” and Pillsbury Co. for labeling Mexican vegetables with the words “San Francisco style.” Both suits were settled.3 Nike sought dismissal of Kasky’s suit, arguing that the statements he questioned were part of a public de- bate about sweatshops and protected by the First Amendment.

NIKE

Nike, Inc., is the world’s largest producer of athletic shoes and sports apparel. It grew out of a handshake in 1962 between Bill Bowerman, the track coach at the University of Oregon, and Phil Knight, a runner he had coached in the 1950s. Knight had just received an MBA from Stanford University, where in a term paper he had written about competing against estab- lished athletic shoe companies by importing shoes made in low-wage Asian factories. Now he was ready to try it. He and Bowerman each put up $550 and Knight flew to Japan, arranging to import 300 pairs of Onitsuka Tiger shoes.

After seven years, Knight and Bowerman decided to stop selling the Japanese company’s brand and create their own. So they designed a shoe and sub- contracted its production to a factory in Japan. By now Bowerman and Knight had incorporated, and an employee suggested naming the company Nike, for the Greek goddess of victory. Knight paid a design student at Portland State University $35 to create a logo. She drew a “swoosh.” The elements of future market conquest were now in place and the company rapidly grew.

Nike succeeded using two basic strategies. First, its product strategy is to design innovative, fashion- able footwear and apparel for affluent markets, then have contractors in low-wage countries manufacture it. This way Nike avoids the cost of building and managing factories. At first, it made most of its shoes in Japan (some were made in the United States until 1980), but as wages rose there it moved contracts to plants in South Korea and Taiwan. When wages rose in these countries, Nike again shifted production, this time to China, Indonesia, and Thailand, and later to Vietnam.

Second, its marketing strategy is to create care- fully calculated brand images. Advertising associates the Nike brand with a range of ideas. Prominent among them is the idea of sport. Endorsements by professional athletes and college teams endow the swoosh with a high-performance image. Campaigns with the “just do it” slogan add connotations of com- petition, courage, strength, and winning. Other ad- vertising associates the brand with urban culture to make it “street cool.” In this way Nike transforms shoes and T-shirts that would otherwise be low-cost commodities into high-priced, high-fashion items that generate positive emotions when they are worn.

THE SWEATSHOP LABOR ISSUE

By 1980 when the company went public, it had seized half the world’s athletic shoe market. But the out- sourcing and advertising strategies that propelled it to the top put it on a collision course with a force in its social environment. This force, the sweatshop issue, would gain power and cause considerable damage.

In 1988 an Indonesian union newspaper pub- lished a study of bad working conditions in a plant making Nike footwear.4 Soon other critical articles appeared in the Indonesian press. The AFL-CIO decided to investigate how workers were being treated in plants that manufactured for American firms and sent an investigator named Jeffrey Ballinger to Indonesia. Ballinger focused on Nike contractors, gathering detailed information.

In 1992 he published a clever indictment of Nike in Harper’s Magazine by exhibiting the monthly pay stub of an Indonesian woman named Sadisah who made Nike running shoes. Sadisah worked on an as- sembly line 10-and-a-half hours a day, six days a week, making $1.03 per day or about $0.14 an hour, less than the Indonesian minimum wage. She was paid only $0.02 an hour for 63 hours of overtime during the pay period. Her home was all she could afford, a rented shanty lacking electricity and plumb- ing. The Nikes she made sold for $80 in the United States, yet the cost of her labor per shoe was only $0.12. If anyone missed the point, Ballinger noted that the year before Nike had made a profit of $287 mil- lion and signed Michael Jordan to a $20 million ad- vertising contract, a sum that Sadisah would have had to work 44,492 years to earn.5

Ballinger’s article appeared with a flurry of other negative stories, but the issue did not immediately heat up. Nevertheless, Nike elected to show more responsi- bility for the welfare of foreign workers. In 1992 it adopted a “Code of Conduct” requiring its contractors to certify compliance with local minimum wage, child labor, health, safety, workers’ compensation, forced labor, environmental, and discrimination laws. In 1994, it hired the accounting firm Ernst & Young to audit code compliance by making spot checks at factories. These developments suggest that at some point CEO Philip Knight came to believe that even if Nike did not directly employ foreign workers, it benefited from their labor and so had an ethical duty toward their welfare. But Nike would not escape damage from the issue. The code and spot checks were not enough. Negative stories about its contract factories grew more numerous.

Finally, the issue exploded after April 1996 congres- sional testimony by the leader of a human rights group, who said clothing for Walmart’s Kathie Lee ap- parel line was made at a Honduran factory where chil- dren worked 14 hours a day. Daytime television viewers saw talk show host Kathie Lee Gifford reduced to tears as she responded, “You can say I’m ugly, you can say I’m not talented, but when you say that I don’t care about children . . . How dare you?”6 Now the issue had emotional content for American consumers.

Soon after the Gifford spectacle anti-sweatshop activists decided to focus on Nike, and attacks heated up. Nike was an industry leader. If it could be re- formed, other clothing companies and retailers would fall into line. It was also vulnerable to a brand name attack. Advocacy groups joined forces to in- form the public of what they saw as a gap between the inspiring images in Nike’s advertising and the grim reality of its labor practices. This alarmed Nike because bad publicity could rub away the image magic that made its brand cool.

NIKE AT WAR WITH ITS CRITICS

The war over Nike’s image would be fought in the media. An early skirmish came when Bob Herbert at The New York Times wrote the first of what became a yearlong series of columns berating Nike. After de- scribing a climate of atrocities in Indonesia, including government-condoned killings and torture, he ac- cused Nike of using “the magnificent image of Michael Jordan soaring, twisting, driving, flying” to divert attention from its exploitation of Indonesian workers. “Nike executives know exactly what is go- ing on in Indonesia. They are not bothered by the cries of the oppressed. It suits them. Each cry is a sig- nal that their investment is paying off. CEO Philip Knight quickly responded with a letter to the editor, citing ways that Nike tried to help work- ers, and noting that it paid “double the minimum wage” and “had an oversight system that works.” He accused Herbert of trying to “sacrifice enlightenment for hype.”8 Herbert’s response was a second column rebuking Nike for running theme ads about women’s empowerment while most of its shoes were produced “by grossly underpaid women stuck in utterly pow- erless and often abusive circumstances.”9

Over the next two years, negative stories about Nike appeared with increasing frequency (see Ex- hibit 1). An inspection report by the human rights group Vietnam Labor Watch reported that young women working in a Nike factory were paid submin- imum wages. A supervisor had forced 56 women to run twice around the 1.2-mile factory boundary un- der a hot sun for failing to wear regulation shoes. Twelve of them fainted and required hospitaliza- tion.10 Gary Trudeau drew a series of Doonesbury cartoons based on these allegations.

Activists urged people to return Nike sneakers during “shoe-ins” at Niketown outlets. A disgruntled Ernst & Young employee leaked a confidential spot inspection report on a Vietnamese shoe factory. It showed violations of Vietnamese labor law and said that 77 percent of the employees suffered respiratory problems from breathing toxic vapors at levels that violated both Vietnamese and U.S. standards.11 Another group, the Hong Kong Christian Industrial Committee, released a study of Nike factories in China documenting long workdays, forced overtime, pay below minimum wages, and unsafe levels of airborne dust and toxic chemicals.12 The Oregonian, the paper in Portland where Nike is headquartered, called Nike “an international human rights incident.”13

Now Nike found itself at the center of a world- wide debate over sweatshops. The company expanded efforts to stop workplace abuses and started a public relations campaign. At great expense it became the only shoe company in the world to eliminate the use of polyvinyl chloride in shoe con- struction, ending worker exposure to chlorine com- pounds. It revised its conduct code, expanding protections for workers. It set up a compliance department of more than 50 employees. Its staff members were assigned to specific Asian plants or to a region, where they trained local managers and did audits assessing code compliance.14

Working with Kathie Lee Gifford, other apparel companies, human rights and labor groups, and uni- versities that buy school clothing, Nike helped to start a voluntary CSR initiative called the Fair Labor Association to enforce a code of conduct and monitor- ing scheme to end sweatshop labor. It hired Andrew Young, a former U.S. ambassador to the United Nations, to visit Asian plants and write an inspection report. Young toured 12 factories over 15 days and found that conditions “certainly did not appear to be what most Americans would call sweatshops Nike purchased full-page editorial advertisements in newspapers to broadcast his generally favorable findings, saying the report showed it was “operating morally” and promising to act on his recommenda- tions for improvement.

Finally, Nike ran a public relations counteroffen- sive. Unlike some rival firms that lay low, it chose to confront critics. It hired an experienced strategist to manage the campaign. Nike responded to every charge, no matter how small or what the source. Al- legations were countered with press releases, letters to the editor, and letters to presidents and athletic directors of universities using Nike products. In these communications Nike sought to portray itself as a responsible employer creating opportunity for thousands of workers in emerging economies. CEO Knight expressed the Nike philosophy, saying, “This is going to be a long fight, but I’m confident the truth will win in the end.

THE KASKY LAWSUIT

While Knight thought he was fighting for truth, Marc Kasky perceived something less noble—a fraud conducted to sell shoes and T-shirts. He be- lieved that Nike knowingly deceived consumers, who relied on the company’s statements for reassur- ance that their purchases did not sustain sweat- shops. Under an unusual state law, any California citizen can sue a corporation on behalf of the public for an unlawful business practice. Kasky took advantage of this provision, alleging that Nike had engaged in negligent misrepresentation, fraud and deceit, and misleading advertising in violation of the state’s commercial code. The code prohibits “any unlawful, unfair, deceptive, untrue or misleading advertising.”17

In his complaint, Kasky accused Nike of using a “promotional scheme,” including its code of con- duct, to create a “carefully cultured image” that was “intended . . . to entice consumers who do not want to purchase products made in sweatshop . . . condi- tions.”18 He set forth six classes of misleading claims.

• In its Code of Conduct (see Exhibit 2) and in a “Nike Production Primer” pamphlet given to the media, Nike stated that its contracts prevent corporal punishment and sexual harassment at factories making Nike products. But the Vietnam Labor Watch report told of workers forced to kneel in the hot sun and described frequent complaints by female employees against their supervisors.

· In a range of promotional materials Nike asserted that its products were manufactured in compliance with laws and regulations on wages and over- time. But evidence from a report by the Hong Kong Christian Industrial Committee and the leaked Ernst & Young audit showed that plants in China and Vietnam violated such laws.

· At the Nike annual shareholder meeting in 1997 CEO Knight said that the air in Nike’s newest Vietnam shoe factory was less polluted than the air in Los Angeles. But the Ernst & Young report documented exposures to excessive levels of hazardous air pollutants.

· In his letter to the editor of The New York Times, Knight stated that Nike paid, on average, double the minimum wage to workers worldwide. But this was contradicted by data from pay stubs in the Vietnam Labor Watch report. He also said that Nike gave workers free meals, but an article in the Youth Newspaper of Ho Chi Minh City reported that workers paid for lunches.

· In its paid editorial ads discussing Andrew Young’s report on its factories, Nike made the claim that it was “doing a good job” and “operating morally.” But the report was deficient because it failed to address central issues such as minimum wage violations.

· In a press release Nike made the claim that it guaranteed a “living wage for all workers.” But the director of its own Labor Practices Depart- ment had written a letter defining a “living wage” as income sufficient to support a family of four, then stated that the company did not ask contrac- tors to raise wages that high.

Kasky sought no monetary gain for himself. Instead, he asked for an injunction against further deception, a court-approved public information cam- paign forcing the company to correct misrepresenta- tions, disgorgement of Nike profits from California sales, and payment of his legal expenses. 
However, Superior Court Judge David A. Garcia threw the case out. There was no trial to decide whether any of the statements made by Nike were misleading. The judge simply accepted Nike’s claim that the statements in question were part of an ongo- ing public debate and, therefore, entitled to broad protection.

COMMERCIAL SPEECH OR

PROTECTED EXPRESSION?

Freedom of speech is a central value in American culture. It derives from a long philosophical tradi- tion, exemplified in John Stuart Mill’s classic essay On Liberty. Mill believed that freedom of opinion and expression were necessary to maintain a free society, the kind of society that could protect liberty and pro- mote happiness. He wrote that a natural tendency existed to silence discomfiting, doubtful, or unortho- dox views. But this is wrong, because no person is in possession of unerring truth.

Restricting debate deprives society of the oppor- tunity to find new ideas that are more valid than prevailing ones. Even bizarre or incorrect com- ments should be valued. The former may contain partial truth and the latter make the truth more compelling because of its contrast to the falsehood. Censorship of any kind is wrong because no per- son, society, or generation is infallible. It is better to leave open many avenues for expression of views so that error and pretention can be opposed. Truth, said Mill, needs to be “fully, frequently, and fear- lessly discussed.”20

The First Amendment was intended to protect public debate that is critical to the functioning of de- mocracy. It prohibits government from “abridging the freedom of speech, or of the press.”21 A compli- cating factor is the efforts of courts over many years to distinguish between commercial speech and other speech. Commercial speech, or advertising, receives less protection from restriction by government than speech in the broad marketplace of ideas. Ordinary speech, including political, scientific, and artistic expression, is entitled to strong protection. Laws restricting expression of opinion are regarded as invalid on their face and justified only in extreme circumstances. Commercial speech, however, is often restricted by federal and state laws to prevent con- sumer deception and fraud. Over many years, courts have struggled to come up with a clear definition of commercial speech.22 The Supreme Court has defined it as “speech propos- ing a commercial transaction,” but this still begs clar- ification.23 An ad that said “Buy Nike shoes” would be commercial speech under this definition. But what about an ad picturing athletes with the statement “Just Do It,” in which there is no literal sales pro- posal? Elsewhere in the same case, the Supreme Court also defined commercial speech as “expression related solely to the economic interests of the speaker and its audience.”24 Would Nike’s statements on sweatshops meet this standard?

The focal point of Kasky’s suit would become whether or not Nike’s communications were, in fact, commercial speech. At a Superior Court hear- ing in early 1999, his lawyers argued that they were, therefore, they should be required to meet standards of truth and honesty enforced in California law. They were not entitled to the defer- ence that would be given under the First Amendment to, for example, statements of political candidates or poets. Nike disagreed, saying that its statements about shoe and garment factories were part of a broader public debate and thus were speech enti- tled to strong First Amendment protection.25 The judge agreed with Nike and dismissed the case.26 Kasky appealed, but a year later the appeals court again rejected his argument. Kasky then appealed to the California Supreme Court.

There he won. In a 4–3 decision the California Supreme Court held that Kasky’s case should go to trial.27 In reaching its decision, the majority created a novel, three-part definition of commercial speech and applied it to Nike’s messages. For speech to be commercial it had to (1) come from a business, (2) be intended for an audience of consumers, and (3) make representations of facts related to products. Nike’s statements fit each requirement. The majority con- ceded that commercial and noncommercial speech were intermingled in the communications, but ar- gued, “Nike may not ‘immunize false or misleading product information from government regulation simply by including references to public issues.’”28 That put Nike in the position of a used car dealer falsely advertising “none of our cars has ever been in an accident,” but evading prosecution for fraud by adding a political opinion such as, “our city should budget more for traffic safety.”

Dissenting opinions revealed serious disagree- ment among the justices. Justice Ming Chin attacked the majority for unfairly tilting the playing field against Nike. “While Nike’s critics have taken full advantage of their right to ‘uninhibited, robust, and wide-open’ debate,” he wrote, “the same cannot be said of Nike, the object of their ire. When Nike tries to defend itself from these attacks, the majority de- nies it the same First Amendment protection Nike’s critics enjoy.”29

A second dissent came from Justice Janice R. Brown, who found Nike’s commercial and noncom- mercial speech inseparable. In her view, “Nike’s com- mercial statements about its labor practices cannot be separated from its noncommercial statements about a public issue, because its labor practices are the public issue.”30 She admonished the majority for creating a test of commercial speech that was unconstitutional because it made “the level of protection given to speech dependant on the identity of the speaker— and not just the speech’s content.”31

The consequences of the decision went far beyond Nike. Now any company doing business in California had to be careful about expressions of fact or opinion that reached consumers in the state. The sharpest and most ideological critics of a corporation could take is- sue with its statements, bring it to court, and force a trial about the accuracy of its claims. The decision was as unwelcome in the business community as it was unexpected. Nike would seek to overturn it.

IN THE UNITED STATES

SUPREME COURT

Nike appealed to the United States Supreme Court, which accepted the case. In its brief, Nike asked that the California Supreme Court’s definition of com- mercial speech be struck down to remove its uncon- stitutional, chilling effect on public debate. Kasky argued once again that statements emanating from Nike’s public relation’s campaign fell into the cate- gory of free speech. He asserted that the First Amend- ment gave no shelter to false statements by a company about how its products were made.

Strangely, no decision would ever be made. The nine justices heard oral argument in April 2003. Then, late in June, they dismissed their consideration of the case as “improvidently granted.”32 In a brief opinion Justice John Paul Stevens said the Court had erred in accepting it before trial proceedings in California were finished. The Court would wait.

This view was not unanimous. Three justices dis- sented. They saw no reason to wait and hinted that they were ready to strike down any restriction on Nike’s speech.

In my view . . . the questions presented directly con- cern the freedom of Americans to speak about public matters in public debate, no jurisdictional rule pre- vents us from deciding these questions now, and de- lay itself may inhibit the exercise of constitutionally protected rights of free speech without making the issue significantly easier to decide later on. . . .

[A]n action to enforce California’s laws—laws that discourage certain kinds of speech—amounts to more than just a genuine, future threat. It is a present reality—one that discourages Nike from engaging in speech. It thereby creates “injury in fact.” Further, that injury is directly “traceable”
to Kasky’s pursuit of this lawsuit. And this Court’s decision, if favorable to Nike, can “redress” that injury.

alleged misrepresentations about its labor practices. Its antagonists relished the prospect.

However, late in 2003 Kasky and Nike announced a settlement. In return for Kasky dropping the case, Nike agreed to give $1.5 million to an industry- friendly factory monitoring group. It may have paid Kasky’s legal fees. This was not a tough settlement for Nike.

Supporters on both sides were disappointed. Activists lost their grand show trial putting the cor- porate devil on display. Industry was disappointed that Nike did not stay the course because settlement left standing the California Supreme Court’s broad definition of commercial speech. This definition still stands.

NIKE TURNS A NEW LEAF

Meanwhile, Nike was moving through a process of CSR review and implementation. In 2005 it published a Corporate Responsibility Report stating three strategic CSR goals.34 First, it would seek to create industry- wide, systemic change for the better in contractor shoe and apparel factories. Second, it would promote sustainability by eliminating toxic chemicals in shoe- making and using more recycled materials. Third, it would improve society by promoting the idea of sport with its benefits of healthy exercise and keep- ing young people out of trouble.

Nike learned that its business processes and cul- ture were in tension with the policies in its code for contractors. Many of its own actions triggered vio- lations. For example, it rewarded its buyers for meeting price, quality, and delivery date targets, giving them a financial incentive to push contrac- tors hard. That undermined code policies to limit workweeks and hours in the factories. Nike prod- ucts were often seasonal and ordered in response to rapidly shifting fashion trends. This led Nike to adopt a low inventory policy, but in consequence the factories it contracted with were often pres- sured to meet last-minute production goals. Some- times their managers responded by cheating on labor guidelines. Changing Nike’s internal proc- esses to align them with its CSR goals meant slowing its reaction to consumer trends and risking loss of revenue. It also violated the spirit of Nike’s aggressive procurement culture and met with internal resistance.35

Nike’s main tactic for improving labor conditions is factory monitoring to check compliance with the Nike Code of Conduct. Its self-run monitoring program has two parts. One is a labor audit of factories requiring inspectors to check off boxes for requirements in areas such as work hours, wages, and grievance systems. The other is an environmental health and safety audit on compliance with rules on chemical management, fire safety, and protective equipment. These audits take 48 working hours to complete and result in letter grades from A to F. Experts say their design is exem- plary.36 Their results are reviewed all the way up to Nike’s board of directors. Yet they have failed to end very significant labor problems.

Nike uses about 700 factories in 56 countries em- ploying 800,000 workers. It cannot hope to monitor them all, so it focuses its audits on roughly 20 percent that do most of its production or are high risk, trying to check on them once every three years. For exam- ple, in China it has 57 so-called “focus factories,” and in 2007 audited 22 of them, handing out five As, six Bs, eight Cs, and three Ds.37 Other factories are moni- tored by voluntary responsibility alliances, such as the industry-funded Fair Labor Association. A few pay for their own audits. It is an expansive effort, but bad reports keep coming in.

In Vietnam, 20,000 workers walked off the job for two days at a plant making Nike shoes. They were asking for a 20 percent raise, but received only 10 per- cent and free lunches. On their return they were in a violent mood and the plant had to be closed for an- other three days.38 This was just one of 720 strikes at factories in Vietnam in 2008.39

When management at a Nike hat plant in Bangladesh learned that workers had attended a labor rights seminar, the personnel manager interrogated a woman who had attended, threatening to reinjure a hand she had badly injured in the past unless she gave up the names of other attendees. She refused, but man- agement intimidated another person into revealing the names and those named were fired. Nike investigated the situation and got the workers rehired.40

An Australian TV reporter posed as a fashion buyer to get inside a Malaysian garment factory making Nike T-shirts where he discovered parlous conditions. It employed immigrant workers who paid large recruit- ing fees to get their jobs, then had to surrender their passports to plant management, which held them until the recruiting fees were repaid, an unlikely event given the low wages paid. They lived in crowded, malo- dorous rooms. Nike admitted many code violations, rectified the problems, and called in managers from all of its 37 factories in that country for training.41

These are more than isolated episodes. A scholarly analysis of 800 Nike audits concluded that despite years of effort, working conditions at its factories re- mained highly variable. While conditions improved in some plants, in others they stayed the same, and in many they deteriorated, leaving “little evidence that this system of private voluntary regulation is at all an effective strategy for improving labor standards.”42 And an in-depth report by a global coalition of more than 100 unions and human rights groups concluded this:

Despite more than 15 years of codes of conduct adopted by major sportswear brands such as Adidas, Nike, New Balance, Puma and Reebok, workers making their products still face extreme pressure to meet production quotas, excessive, undocumented and unpaid overtime, verbal abuse, threats to health and safety related to the high quotas and exposure to toxic chemicals, and a failure to provide legally required health and other insurance programs.

UNDERLYING PROBLEMS

Why do such problems still exist? Nike’s 700-factory supply chain is too big to monitor. Its business model invites labor exploitation. When wages rise in one country, it seeks a lower-wage alternative. Factories are still faced with tight deadlines, sudden shifts in orders, and late design changes. They have insufficient power in supply chains to push back against global brands such as Nike. But they often have great power over workers eager for jobs. If timely order fulfillment is threatened, the easiest way to catch up is forced overtime or elimination of days off.44

According to Jeffrey Ballinger, monitoring by Nike and groups such as the Fair Labor Association is a prime example of voluntary corporate responsi- bility being used to avoid real reform.45 Audits focus on the accuracy of wage slips, worker-to-toilet ratios, and placement of fire extinguishers. They avoid securing core global labor rights such as collective bargaining. Part of the problem is that many nations do not adequately enforce their labor laws.

International Labor Organization Convention No. 81 requires countries to inspect workplaces for compliance, but most countries with low-wage labor markets do not do so, in part because they want to attract foreign investment. They welcome voluntary corporate responsibility inspection regimes that make it look like action is being taken, even if the action is light. Corporations, in turn, prefer voluntary action to strict regulation. So governments and corporations unite in supporting CSR as a cosmetic touch to cover fundamental problems. In nations where labor laws are feebly enforced it is hard for workers to help themselves. They are often unin- formed about their rights; they have no examples of successful unionizing before them. Until workers are empowered, forced work in poor conditions will lead to more scandals, violence, and reputation damage for global brands.

Ballinger suggests a solution for Nike.

My research shows that about 75 cents per pair of shoes to the worker would be needed to fix prob- lems that workers have been complaining about since the 1980s. That is roughly 80 percent more to workers, or $1.80 on a $70 pair of shoes at Foot Locker. If Nike, instead, paid workers that 75 cents more per pair of shoes, the cost to Nike would be $210 million a year.

Questions

1. WhatresponsibilitydoesNikehaveforconditions of work at foreign factories making its products?

2. Could Nike have better anticipated and more effectively handled the sweatshop issue? What did it do right? What was ineffective or counter- productive?

3. Has Nike created and implemented an effective approach to social responsibility? Does it address root causes of problems in Nike’s supply chain? Should it now do more or do something different?

4. Did the California Supreme Court correctly decide the Kasky case? Why or why not?

5. How should the line between commercial and noncommercial speech be drawn?

Ch #7

The Trial of Martha Stewart

From indictment to sentencing, the case of Martha Stewart was a matter of intense public interest. Some thought that her misdeeds, if any, were slight. Cynics believed the government was prosecuting a celebrity for a minor infraction to show it was tough on busi- ness crime. An indignant Wall Street Journal com- plained that innocent employees and shareholders of Martha Stewart Living Omnimedia were paying the price for the government’s zeal.1 Feminists argued that she was picked on for being a successful woman. “It’s hard to imagine a male in precisely this spot,” said Mary Becker, a DePaul University law professor. “Targeting a successful woman is very consistent with dominant cultural values.”2

Others believed that her prosecution was justified. “I don’t buy any of it,” wrote Scott Turow, a criminal defense lawyer and the author of best-selling legal fiction. “What the jury felt Martha Stewart did—lying about having received inside information before she traded—is wrong, really wrong.”3

This is the story.

DECEMBER 27

On the morning of Thursday, December 27, 2001, Douglas Faneuil was on duty at the mid-Manhattan office of Merrill Lynch. Faneuil, 24, who had been in his job only six months, assisted a stockbroker named Peter Bacanovic. It was two days after Christmas and Bacanovic was on vacation. Staffing was thin and Faneuil expected a slow day with light trading.

Soon Faneuil took a call from Aliza Waksal. Aliza was the daughter of Samuel Waksal, co-founder of ImClone Systems, a biopharmaceutical company. She wanted to sell her ImClone shares. Faneuil exe- cuted the order and by 9:48 a.m. her 39,472 shares had been sold for $2,472,837. Then Faneuil had a call from Samuel Waksal’s accountant requesting that another 79,797 shares held in his Merrill Lynch ac- count be transferred to Aliza’s account and then sold. The call was followed by a written direction saying that making the transfer and sale that morn- ing was imperative.

Faneuil sought help on the transfer and called Peter Bacanovic in Florida. Bacanovic, 39, was an old friend of Waksal’s. He had worked at ImClone for two years before coming to Merrill Lynch, and he handled the personal accounts of Waksal and his daughter. When Bacanovic learned that the Waksals were selling, he instructed Faneuil immediately to call another of his clients, Martha Stewart, while he remained on the line.

Bacanovic, who was active in New York social life, first met Martha Stewart in the mid-1980s when they were introduced by her daughter Alexis. Stewart was one of his most important clients. He handled her pension and personal accounts. He also handled accounts for her company, Martha Stewart Living Omnimedia, Inc.

At 10:04 a.m. Faneuil dialed Stewart, but reached her administrative assistant Ann Armstrong, who said Stewart was on an airplane. Bacanovic left a brief message, asking Stewart to call back when she became available. In her phone log, Armstrong wrote, “Peter Bacanovic thinks ImClone is going to start trading downward.” Bacanovic instructed Faneuil that when Stewart called back he should tell her that the Waksals were selling all their shares. At this time ImClone was priced at $61.53 a share.

This instruction from Bacanovic bothered Faneuil. Merrill Lynch had a written policy (see Exhibit 1) that required its employees to hold client information in strict confidence. But he was very busy and working under a sense of urgency, handling calls from the Waksals, and making calls to Merrill Lynch staff in several offices arranging the transfer of Sam Waksal’s shares to his daughter.

Several hours later, Stewart’s plane landed in San Antonio to refuel. She went into the airport and on her cell phone called Ann Armstrong to check for messages. At 1:39 p.m. she phoned Merrill Lynch, reaching Faneuil, who told her that Sam Waksal and his daughter had sold all of their shares. She asked for the current price of ImClone. Faneuil quoted ap- proximately $58 a share. Stewart told him to sell all 3,928 shares she owned. She hung up and immediately put in a call to Sam Waksal. The two were close friends who had been introduced by Stewart’s daughter Alexis in the early 1990s. Unable to reach him, she left a message that his assistant took down as “Martha Stewart some- thing is going on with ImClone and she wants to know what.”4 By 1:52 p.m. Stewart’s ImClone shares had been sold at an average price of $58.43, for a total of approximately $228,000.

THE PUZZLE OF THE

WAKSAL TRADES

What was going on with ImClone? For almost 10 years Waksal had put ImClone’s resources into the develop- ment of a promising new colon cancer drug named Erbitux. Two months earlier, ImClone had submitted a licensing application for approval of Erbitux to the Food and Drug Administration (FDA). On Decem- ber 26, Waksal learned from an ImClone executive that, according to a source within the FDA, on December 28 ImClone would receive a letter rejecting the Erbitux application. When the FDA’s action was publicly an- nounced ImClone’s share price was sure to plummet.

Waksal was in possession of material insider in- formation. It was material because any reasonable investor would find it important in deciding to buy or sell ImClone stock. It was insider information be- cause it was not yet known to the public. Since the FDA application was so critical, ImClone’s general counsel had declared a “blackout period” after December 21 when employees should not trade ImClone shares. The purpose of the blackout was to guard against illegal insider trading. Despite being informed of the blackout and de- spite possessing knowledge of the law with respect to insider trading, Waksal elected to sell. This was ex- ceptionally foolish. His motive was to escape the un- pleasant consequences of debt. He had obligations of $75 million, most of which was margin debt secured by shares he owned in ImClone. Servicing this debt was costing him $800,000 a month. He knew that if ImClone’s share price slipped very far, many of his shares would be sold, dramatically lowering his net worth. He also tipped family and friends to sell on December 27. Besides his daughter Aliza, his father sold 135,000 shares, his sister Patti sold 1,336 shares, and another daughter, Elana, sold 4,000 shares. Waksal also tipped an investment adviser who sold all of her 1,178 shares on December 27 and passed the tip to a physician on one of ImClone’s advisory boards, who sold more than $5 million in shares—all he owned— on the same day.

On Friday, December 28, the FDA faxed ImClone a “refusal to file” letter at 2:55 p.m. Later in the after- noon, after the market closed with ImClone trading at $55.25 a share, the company issued a press release disclosing the FDA’s action. On December 31, the next trading day, ImClone opened at $45.39 a share. If Martha Stewart had waited until then to sell her shares, she would have gotten about $178,292 or $49,708 less than she received by selling on the after- noon of December 27. ImClone closed on December 31 at $46.46. It had dropped about 16 percent on the news of the FDA’s action.

AN UNSETTLED AFTERMATH

Four days later a supervisor at Merrill Lynch ques- tioned Faneuil about the ImClone trades. Afterward, Faneuil called Bacanovic, who was still vacationing in Florida. Bacanovic told him that Martha Stewart sold her shares because of a prearranged plan to reduce her taxes. He told Faneuil about a December 20 telephone call in which he and Stewart had gone down a list of the stock holdings in her account de- ciding which ones to sell at a loss to balance out capi- tal gains from other sales during 2001.

Soon, however, Faneuil had a call from Eileen DeLuca, Martha Stewart’s business manager, who demanded to know why the ImClone shares had been sold, since the sale had resulted in a profit that disrupted her tax-loss selling plan. Again he called Bacanovic. This time, Bacanovic told him that Stewart had sold because they had a preexisting agreement to sell ImClone if the price fell below $60 a share.

Merrill Lynch contacted the Securities and Ex- change Commission (SEC) to report suspicions of insider trading in ImClone. On January 3, 2002, SEC attorneys called Faneuil to interview him. Faneuil told them Stewart had sold because the price of Im- Clone fell below $60 a share. He did not tell them that he had conveyed news about the Waksals’ sales to her. On January 7, SEC attorneys interviewed Bacanovic on the telephone. He told them he had spoken to Martha Stewart on the day she traded and recommended that she sell based on their preexisting $60 sell agreement.

On January 16, Martha Stewart and Peter Bacanovic had a breakfast meeting. Their conversa- tion is unrecorded. According to Faneuil, after the meeting Bacanovic told him, “I’ve spoken to Martha. I’ve met with her. And everyone’s telling the same story . . . This was a $60 stop-loss order. That was the reason for her sale. We’re all on the same page, and it’s the truth.”5 In at least five subsequent conversa- tions, Bacanovic reassured Faneuil of the need to stick to this story. If he did, Bacanovic promised to give him extra compensation.

On January 30, in response to a request for docu- ments by the SEC, Bacanovic turned over the work- sheet that he said was used in his December 20 tax sale conversation with Martha Stewart. It was a sin- gle-page printout listing approximately 40 securities in her account and noting the number of shares and the purchase price. The notation “@60” appeared near the entry for ImClone,

On January 31, Martha Stewart had a lengthy con- versation with a criminal attorney. Following the con- versation she went to her assistant Ann Armstrong asking to see the telephone log. Sitting at Armstrong’s computer, she changed Bacanovic’s December 27 phone message from “Peter Bacanovic thinks ImClone is going to start trading downward,” to “Peter Bacanovic re imclone.”6 Then, thinking better of it, she told Armstrong to restore the original word- ing and left.

INTERVIEWS

On February 2, Martha Stewart was interviewed in New York by attorneys from the SEC, the Federal Bureau of Investigation (FBI), and the U.S. Attorney’s Office. Asked to explain her ImClone transaction, she said she and Bacanovic had decided to sell if ImClone fell below $60 a share. On December 27 she had spo- ken to Bacanovic, who told her it had fallen below $60 and inquired if she wished to sell. She had as- sented, in part, because she was on vacation and did not want to worry about the stock market. She did not recall speaking to Faneuil on that day. She denied knowledge of the December 27 phone message from Bacanovic, even though only two days before she had gone to her assistant’s computer to alter its wording. According to one attorney present, at the end of the interview Stewart asked in a “curt, an- noyed” tone, “Can I go now? I have a business to run.”7

On February 13, Bacanovic was subpoenaed by the SEC to testify under oath in New York. He re- ported a December 20 phone call with Stewart in which he recommended the sale of ImClone if it fell below $60. The worksheet he turned over to the agency had notes of this conversation. He also stated that he had not discussed the ImClone stock sale with Stewart since December 27. Yet records of calls between Bacanovic’s and Stewart’s cell phones show that by this time they had spoken often, including once on the day of Stewart’s interview in New York. The content of their conversations is unrecorded.

On March 7, Douglas Faneuil was interviewed by SEC attorneys. Details of this session have not been made public, but his subsequent indictment alleges that he failed to fully and truthfully disclose all he knew about the events of December 27.8 Following the interview, Bacanovic offered Faneuil an extra week of vacation and airfare for a trip as a reward for sticking to Bacanovic’s script.9

On April 10, Stewart was interviewed again on the telephone by investigators. She told them she had spoken with Bacanovic on December 27, but she could not remember if Bacanovic had mentioned the Waksals. She said again that the two had set up a $60 sell order on ImClone.

TURMOIL

After these interviews, government investigators con- tinued the painstaking work of gathering, verifying, and interpreting details. Meanwhile, the main actors in the ImClone trades struggled in the backwash of their actions. In late May, Samuel Waksal resigned as the CEO of ImClone. In early June, the Associated Press broke the story that Martha Stewart was being investi- gated, setting off a three-week decline in the share price of Martha Stewart Living Omnimedia. Merrill Lynch suspended Peter Bacanovic without pay.

When Waksal was arrested and charged with criminal insider trading on June 12, shares in Stewart’s company fell 5.6 percent. Waksal would eventually plead guilty to insider trading charges, receive a prison sentence of 87 months, and pay a fine of $4 million. The family members were forced to dis- gorge the profits from their trades, with interest, and the two other tippees—the investment adviser and the physician—paid disgorgement of profits, interest, and civil fines totaling $112,000 and $2.7 million, respectively.

Stewart issued a statement saying she and her broker had agreed on a $60 sell order in October 2001, that he had called her on December 27 and told her ImClone was trading under $60, and that she had told him to sell in line with their prior understand- ing. She denied having nonpublic information at the time. Later in the month she repeated this story at a conference for securities analysts and investors. Her intent was to halt the decline in her company’s shares. At this time she held 61,323,850 shares and had suffered paper losses of more than $462 million over three weeks. Douglas Faneuil’s conscience bothered him. In late June he went to a manager at Merrill Lynch and volunteered what he believed was the complete and accurate story of December 27 and its aftermath. Sub- sequently, he spoke again to government investiga- tors, who then subpoenaed both Stewart and Bacanovic to testify at an investigative hearing. This time, both declined, invoking their Fifth Amendment privilege against self-incrimination. Faneuil pled guilty to a misdemeanor charge of accepting money from Bacanovic in return for not informing federal investigators of illegal conduct. Merrill Lynch fired Bacanovic.

INDICTMENTS

It took the government a year and a half, but on June 4, 2003, in a “coordinated action,” both the U.S. Attor- ney’s Office and the SEC filed indictments against Martha Stewart and Peter Bacanovic.

The U.S. Attorney’s Office filed a criminal com- plaint with multiple counts under the basic charges of, first, conspiracy, and second, obstruction of justice and making false statements.10 The two were charged with conspiring to conceal evidence that Bacanovic had given nonpublic information about ImClone to Stewart. And they were accused of lying to gov- ernment attorneys to hamper the investigation. In addition, only Martha Stewart was charged with securities fraud. The charge was that she had made a series of false statements about her innocence to mis- lead investors and prop up her company’s share price. Conviction on all counts could bring a maxi- mum of 30 years in prison and a fine of $2 million. Bacanovic alone was additionally charged with per- jury for altering the worksheet that listed Stewart’s stocks by adding “@60” near ImClone to fool investi- gators. He faced a maximum of 25 years in prison and a $1.25 million fine.

In its separate civil action, the SEC charged Stewart and Bacanovic with insider trading.11 It sought disgorgement of illegal gains and the imposition of a fine. In addition, it sought to bar Stewart from acting as a director or officer of a public company. Martha Stewart’s lawyers immediately issued a statement challenging the government’s case. “Martha Stewart has done nothing wrong,” they said. They accused the government of making an “unprece- dented” interpretation of the securities laws when it charged her with fraudulent manipulation simply because she spoke out publicly to maintain her innocence. And they questioned the government’s motive for the other charges, raising themes that would course through the media during the subse- quent trial.

Is it for publicity purposes because Martha Stewart is a celebrity? Is it because she is a woman who has successfully competed in a man’s business world by virtue of her talent, hard work and demanding standards? Is it be- cause the government would like to be able to define securities fraud as whatever it wants it to be?12

A week later, Martha Stewart went to the FBI’s Manhattan office for processing. She was given a mug shot, fingerprinted, and released without bail. She also resigned her positions as director and chief creative officer of Martha Stewart Living Omnimedia, taking on the nonofficer position of founding edi- torial director. She continued to receive her annual salary of $900,000 and in 2003 she was awarded a $500,000 bonus.

THE TRIAL OPENS

On January 20, 2004, Martha Stewart and Peter Bacanovic appeared in the Manhattan courtroom of the Hon. Miriam Goldman Cedarbaum, a federal dis- trict court judge with 18 years’ bench experience. They entered pleas of not guilty and jury selection began. Potential jurors were given 35 pages of questions de- signed to detect biases. One question was, “Have you ever made a project or cooked a recipe from Martha Stewart?”13 Eight women and four men were picked.

The trial began January 27. The lead prosecutor was Assistant U.S. Attorney Karen Patton Seymour. In her opening argument she told the jury that Martha Stewart sold ImClone after a “secret tip” from Bacanovic that the Waksals were selling. Then, she and Bacanovic tried to cover it up. Stewart’s motive, she argued, was a desire to protect her multimillion- dollar business empire. Seymour pointed out that every $1 decline in the stock price of Martha Stewart’s company decreased her net worth by $30 million. “Ladies and gentlemen,” she said, “lying to federal agents, obstructing justice, committing perjury, fabri- cating evidence and cheating investors in the stock market—these are serious federal crimes.”14

In his opening argument Stewart’s attorney, Robert G. Morvillo, pronounced her “innocent of all charges” and tried to offer reasonable explanations for her actions. He pointed out that the ImClone shares she sold were less than 1 percent of her net worth. He told the jury that December was a busy month for her and she gets worn out. When she called Faneuil about the trade she was in a noisy air- port on her cell phone and thought she was talking to Bacanovic. She had no way of knowing that insider trading was taking place. “How,” he asked, “was she supposed to figure out the broker, who has always been honorable, was asking her to commit a crime?” If, indeed, she had been told that Waksal and his daughter were selling, it meant that Merrill Lynch was making the sales, which it would not do if it be- lieved them to be illegal.

Morvillo explained that Stewart and Bacanovic had established a $60 sell agreement the week before her trades. And he called Stewart’s alteration of her assistant’s entry in the phone log “much ado about nothing.” He said that she was changing it “to be consistent with what she recalled,” but then quickly realized that her change “might be misconstrued.” He concluded his opening statement by asking the jury to “decide the case based upon what is correct and just.”15

TESTIMONY

Key witnesses for the government were Helen Glotzer, an SEC attorney, and Catherine Farmer, an FBI agent. Both had been present at interviews of Stewart and Bacanovic and both testified about apparent false statements, including Stewart’s denial that she spoke with Faneuil on December 27 and her denial that she knew that the Waksals were selling.

The government’s star witness, however, was Douglas Faneuil. Under questioning by Seymour, Faneuil described his morning phone call to Bacanovic on December 27. On learning that the Waksals were selling Bacanovic said: “Oh my God, you’ve got to get Martha on the phone!” Faneuil said that he then asked Bacanovic, “Can I tell her about Sam? Am I al- lowed to?” “Of course,” replied Bacanovic, “That’s the whole point.”16 When Martha Stewart called in that afternoon, she asked, “What’s going on with Sam?” Faneuil said that he told her, “We have no news about the company, but we thought you might like to act on the information that Sam is selling all his shares.” He described her end of the conversation as a series of “clipped demands.”

Faneuil also recounted how Bacanovic had tried to pull him into a cover-up. He described a scene at a cof- fee shop near their office in which he told Bacanovic, “I was on the phone. I know what happened.” In response Bacanovic put an arm around him and said, “With all due respect, no, you don’t.”17

During cross-examination Bacanovic’s attorney, David Apfel, tried to tarnish Faneuil as an unreliable witness. He called Faneuil an admitted liar who had changed his story seeking leniency from prosecutors. He brought out Faneuil’s use of recreational drugs. And he introduced e-mail messages by Faneuil to show that he disliked Martha Stewart and might have held a grudge against her. One read: “I just spoke to MARTHA! I have never, ever been treated more rudely by a stranger on the telephone.” An- other was: “Martha yelled at me again today, but I snapped in her face and she actually backed down! Baby put Ms. Martha in her place!!!”18 Faneuil also testified about a time when he put Martha Stewart on hold. When he came back on the line she threatened to pull her account from Merrill Lynch unless the hold music was changed. Jurors laughed. Faneuil’s testimony took 13 hours over six days. On his last day he was cross-examined by Stewart’s attorney Morvillo, who tried to depict him as over- whelmed by the rush of events on December 27. He pointed out that Faneuil had taken 75 phone calls that day and some e-mails. He questioned why his memory of Stewart’s call was sharp, in contrast to some other calls about which he was less clear. He got Faneuil to admit that he suspected the Waksals of insider trading, but said nothing to Bacanovic.

Following Faneuil, Stewart’s administrative as- sistant Ann Armstrong was called to testify about how Stewart altered the message of Bacanovic’s call. Taking the stand, she began to sob. After getting a glass of water from the defense table she tried to resume, but could not. Judge Cedarbaum recessed the trial to the next day, when Armstrong recounted how Stewart first altered, then instructed her to re- store, the wording of the phone message.

Maria Pasternak was a friend who had been traveling with Martha Stewart on December 27. Pasternak related conversations with Stewart at a re- sort in Los Cabos over the following days. She said Stewart told her that the Waksals were trying to sell all their shares in ImClone and that she had sold all her shares. She testified that Stewart remarked, “Isn’t it nice to have brokers who tell you those things?” But under cross-examination she vacillated about the clarity of her recall. The judge instructed jurors to disregard the remark.

An expert ink analyst with the U.S. Secret Service was called for his analysis of Bacanovic’s tax sale work- sheet. Larry Stewart, who is not related to Martha Stewart, testified that tests he conducted showed two pens had been used on the worksheet. All the nota- tions on it, except “@60,” were made by a “cheap” Paper Mate pen. The “@60” was written with a sec- ond, unidentified pen. The second pen did not match any of 8,500 ink samples on record, so he concluded it was either foreign or very rare.19 This was important evidence for the prosecution, which argued that the “@60” had been added only after December 27, when the defendants constructed a cover-up.

After the prosecution finished its case, Martha Stewart’s lawyers elected to use a minimal defense. They called only one witness, a former Stewart lawyer and note-taker at the February 4 meeting with investi- gators, who testified for only 15 minutes. There was much speculation about whether Martha Stewart would take the stand in her own defense. If she did, prosecutors would push her, try to trap her in incon- sistencies and provoke her temper. If she did not, the intense curiosity of the jurors to learn what she could say to them would be unfulfilled. In the end, she did not take the stand.

Late in the trial Judge Cedarbaum dismissed the government’s allegations of securities fraud. This charge had met with wide skepticism from the begin- ning. How could a defendant exercise her right to speak out in self-defense if doing so could be con- strued as criminal manipulation of share prices? Ce- darbaum held that, given the evidence, no reasonable juror could find her guilty beyond a reasonable doubt.20

After the defense called its single witness, there had been 27 witnesses during 19 days of testimony. Closing arguments came on March 2. Prosecutor Michael Schachter told jurors that Stewart and Bacanovic believed they would never be caught. But mistakes they made trying to deceive left a trail of damning inconsistencies. He carefully listed contra- dictions in their stories. Bacanovic’s lawyer gave a closing argument trying once again to undermine the credibility of Douglas Faneuil’s testimony.

In his closing argument for Martha Stewart, Morvillo ridiculed the conspiracy charge, saying the events alleged by the government amounted to “a confederation of dunces.”21 Nobody, he argued, “could have done what Peter Bacanovic and Martha Stewart are alleged to have done and done it in a dumber fashion.” He asked the jurors to consider that if the two had really conspired they would have been much more consistent in their stories. Their in- consistencies were a sign of innocence. This was a dangerous argument, because it conceded some con- tradictions in testimony.

Morvillo then made the case for Stewart’s inno- cence. She had no evidence that anything was wrong with the trade. She had no reason to suspect that Waksal would behave so foolishly as to trade during a blackout period. She had a preexisting agreement with her broker to trade ImClone if it fell below $60. She could not hear well enough on the phone to know she was talking to Faneuil, not Bacanovic. The amount of the trade was too small to tempt jeopard- izing her future. Her change in Ann Armstrong’s telephone log was insignificant. Faneuil was an un- trustworthy witness. Finally, he explained that she did not take the stand because she twice testified on the record at investigative hearings two years before and “her recollection [of the events] hasn’t gotten any better.” He concluded with this.

This has been a two-year ordeal for this good woman. It’s an ordeal based on the fact that she trusted her financial adviser not to put her in a compromising position. It’s an ordeal based on the fact that she voluntarily submit- ted to a government interview. And it’s an or- deal that is in the process of wiping out all the good that she has done, all her contributions, all her accomplishments . . . Martha Stewart’s life is in your hands . . . I ask you to acquit Martha Stewart. I ask you to let her return to her life of improving the quality of life for all of us. If you do that, it’s a good thing.22

THE VERDICT

The jury deliberated for 14 hours over three days. On March 5 one female juror wept as the verdicts were announced. Stewart and Bacanovic were each found guilty on four counts of lying and conspiring to lie to conceal the fact that she had been tipped with insider information. However, the jury could not agree that the government had proved beyond a reasonable doubt its allegation that Stewart and Bacanovic fabri- cated the $60 sale agreement and it acquitted them on those counts.

Jurors described their deliberations as calm. They found Faneuil credible and gave much weight to his testimony. Ann Armstrong was also an important witness because she cried. “We feel that she knew that something was wrong,” said the forewoman. Jurors were also suspicious of the January 16 break- fast meeting between Stewart and Bacanovic and they felt cynical about Stewart hiring a criminal de- fense lawyer even before she was contacted by gov- ernment investigators. They put little stock in the “conspiracy of dunces” argument. “We felt that she was a smart lady who made a dumb mistake,” said the forewoman.23

A juror named Chappell Hartridge characterized the verdict as “a victory for the little guys who lose money in the market because of these kinds of trans- actions.”24 After looking into Hartridge’s back- ground, Stewart’s legal team believed he had not been completely honest on his jurors’ questionnaire. When asked about contacts with law enforcement, he did not disclose an arrest for assaulting a former girl- friend, and several other problems. Arguing that they would have exercised a challenge to keep Chappell off the jury had they known, her lawyers moved for a new trial. Judge Cedarbaum ruled that the allega- tions were little more than hearsay and there was no evidence that bias in Chappell affected the verdict.25

Meanwhile, prosecutors had filed a criminal com- plaint against Larry Stewart, the ink expert who testi- fied at the trial. Stewart was accused of perjury for saying that he had conducted the ink tests after a co- worker came forward saying that, in fact, she had done them. Again Stewart’s attorneys filed a motion for retrial. Again Cedarbaum denied the motion, be- cause “there was no reasonable likelihood that this perjury could have affected the jury’s verdict, and be- cause overwhelming independent evidence supports the verdict . . .”26 Subsequently, Larry Stewart was tried and, based on evidence that his co-worker had a history of harassment, acquitted of perjury.27

SENTENCING

On July 16, 2004, Martha Stewart appeared before Judge Cedarbaum. Addressing the judge, she ap- pealed for leniency, saying, “Today is a shameful day. I ask that in judging me, you remember all the good I’ve done and the contributions I’ve made.” Prosecutor Seymour countered, arguing that Stewart was “ask- ing for leniency far beyond” that justified for “a seri- ous offense with broad implications” for the justice system. Judge Cedarbaum responded, “I believe that you have suffered, and will continue to suffer, enough.”28 Her sentence was five months’ imprison- ment followed by five months’ of home confinement. She was fined $30,000. This set of penalties was at the light end of what could have been imposed under federal sentencing guidelines and showed that Judge Cedarbaum was using what discretion she had to avoid a harsh sentence.

After the sentencing, Martha Stewart emerged from the courthouse to read a less contrite statement. “I’m just very, very sorry that it’s come to this, that a small personal matter has been able to be blown out of all proportion, and with such venom and such gore—I mean, it’s just terrible.”29

At a separate hearing that day, Peter Bacanovic re- ceived a nearly identical sentence of five months in prison, five months of home confinement, and a $4,000 fine. A week later Daniel Faneuil appeared be- fore Judge Cedarbaum. Tearfully, he apologized for his actions. His cooperation with federal prosecutors saved him from going to prison. His sentence was a $2,000 fine.

On October 8, Martha Stewart reported to a mini- mum-security prison camp in West Virginia to begin her incarceration. She had appealed her case, but the appeal was expected to take two years. Therefore, she elected to serve her sentence. Doing so would end much of the speculation and tumult affecting both her and her company.

She served her time. In prison she worked in the garden and cleaned the warden’s office for 12 cents an hour. She disliked the food but made some friends among the other women. She gave them yoga lessons and a seminar on entrepreneurship. Her last day of home confinement (extended three weeks due to a violation that was not publicly ex- plained) ended on September 1, 2005. In 2006 a fed- eral appeals court turned down her request to overturn her conviction.30 Then she settled with the SEC, which had brought a civil case of insider trad- ing against her in 2003. In the settlement, she neither admitted nor denied guilt. She agreed to a five-year ban on serving as an officer or director of her com- pany and a $195,081 fine. In the same settlement, Bacanovic agreed to a fine of $75,645.31 Stewart’s

legal troubles were finally over with the end of court-ordered probation in March 2007.

Questions

1. Did Martha Stewart commit the crime of insider trading when she sold her ImClone shares on December 27, 2001?

2. Did the U.S. attorneys and the Securities and Exchange Commission use good judgment in in- dicting Martha Stewart? Do you believe that her indictment was based on evidence of a serious crime, or do you believe that prosecutors con- sciously or unconsciously had additional motives for pursuing the case?

3. Do you agree with the jury that she was guilty be- yond a reasonable doubt of the conspiracy and obstruction of justice charges?

4. Was her punishment, including both imprison- ment and fines, appropriate? Were the punish- ments of Peter Bacanovic and Douglas Faneuil appropriate?