Martha Stewart an American Sweetheart known for being a homemaker, and DIY project how to-.
"When someone uses a material, nonpublic information to make a decision about buying or selling a security"
Securities and Exchange Commission. This organization makes sure that all the markets operate fairly for everyone.
Selling her Stocks
On December 27 of 2001, Martha Stewart sold 4,000 shares of Imclone, a huge company at the time. On December 29 of 2001, 2 days after Martha had sold her stocks, the company's stock went down 16% ,because the FDA rejected one of the company's main drug Erbitux. The company had invested 2 million dollars into the drug. By selling her shares 2 days before the decline of the company, Martha avoided losses of $43,673.
Sam was the CEO of the company Imclone. He was a friend of Martha's; He sold 5 million dollars of shares in the company on the same day as Martha. He told his daughter to sell her shares of the company knowing the price was going to go down. He gave his shares to his daughter thinking that if she sold them it would be OK. "I didn't think I was going to get caught at all" Sam states in an interview. Sam learned from a Bristol Myers executive that Erbitux was not going to get approved by the FDA because of the insufficient data provided. " [the 1st time I knew I was in trouble] was when the SEC wanted to interview me" Catching Sam was not a struggle ,because he was a big CEO selling a large part of his company before the stock dropped.
The SEC asked him if he knew anything about Martha selling her shares in the company the same day he sold his. He said that he did not speak to Martha the day that he sold his shares. After the trial he was interviewed and said, “Whatever happened with Martha did not happen because she spoke to the CEO of Imclone.”
The End of Sam
Sam was not only accused of insider trading. He was also accused of:
1. Telling his father and daughter to lie for him
2. Directing an Imclone employee to destroy important documents
3. Forging a signature of a corporate officer to obtain an illegal bank loan.
4. Avoided more than a million dollars of NY state taxes by shipping 15 million dollars of art work to an Imclone address in New Jersey.
Sam plead guilty to 6 out of 13 accounts, but he did not plead guilty to the ones including his father. “I know I did something wrong… I wish I could change the clock back and just change certain events at the end of December of 2001... I’ve learned not to be care less & not to be glib about things that you do because they can destroy all of the good in one fail swoop.”
Martha's case was a bit more complicated, because she traded her stock at a reasonable time before the drop of the stock. She was a friend of Sam which could lead the SEC to believe Sam had shared information about the company to her but they could not prove that. The Facts state that Sam did not tell her about the company’s future decline, in fact, Sam did not talk to Martha the day of the trade. So what was the connection? Sam and Martha had the same broker at Merrill Lynch. Peter Bacanovic and his assistant had no idea about the drug that was about to be declined ,but they did know that Sam was trying to get rid of this stock fast and then warned Martha about the fast stock trade. But, this was not what put her behind bars, knowing the FDA would decline the product is classified as public information. What was not public information as knowing that the CEO of the company was trying to sell 5$ million of his stock, because The SEC requires the CEO to disclose information like this to the public. The SEC & FBI did not focus as much on the insider trading but it was the lies that put her behind bars. The SEC and the FBI questioned Martha months after she made the trade of the stock she answered by saying “[she had] no knowledge of Waksal’s trade and that she had sold on a standing agreement with her broker to sell if shares traded below $60."
Annie Armstrong was Martha’s assistant and she told the FBI & SEC that Martha had tried to change a message of her broker to her about ImClone “Peter Baconivic thinks ImClone is going to start trading downward”
There were other charges that could have been brought against Martha that could have landed her 20 years in prison, but the judge dismissed those charges. Insider Trading also can carry up to 20 years in prison, but It is not clear why the government didn’t charge Martha with insider trading