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Martha Stewart Scandal

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According to the U. S. Securities and Exchange Commission, insider trading is a term that most investors usually associate with illegal conduct. There is however legal and illegal insider trading. Legal insider trading is when corporate insiders, officers, directors, and employees, buy and sell stock in their own companies, these trades must be reported to the SEC. Illegal insider trading is the buying and/or selling of a security while in possession of confidential or nonpublic information regarding the security.

It is also common policy for financial brokers to not discuss the business affairs of any client with anyone, including other employees, except on a need-to-know basis. Information or records concerning the business of the firm and/or its clients may not be released except to persons legally entitled to receive them. Why is insider trading such an issue? Insider trading is such an issue because it undermines investor confidence. Investors need to be able to have confidence while still expecting fairness and integrity from the companies that trade in these securities.

After the stock market crash in 1929 people were saying that the stock market was rigged. But they didn’t realize to what extent they were right. The big corporations and big banks would raise the prices of stocks, get people to buy the stocks, and then drop the stock price. This would cost people a ton of money, while making the big corporations a lot of money. People expect to be able to invest their funds in order to get ready for retirement. The SEC enacted the insider trading regulations in order to keep the stock market fair.

Since that time the SEC has determined that insider trading is going to be a prominent issue that they will always enforce. If a person is convicted of insider trading then they are in violation of the rules of the SEC. But what needs to be proven to convict someone of insider trading? A person needs to be proven to have a fiduciary duty to a company, or that the person intended to gain personally from the buying and selling of shares. But they have to buy and sell the shares based on insider information.

The case of United States vs O’Hagan gives a good example of how someone can be prosecuted for insider trading. Mr. O’Hagan was a lawyer in a firm that started representing a company called Grand Met. Grand Met was being represented because they were giving a tender offer for stock in Pillsbury. O’Hagan knew they were interested in Pillsbury, so he bought a lot of stock in Pillsbury. Once Grand Met and Pillsbury reached an agreement the stock rose, making O’Hagan more than a 4. 3 million dollar profit. Because O’Hagan used his knowledge as a representative of Grand Met he was guilty of insider trading.

He was convicted of mail fraud, securities fraud, fraudulent trading, and federal money laundering. These are just a few of the crimes you could be convicted of if you are guilty of insider trading. Insider trading is a very dangerous thing. While it may seem like a good or innocent idea, there could be very bad consequences. It could lead to a fine, imprisonment, or both. Insider trading could also cripple our economy. When investors can’t trust corporations to act in good faith and be fair, the investors will leave. This will cause a lack of funds for corporations who rely on these investors.

Ultimately crippling our economy and causing people to go bankrupt. Insider trading could be called the most devastating financial crime there is. From 1968 through 1973, Martha Stewart had been licensed by the national security association to sell securities and was employed as a securities broker. In June 2002, Martha Stewart was also elected to serve on the board of directors of the NYSE. With this type of background, it is clear that Martha Stewart was well educated on what the laws and penalties were in regards to illegal insider trading.

The start of Martha Stewart’s downfall began on December 27, 2001 when she sold all of her 3,928 shares of ImClone stock that she owned. This came a day after that the founder of ImClone, Sam Waksal, was tipped off that the FDA was going to reject its new cancer drug Erbitux. Waksal then informed his daughter and they both began to attempt to sell of their shares of stock, it is also believed that Waksal has tipped off Martha Stewart about the information. ImClone stocks drop 18 percent on December 31st after it is announced that the FDA has rejected the new cancer drug.

Later on January 7, 2002 the SEC goes and questions Stewart’s stock broker Peter Bacanovic about the selling of all her stock. Bacanovic claims that on December 20th Stewart wanted to sell off all of her stock if the price of ImClone fell below $60 per share. Waksal is arrested and charged for insider trading on June 12, 2002, he later admits in October that he did tip off his daughter and attempted to sell off his stock in ImClone. He will later be sentenced to 7 years of prison in June 2003 (Associated Press, 2004).

Martha Stewart is indicted along with her stock broker on June 4, 2003 for nine federal counts in the insider trading case, they both plead innocent. The federal counts against Stewart include conspiracy that alleges Stewart and Bacnovic worked together to create false statements and obstruct justice in the case. She was also indicted for false statements alleging that she lied to the SEC and FBI about the $60 per share sell agreement with her stock broker. They also allege she made false statements when she claimed she did not know the Waksal family was selling off their stocks on December 27, 2001.

They filed obstruction of justice claims she deliberately tried to impede the SEC investigation from January 2002 to April 2002. The final count filed on Stewart was securities fraud, this alleged she knew her personal reputation was important to her company’s shareholders and that she made misleading remarks in June of 2002, after the ImClone scandal became public and that she may be involved (Breakdown of Charges against Martha Stewart, 2003). After Stewart pleaded not guilty to the charges against her she resigned as the chairwoman and CEO of her company, Martha Stewart Living on the same day.

She decides to stay on with the company as a board member and as the chief creative officer (Associated Press, 2004). Stewart had made a request to toss out two of the charges against her but U. S. District Judge Miriam Goldman Cedarbaum refuses the request in November 2003. On January 6, 2004 potential jurors begin to fill out questionnaires to determine if they will be used in the case the questions included if they had ever cooked with her recipes, on Jan. 26th eight women and four men are selected for the trial.

The trial began on the 27th with the Prosecutor claiming that Martha Stewart used information she was tipped off about to sell her ImClone stock and then proceeded to lie about it to cover up her tracks. During the trial on February 27th the judge throws out the count of securities fraud that claimed she had misled investors in her own company by her statements about the $60 stock sell agreement. On March 5th, Martha Stewart was found guilty of conspiracy, obstruction of justice, and two counts of making false statements to a federal investigator.

She was found guilty of conspiracy because of the attempted cover-up that Stewart and Bacanovic had come up with in regarding the plan established to sell the shares of ImClone once they dropped below $60 per share. She was found guilty of obstruction of justice for tampering with the phone message logs and also with the “worksheet” that Bacanovic provided with notes pertaining to their alleged conversation of when to sell the ImClone shares. She was also found guilty of false statements to a federal investigator when she lied under oath regarding her conversations with Bacanovic about when to sell her shares of ImClone.

Martha Stewart was sentenced to five months in prison, five months of home confinement, and two years of probation. She was also ordered to pay a $30,000 fine. She served her prison sentence in a federal prison camp near Alderson, West Virginia, which is a minimum security prison. There are many other cases of insider trading that have involved a much larger amount of money. Enron, among other crimes, was involved in insider trading. The fact that her monetary gain was not substantial in her world does not make Stewart’s actions any less illegal.

She still participated in a white collar crime to obtain financial advantage. She is charged with violating both Federal law with the securities fraud and State statutes when she lied to authorities. Personally, I can’t understand why people of wealth commit these crimes. I am sure Stewart would have been just fine without the $46,000. After the trials, the lawyers, and the loss of business from this public scandal, I am confident she has well exceeded that amount. It usually is a greater pay off to just stay on the right side of the law!







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