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Security Analysis Individual Assignment: Insider Trading: Case of Martha Stewart

This document summarizes the insider trading case of Martha Stewart. It explains that Martha Stewart sold shares of ImClone stock after learning from her broker, who was also the broker for ImClone's CEO, that the CEO was selling his shares. An investigation found that Martha Stewart likely sold her shares based on non-public information from the CEO. While she may not have technically breached fiduciary duty, Martha Stewart lied about her reasons for selling and was convicted of insider trading, conspiracy, and obstruction of justice. She received a five-month jail sentence, five-month house arrest, two years probation, and a $30,000 fine.

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Anum Charania
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123 views

Security Analysis Individual Assignment: Insider Trading: Case of Martha Stewart

This document summarizes the insider trading case of Martha Stewart. It explains that Martha Stewart sold shares of ImClone stock after learning from her broker, who was also the broker for ImClone's CEO, that the CEO was selling his shares. An investigation found that Martha Stewart likely sold her shares based on non-public information from the CEO. While she may not have technically breached fiduciary duty, Martha Stewart lied about her reasons for selling and was convicted of insider trading, conspiracy, and obstruction of justice. She received a five-month jail sentence, five-month house arrest, two years probation, and a $30,000 fine.

Uploaded by

Anum Charania
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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SECURITY ANALYSIS INDIVIDUAL ASSIGNMENT

Insider Trading: Case Of Martha Stewart


SUBMITTED BY: ANUM AMIN ALI (0811104)

Insider trading is defined by the SEC as 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 (U.S. SEC, 2009). 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 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. However, in an interesting legal technicality, Martha Stewart did not necessarily breach a fiduciary duty to the other investors, since she had no real obligation to inform other investors, which would be the case if she were an officer with the company. It is therefore possible that if Martha Stewart had initially confessed to her activities that she might not have been convicted of insider trading. However, that is not the course that Ms. Stewart took. She instead chose to collude with her broker in an attempt to fabricate a story about how there was a standing order for Ms. Stewart to sell her shares if the stock price fell below $60 per share. Martha Stewart was found guilty because of the insider trading action in ImClone and the cause of defrauding and misleading her shareholders in her company. To illustrate, she has traded on insider information about the biotech company ImClone Systems, and by doing so; she avoided a loss of about $51,000/320,000 by selling nearly 4,000 shares of ImClone stock on the 27th of December 2001 before the news was broke to the public. On the day after, the stock tumbled by 60% due to the regul ators rejection of the company's application for a key cancer drug (Stewart convicted on all charges, 2004). Furthermore, Ms. Stewart has sold significant amount of stocks of Martha Stewart Living Omnimedia Inc. to protect herself and to avoid losses that would have resulted after the government announced public charges against her. Shareholders of her company were deceived since she did not tell them the truth behind the significant amount of the sell. Accordingly, Ms. Stewart conducted unethical behavior by conducting insider trading actions and the misleading of her companies shareholders. She had also continued her unrighteous path by deceiving the government and misleading them to believe that she had an agreement with her brokers to sell ImClone stock if it fell below $60. These actions indicate unethical behavior and define the lack of integrity that made Ms. Stewart strongly guilty. In the case of Martha Stewart, she was convicted of conspiracy and obstruction of justice in an insider stock trading case in 2004 and her punishment was five-month jail sentence, five-month house arrest, two years' probation and a $30,000 fine.

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