Martha Stewart Case

Martha Stewart Case

As the whole world knows by now, Martha Stewart was found guilty of conspiracy, obstruction of justice, and making false statements to the government in connection with the sale of her ImClone Systems stock. She says she sold the stock because the price went below $60, as previously arranged with her then-Merrill Lynch stockbroker and co-defendant Peter Bacanovic. The government says she sold it because she was illegitimately tipped off that ImClone CEO and friend Samuel Waksal was unloading his stock. He was selling because he had learned before the public did that the Food and Drug Administration would reject his application for the cancer drug Erbitux. The government never alleged that Stewart knew about the FDA decision. Most ironically, the FDA has now approved Erbitux.

Insider trading is the trading of a corporation’s stock or other securities by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information. However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary duty or other relationship of trust and confidence or where the non-public information was misappropriated from the company. Rules against insider trading on material non-public information exist in most jurisdictions around the world, though the details and the efforts to enforce them vary considerably. The United States is generally viewed as having the strictest laws against illegal insider trading, and makes the most serious efforts to enforce them.

Corporate insiders are defined as a company's officers, directors and any beneficial owners of more than ten percent of a class of the company's equity securities. Trades made by these types of insiders in the company's own stock, based on material non-public information, are considered to be fraudulent since the insiders are violating the trust or the fiduciary duty that they owe to the shareholders. The corporate insider, simply by accepting employment, has made a contract with the shareholders to put the shareholders' interests before their own, in matters related to the corporation. When the insider buys or sells based upon company owned information, he is violating his contract with the shareholders.

Proving that someone has been responsible for a trade can be difficult, because traders may try to hide behind nominees, offshore companies, and other proxies. Nevertheless, the U.S. Securities and Exchange Commission prosecutes over 50 cases each year, with many being settled administratively out of court. The SEC and several stock exchanges actively monitor trading, looking for suspicious activity.

There are absolutely no grounds for putting the Stewart case in the category of corporate crime, as epitomized by Enron, WorldCom, and Tyco. The allegations in those cases relate to corporate officers’ stealing and hiding material facts from shareholders. Martha Stewart’s actions, even examined in the worst light, are nothing like the actions in those cases. The worst that can be said of Stewart is that she lied, while not under oath, to investigators about her reasons for selling the shares from her personal portfolio.

Stewart’s brief time in prison came about as a result