Nearly everyone knows something about Martha Stewart’s story at this point. She is a famous television personality and media mogul known for her wholesome personality and content. It was probably a surprise to many people when a court convicted her for the felony of insider trading. We will go over the major points you need to understand and explain insider trading.
People often misunderstand what insider trading really is. When most people hear those words, they immediately think of a criminal act. In reality, insider trading can be a legal activity in America. It means trading a public company’s stocks while having inside knowledge of that company. This inside knowledge is most relevant in the case of officers, directors, and people with a 10% or larger share in the company. To do this legally, the inside trader must disclose their trades publicly with the Securities Exchange Commission with Form 4. The law does not immediately regard all trading by insiders as insider trading.
To sum up illegal insider trading, people are not meant to trade on important information that is not public. This is what Martha Stewart got in trouble for doing. Two days before a stock of hers named ImClone lost a chunk of its value, she sold it. Selling it when she did made her over $45,000 more than if she had sold after the downturn. This made the SEC suspicious, and they investigated her.
Martha Stewart’s Involvement
They accused Martha of knowing the upcoming news from the FDA about ImClone’s new drug. Martha and her legal team argued this was not the case, and that she instead had a tip from her broker. Her broker also handled trades for ImClone CEO Sam Waksal, and Martha says he told her when Waksal had sold his stock. This would not be insider trading, but still illegal.
In the end, Martha had the insider trading charges dismissed. She received a 5-month sentence in prison for conspiracy and obstruction of justice. This was obviously hard on her public image as someone down to earth and innocent. In a parallel case with the SEC, the courts made her pay nearly $200,000 in fines and interest. This debacle even cost her the CEO position in her company, Martha Stewart Living Omnimedia, for five years. In this matter, the SEC and other regulators made it quite clear how they feel about trading fraud, insider or otherwise.