Martha Stewart, homemaker turned media mogul, spent time in 2004 and 2005 in jail for illegal insider trading. While insider trading is not necessarily illegal if reported properly, more often insider trading is done in a fraudulent manner. This paper will examine insider trading and discuss the Martha Stewart case in regards to fraudulent insider trading. Insider trading is when corporate insiders such as officers, directors, or holders trade more than 10% of the corporations stocks or securities (wikipedia, 2006).
Insider trading is legal as long as the transaction is reported to the Securities and Exchange Commission (SEC) and not based on material non-public information.
Insider trading is illegal when a corporate ‘insider’ is misappropriating private information, and trading on it or secretly relaying the information (wikipedia, 2006). Illegal insider trading is considered a violation of trust to the shareholders and destroys the level playing field for all investors to make decisions based on the same information.
In the Martha Stewart case, Stewart received information from her friend Sam Waksal that his company, ImClone’s cancer drug had been rejected by the FDA before the information was made public (Rasmussen, 2006).
The rejection by the FDA caused ImClone’s stock to drop sharply. Before this news was made public, Martha Stewart had her stockbroker sell her 4000 shares of ImClone. The ‘inside’ information saved Stewart a lot of money when she sold her shares premature of the bad news going public for ImClone.
The Martha Stewart verdict was justified because Martha was not forthcoming with the information she knew and her motives to sell the stock. Martha and especially her stockbroker knew they were taking advantage of what seemed like ‘lucky’ information. Although Martha felt like a scapegoat, there are many others that have probably committed the same crime of insider trading and hopefully this case has helped deter further violations of the law in the future.