Question: What challenges will the new owners of Satyam be facing? Explain.

MARTHA STEWART AND IMCLONE SYSTEMS

At the end of December 2001, design guru Martha Stewart, chief executive of Martha Stewart Living Omnimedia, reportedly sold 3,928 shares of stock in a drug company called ImClone Systems. The 3,928 shares represented her entire holding in ImClone, and the sale fetched over $227,000 for Stewart, based on an average selling price of around $58 per share-not a large transaction by Wall Street standards. In fact, such an average sale, out of the millions of transactions that took place that day, should not have drawn any undue attention, until it was revealed that Stewart had a long-standing relationship with the chief executive of ImClone Systems, Dr. Sam Waksal, and that within a day or two of her sale, the Food and Drug Administration (FDA) would announce an unfavorable ruling on ImClone's new cancer drug, Erbitux, which sent the stock plummeting from a high of $75 per share to an eventual low of only $5.24 per share in September 2002.

Further investigation revealed that members of Waksal's immediate family also sold blocks of shares in the two days preceding the FDA announcement. One of his daughters sold a block of shares worth $2.5 million, and his other daughter, along with her husband, sold shares worth $300,000. Waksal was unable to complete the sale of almost 80,000 of his own shares in the company. The fact that Waksal had dated Stewart's daughter for years added a further complication to what was rapidly becoming a very questionable business arrangement. The Erbitux drug was believed to hold tremendous potential as a cancer treatment-so much so that BristolMyers Squibb had agreed to pay $2 billion in 2001 for the rights to the drug, prompting the increase in the share price to $70.

The subsequent collapse in the share price also affected shares in Stewart's own company: After Waksal was arrested on accusations of insider trading in his own company's shares, the shares of Martha S tewart Living Omnimedia fell by 12 percent. At the time of Waksal's arrest, Stewart, who had yet to be accused of any wrongdoing, offered a defense to the media that she had an arm's-length relationship to the sale of the stock-in other words she had an existing order with her broker to sell the stock if it went below $60 per share, and so this transaction was automatic rather than an event prompted by insider information from her friend Sam Waksal. However, further investigation revealed that even though the stock price had fallen below $60 on other occasions in the months preceding the sale, there was no automatic sale of the shares as Stewart had claimed. In addition, it was revealed that Stewart had placed a call to her broker, Peter Bacanovic, during a refueling stop on a fl ight to Mexico on her private jet.

She made a call to Waksal during that same stop, and, by coincidence, Bacanovic was also the broker for Waksal and his two daughters. He was subsequently suspended by Merrill Lynch. After numerous attempts by her legal team to fi ght on her behalf, Stewart was required to deliver more than 1,000 pages of documents-including e-mail messages from her laptop and phone records-to the congressional committee investigating the sale of her ImClone stock in August 2002. She was eventually indicted, not for the sale of the stock based on insider trading, but for obstruction of justice for lying to federal regulators under oath about the details surrounding the transaction. She served a fi ve-month prison sentence and an additional fi ve months under house arrest. Bacanovic also served a fi ve-month sentence for crimes related to the sale of the stock on behalf of Stewart and members of the Waksal family; he was banned from the securities industry and paid a $75,000 fi ne to the Securities and Exchange Commission to settle insider-trading charges.

Waksal himself received an 87-month prison sentence, and he settled the SEC insider trading case against him and his father for more than $5 million. Ironically, Erbitux proved to be more persistent than many had imagined. After being rejected by the FDA in 2001 on the basis of "shoddy data from ImClone," the drug received formal approval in February 2004. The impact on ImClone's share price was immediate, and by July 2008, more than six years after the now infamous sale of Stewart's shares, the price of ImClone was once again back above $60 per share. The original transaction saved Stewart about $45,000 in losses by selling before the FDA rejection was announced. In retrospect, the cost to her company, her investors, and, some would argue, to her reputation was much higher.