Insider Trading Agrawal Rohit
Martha Stewart and Insider Trading
Stock brokers play a major role in Stock markets. Tips, advices and suggestions from the brokers
can bring some major twist and turns in the market. Stock Brokers have capability to create false
impression on any stock and can bring the downfall in the market. To make the investment
ethical and fair Securities and Exchange Commission (also known as SEC) has made certain
rules and regulation which every investor must comply.
Martha Stewart is a self made billionaire. She started her career in modeling and later started
investing in the stocks as a stock broker. She had a good fortune in every field she has chosen.
She also started writing newspaper columns and articles and earned a good fellowship of readers
and reputation. She also wrote books and started her news magazine Martha Stewart Living.
Martha Stewart made huge profits in everything she did, so she later started her own company
Martha Stewart Omni media (MSO) and launched its IPO in the market. Her company got a huge
response from the public because of her huge fan following and reputation.
Martha Stewart was accused of Insider trading and fraud charges were filed against her and her
former stock broker, Peter Bacanovic. Martha Stewart owned shares of a company Called
ImClone. In 2001 ImClone received notification that a new prescription drug, in which the
company poured extensive money into research and development, would not receive approval by
the Food and Drug Administration (Carroll & Buchholtz, 2006, p. 653). The CEO of ImClone,
Sam Waskal, in an effort to avoid financial losses to his shares of ImClone, made a call to his
stock broker to dump his shares of the company stock. The broker, who also served as a broker
for Martha Stewart, notified Stewart that the CEO was liquidating the company stock and that it
Insider Trading Agrawal Rohit
would be in her financial interest to follow suit by selling off her own shares of the company,
which totaled almost 4,000 shares (Hoffman, 2007). The Securities and Exchange Commission
noticed an unusual coincidence between the selling of mass amounts of shares by the CEO of
ImClone and Martha Stewart and began an investigation to determine if Martha Stewart was
guilty of insider trading.(Rawls, 2009)
In addition to the charges that resulted from the selling of her shares of ImClone stock,
Stewart also came under fire from investors in her own company, who alleged that Stewart,
knowing that her company Martha Stewart Living Omni media Inc. would see a negative impact
of stock price from the accusations associated with ImClone, sold many of her shares of the
company to avoid additional financial loss (Carroll & Buchholtz, 2006). Stewart was also
charged with manipulating the price of the stock of her own company by expressing her
innocence to the charges, a charge that was later thrown out (McGee, 2008).
Insider trading is defined by the SEC as “Insider trading is a term that most investors have heard
and usually associate with illegal conduct. But the term actually includes both legal and illegal
conduct. The legal version is when corporate insiders like officers, directors, and employees buy
and sell stock in their own companies. When corporate insiders trade in their own securities, they
must report their trades to the SEC. Illegal insider trading refers generally to buying or selling a
security, in breach of a fiduciary duty or other relationship of trust and confidence, while in
possession of material, nonpublic information about the security. Insider trading violations may
also include "tipping" such information, securities trading by the person "tipped," and securities
trading by those who misappropriate such information” (U.S. SEC, 2009). As mentioned in the
text “Insider trading requires that corporate insiders must refrain from trading on information
Insider Trading Agrawal Rohit
that significantly affects the stock price until it becomes public. The rule for corporate insiders is
to reveal or refrain” (Beauchamp).
On looking to these statements above it can be clearly seen that it’s hard to give and take a stand
on the Insider Trading of the Martha Stewart case. Stewart and her broker, Peter Bocanovic,
were eventually indicted for violating several federal criminal laws. A jury found them guilty
and Stewart received a 10-month penalty, split between five months in prison and five months
under house arrest. The case officially closed in January, 2006, when an appellate court rejected
her appeals. Financial and business markets react to news of the investigation and to leaks
regarding its progress. Investors sell, shareholders sue, clients withdraw, advertisers bail, and
targeted firms soon encounter financial difficulties. Stewart's company, Martha Stewart Living
Omni media, suffered these repercussions. (Moohr, 2007)
As seen it can be seen from the statements by US SEC and Beauchamp, Insider trading can be
illegal and legal. In my viewpoint Martha Stewart has not done insider trading. Her intensions
were of course meant to make some profit but she also wanted to save the losses in her account.
She was on vacations and she received a call from her stockbroker and she made her instant
decision on the issue. She didn’t know about the reason for fall of stock prices in ImClone. Of
course some charges on her were true and legitimate that she sold her stock in MSO to avoid the
losses and fabricated many things to avoid her deed in ImClone issue.
On the flipside I Sam Waksal was rightly accused of selling his shares in the company and also
from his family members account. His father and daughter also sold their stocks in the company.
On rejection of selling his shares in the company from Merrill lynch Sam Waksal tried to transfer
his stock into her daughter’s account but this intention was also rejected. Bacanovic and his
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assistant broke the Merrill Lynch confidentiality policy by revealing the information to Martha
Stewart. If they would have kept that information to them then Martha wouldn’t have taken such
steps. Everyone involved in this issue kept changing their statement which is not correct.
However, there are steps that a company can take to help executives avoid the potentially murky
ethical waters of insider trading. For example, the company can set up systems that allow for
instant notification to shareholders when any individual above a certain organizational level buys
or sells stock in the company. This would help the executives hold to their fiduciary
responsibility to the shareholders, but without keeping them from acting on information that
might benefit them, or at least reduces financial loss. (Rawls, 2009)
In addition to instant notification of shareholders, there could be a waiting period for the buying
or selling of stock by any executive above a certain organizational level (Olson, 1987). This
would prevent situations such as ImClone where the CEO was able to execute a trade before
information became public. If there were a 48 hr waiting period in place it might prevent such
situations from occurring. (Rawls, 2009)
These cases involve many people. Some booked looses and some profits. All these actions also
create and help some retail stock holders as a buyer and seller. They can also make profits from
these situations. A buyer can buy stock of some company once the CEO or any employee has
been convicted of charges later when charges gets dropped or turns out to be fake then he can
make huge profits by selling those stocks. From this case it is clear that Insider Trading is illegal
and it could sometime leads to huge financial losses to companies and small retail investors. I
would suggest that companies like Merrill Lynch should further strengthen their policies and
Insider Trading Agrawal Rohit
keep a track on their accounts and would also recommend for immediate actions for such type of
activities.
Insider Trading Agrawal Rohit
References
Rawls, Kevin (2009). Martha Stewart and Insider trading. Retrieved from:
http://digitalcommons.liberty.edu/cgi/viewcontent.cgi?article=1002&context=busi_fac_pubs
Carroll, A., & Buchholtz, A. (2006). Business and Society. Mason, OH: Thomson-South
Western.
Hoffman, D. (2007). Martha Stewart's insider trading case: A practical application of rule 2.1.
The Georgetown Journal of Legal Ethics, 20(3), 707-718.
McGee, R. (2008). Applying ethics to insider trading. Journal of Business Ethics, 77(2), 205.
U.S. Securities and Exchange Commission. (2009). Insider Trading. Available from http://
www.sec.gov/answers/insider.htm
Beauchamp, T., Bowie, N., and Arnold, D. (2009). Ethical theory and business (8th Ed.). Upper
Saddle River, New Jersey. Pearson Prentice Hall.
Rasmussen, Hannah. The Insider trading scandal-What did Martha Do? Retrieved from:
http://economics.about.com/cs/finance/a/insider_trading.htm
Moohr, S, G. (2007) Martha Stewart: Criminal? , retrieved from,
http://www.law.uh.edu/faculty/gmoohr/MarthaStewartArticle.pdf
