Martha Stewart and Insider Trading

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Martha Stewart and the question of Insider Trading

Martha Stewart has been in the news for the past several months because of allegations that she is guilty of insider trading. Stewart sold about ,000 shares of ImClone stock days before the Food and Drug Administration rejected the application for ImClones cancer drug, Erbitux. What makes it even more suspicious is that Martha Stewart is a close friend of Sam Waksal, who was the CEO of ImClone during this scandal. Waksal has since been put in jail for insider trading.

Stewart claims that it is just luck that she happened to sell her shares just before the announcement was made public and that she had no prior information about it. She said that she had a prior agreement with her broker, Peter Bacanovic, to sell her shares if the stock dropped below a certain target price. However, Bacanovics assistant, Doug Faneuil, has told the Securities and Exchange Commission that no such agreement was ever made. If these allegations are true, then I think that Martha Stewart is guilty of insider trading.

The crime of insider trading is the illegal use of nonpublic information about a company to make a profitable security transaction. This is exactly what Martha Stewart did. She sold shares a few days before it became public that ImClones Erbitux was not going to be approved by the FDA. Therefore, she sold her shares in the company before the stock price dropped, and avoided a nearly $00,000 loss.

The argument that exists is that it may be that Stewart got the news through Bacanovic that people in the know at ImClone were selling and that she should sell, too. Or she may have simply been advised that this was a good time to sell ImClone. And that if she did not learn directly or indirectly about Erbitux from company officers then she is not guilty of insider trading.

I disagree with this argument because of the fact that Stewart had such a close relationship with Waksal. This I think looks very unfavorable for Stewart because of the fact that Waksal admitted to insider trading himself, as well as to tipping of his daughter to sell her stock as well.

One of the first things that can be done to reduce the number of insider trades is to educate people further. I dont mean this necessarily for officers of publicly held companies, because I feel that they are pretty well educated about when or when they are not allowed to buy or sell stock, but I think that people who have close relationships with these officers need to become aware of what is legal and not legal. Officers and directors of these corporations have a big networks of people they talk to and are involved with everyday, therefore I dont think it is all that hard for an "outsider" to gain inside information.

Another idea that can be looked at in order to limit insider trading is to not allow officers and directors and their family members to own stock in their company. Although this is not something that I can ever see happening and this is not something that would have stopped Martha Stewart, I think that it is something that should be considered. With the number of unethical things are going on today in the business world, it wouldnt surprise me if insider trading is even more prevalent than we think.

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