Taxing Times - Cooking the Books: Martha Stewart’s Financial Scandals

We have gone over many unique tax cases over the past few episodes. Starting today I will also be sprinkling in fascinating stories behind some of the most notorious tax evaders in history. 

Join me on the highs and lows of the domestic guru and media mogul who was convicted of insider trading and tax evasion in the early 2000s…Martha Stewart. 

Transcript

Hello and welcome to Taxing Times, the podcast that explores the fascinating, controversial and often wacky history of taxation. I'm your host Nupur Kumar - aka Super Nupur, a major tax & history nerd and the managing partner of FACT Professional, a CPA firm.

We have gone over many unique tax cases over the past few episodes. Starting today I will also be sprinkling in fascinating stories behind some of the most notorious tax evaders in history. 

Join me on the highs and lows of the domestic guru and media mogul who was convicted of insider trading and tax evasion in the early 2000s…Martha Stewart,

Martha Stewart is best known for her lifestyle brand, Martha Stewart Living Omnimedia, which includes magazines, books, TV shows, and products. She has written dozens of bestselling books on cooking, entertaining, gardening, and home decorating. She has also hosted several popular TV shows, such as Martha and Martha Stewart Living. She is widely regarded as an expert on all things domestic, and has a loyal fan base of millions.

But behind her image of perfection and success, Stewart was hiding some dark secrets. In 2001, she was involved in a scandal that rocked the financial world. She was accused of selling nearly 4,000 shares of ImClone Systems, a biotechnology company, based on insider information that the company’s cancer drug was about to be rejected by the FDA. 

Insider trading is the trading of a public company’s stock or other securities based on material, non-public information about the company. Material information is any information that could substantially impact an investor’s decision to buy or sell the security. Non-public information is information that is not legally available to the public. This form of insider trading is illegal and has stern penalties, including potential fines and jail time. 

By Insider Trading Martha avoided a loss of $45,673 by selling her shares one day before the news became public. She was also accused of lying to federal investigators and obstructing justice during the probe.

The case was brought by the U.S. Securities and Exchange Commission (SEC) and the U.S. Attorney’s Office for the Southern District of New York. The lead prosecutor was James Comey, who would later become the FBI Director. Stewart and her broker, Peter Bacanovic, were indicted on nine counts, including conspiracy, securities fraud, and making false statements. They both pleaded not guilty and went to trial in 2004.

The trial was a media sensation, as Stewart’s fans and critics followed every twist and turn of the case. The prosecution presented evidence that Stewart and Bacanovic had a prearranged agreement to sell ImClone shares if they fell below $60, and that they fabricated phone records and emails to cover up their scheme. The defense argued that Stewart had a valid reason to sell her shares, and that she was a victim of selective prosecution and media bias.

Selective prosecution is when a prosecutor decides to charge or not charge someone based on an unjustifiable or discriminatory criterion, such as gender, race, religion, or political affiliation. This violates the equal protection clause of the 14th Amendment, which guarantees that everyone is treated equally under the law. Selective prosecution is a rare and difficult defense to prove, as the defendant must show that the prosecutor had a discriminatory effect and intent in their decision.

The jury deliberated for three days and found Stewart and Bacanovic guilty on all counts, except for the securities fraud charge against Stewart, which was dismissed. Stewart was sentenced to five months in prison, five months of home confinement, and two years of supervised release. She was also fined $30,000 and ordered to pay $137,019 in restitution. Bacanovic was sentenced to five months in prison, five months of home confinement, and two years of supervised release. He was also fined $4,000 and ordered to pay $1,039 in restitution.

Stewart’s legal troubles did not end there. She was also a convicted tax evader. In 2002, she was fined $221,677 for state taxes for failing to pay taxes in New York on her luxurious East Hampton home. She claimed that she hardly spent time there, but the state of New York did not buy her excuse.  She was indicted by a federal grand jury on charges of obstruction of justice, securities fraud, conspiracy and making false statements. She pleaded not guilty, but was convicted by a federal jury on March 5, 2004. She also had to pay back taxes, interest, and penalties for the years 1991 to 1999.

Stewart’s conviction and imprisonment had a huge impact on her business and reputation. Her company’s stock price plummeted, and she resigned as CEO and chairwoman of Martha Stewart Living Omnimedia. She also lost several endorsement deals and partnerships with retailers. Her TV shows were canceled or put on hiatus. She faced lawsuits from shareholders and customers who felt betrayed by her actions.

But Stewart did not give up. She served her time in a West Virginia minimum-security federal prison, where she reportedly taught yoga and cooking classes to fellow inmates. Which to me sounds a little bit like a vacation. She also maintained her innocence and appealed her conviction, but was denied a new trial. She completed her sentence in 2005, and returned to the public eye with a new TV show, The Apprentice: Martha Stewart, hopefully not to teach how to get aways with tax evasion. She also resumed her role as chief creative officer of her company, and rejoined its board in 2011.

Stewart has since rebuilt her empire and regained her popularity. She has launched new magazines, books, products, and TV shows, including a cooking show with rapper Snoop Dogg. She has also expanded her brand into new markets, such as cannabis and pet care. She has settled most of her lawsuits and paid her fines and restitution. She has also received several awards and honors, such as the Presidential Medal of Freedom and the National Humanities Medal.

Stewart’s story is a remarkable example of how one can rise from the ashes of a scandal and reinvent oneself. She is also a cautionary tale of how greed and dishonesty can ruin one’s career and reputation. Martha Stewart is one of the most famous and infamous tax evaders in history, and her case is still studied and debated by legal experts, business analysts, and tax enthusiasts.

I won’t deny Martha Stewart committed tax fraud and insider trading. However lets reflect on how many others commit insider trading and manipulate the market without protest or consequences. I will say that part of me feels she was being made an example out of. Which has some merit towards selective prosecution as a case. 

Lets take two different examples shall we?

For example Elon Musk has tweeted about dogecoin many times, but the most recent one was on December 28, 2023. He changed his Twitter bio to “Chief Twit” and posted a picture of a dog wearing sunglasses. This tweet caused a 35% surge in the price of dogecoin, which is a cryptocurrency based on a viral dog meme. Musk is known for his influence on the crypto market, as his tweets often affect the prices of various coins, especially dogecoin. 

On the other hand, Kim Kardashian is a reality TV star and entrepreneur who was charged by the U.S. Securities and Exchange Commission (SEC) in 2022 for unlawfully promoting a crypto asset security called EthereumMax (EMAX) on her Instagram account. She agreed to pay a $1.2 million fine to settle the charges without admitting or denying the allegations.

According to the SEC, Kardashian failed to disclose that she was paid $250,000 to post about EMAX tokens, which were offered by a company called EthereumMax Holdings LLC. She also did not provide any information about the risks or merits of investing in EMAX tokens, which are based on the Ethereum blockchain but are not affiliated with the cryptocurrency Ethereum. Her post, which included the hashtag “#ad” and a link to the EthereumMax website, reached over 200 million followers and caused a significant increase in the price and trading volume of EMAX tokens.

So my dear listeners why was Kim Kardashian fined and dragged through the mud while Elon Musk was celebrated and dare I say elevated. We can dig into the law more – which is not my expertise BUT weren’t both of them promoting a cryptocurrency?

I will leave you to ponder on that one as that’s all for today’s episode of Taxing Times. 

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