Martha Stewart Insider Trading Scandal

Martha Stewart Insider Trading Scandal

Let’s examine the finer points of the scandal surrounding Martha Stewart insider trading conviction. Not many people know the basic definition of “insider trading”. Some didn’t even know if this term existed. But actually, there is a general agreement on what it entails.

Insider trading, in a nutshell, is a crime where a person has either purchased or sold stock in a public firm while using company information that is still considered private. A lifestyle media icon Martha Stewart was guilty of this offence. You can learn more about her clicking here.

Although some forms of insider trading are not illegal, the majority of the time, they are when a person violates a fiduciary duty under federal securities law. This usually signifies that the perpetrator acted on the “insider” information for personal benefit or to mitigate personal financial losses.

As a result, a stockbroker who informs all of his clients that he has privately learned that the stock price of a specific firm is going to fall shortly as per the information that still not public will be guilty of insider trading.

According to some experts, you’ll usually know someone has committed insider trading if he or she bought stocks based on publicly unreleased news. Or, that person sold significant stock based on publicly undisclosed bad news.

What did Martha Stewart do that led to her conviction and imprisonment?

A doctor who helped develop the pharmaceutical business ImClone received some unpleasant news around the end of 2001. He learned that the FDA would not approve the company’s experimental medicine Erbitux for use in treating particular tumors in specific patients.

The doctor briefed his family and friends about the FDA ruling before it became public. But he knew that what he was doing was unlawful and a breach of his fiduciary duties involving ImClone.

Martha Stewart received this information from her stockbroker. Martha Stewart responded by selling more than $200,000 in ImClone stock. By doing this, she saved herself $45,000.

The federal authorities indicted Martha Stewart within 18 months after selling the stock based on the illegal tip. She was then sentenced to five months in prison in West Virginia, which ended in March 2005.                             

Despite Ms Stewart’s public declaration that she caused no harm. The facts of the case show that she broke the law. What is unclear is why she was targeted in this manner. Given how common this practice is among Wall Street professionals. And also a wide range of stockbrokers and investors.