Martha Stewart: Guilty Of Insider Trading

On December 27th, 2001 Martha Stewart was contacted with some information that was clearly not public knowledge at the time. Her broker, Peter Bacanovic, had attempted to contact Stewart to inform her that ImClone shares were going downward and the Waksals were selling all their shares. Under the Client Information Privacy Policy of Merrill Lynch it clearly states that they “do not release client information, except upon a client’s authorization”. Bacanovic had ignored the policy and had chosen to inform Stewart of the Waksals selling of shares. From the beginning of this investigation, all parties involved claimed that the only reason for Stewart selling her shares was because of an agreement between her and Bacanovic that if the stock price
fell below $60 he was instructed to sell her shares. When Bacanovic first attempted to contact Stewart that morning, ImClone was priced at $61.53 a share. Had he had been able to reach Stewart that morning her shares would have been sold above the so called $60 stop-loss arrangement. It’s questionable from the facts of what happened on the morning of December 27th on whether or not Martha Stewart was guilty of insider trading or if she was just guilty of making a bad judgment call.
The SEC defines insider trading as illegal to either buy or sell shares, equity shares or any class of equity shares, in any public company if you are in possession of material non-public information. It’s safe to say that Waksal was in possession of material non-public information, where the question lies is whether or not Stewart was. When approached with the information that the founder of ImClone was selling all their shares, it can mean one thing and one thing only – shit’s about to hit the fan and you want out as quickly as possible. Had Stewart not have been informed about the Waksal family selling their ImClone shares through Bacanovic, she probably would not have made a rash decision and instructed Faneuil to sell all her shares in the company. There is no doubt whatsoever that Waksal was in possession of “material insider information”, it was Bacanovics relay of information to Stewart that put her in risk. She was not aware of all the information regarding the sudden sell of ImClone shares by the Waksals. As a result of not being fully informed of the situation she was unable to make an informed calculated decision. Stewart was not aware why Sam Waksal was selling, and she was unaware of the FDA drug rejection on Erbitux that was about to take place. More
importantly she wasn’t told of the “blackout period” that ImClone had imposed after December 21st, where no employee was allowed to trade ImClone shares. This was imposed to specifically guard the company against illegal insider trading. Despite this, Waksal ignored the “blackout” and sold his shares anyway. The fact that she merely imitated Waksal by itself is not illegal. One would hope that if Stewart was informed of the full picture by her broker then she would have exercised better judgment and decided to not sell. After all that has been said and done in the case, it seems ridiculous that this was all done to save a mere $228,000. The difference between waiting before or after the FDA announcement was only $49,708, a small price to pay considering how much she has lost in money to date over her decision and not to mention what it has done to her image and reputation. Arguments have been made that because of who she is and her reputation, Martha Stewart was used to be made an example of by the government.
In the wake of corporate scandals like ENRON and Arthur Anderson “the government was prosecuting a celebrity for a minor infraction to show it was tough on business crime”. The government may very well have wanted to show that business crime was intolerable, but no means was it their sole reason for pursuing the indictment. Based on the facts of December 27th and there after it was plain to see that there had been foul play. There was far too many incriminating evidence against Stewart and Bacanovic to say that the SEC and U.S. Attorneys used poor judgment and had additional motives. If they had been no crime committed then Bacanovic wouldn’t have, basically, paid-off Faneuil for corroborating with the story of a stop-loss agreement of selling the shares at $60. Stewart would not have contemplated altering the phone log entry on December 27th regarding Bacanovic’s call about the ImClone shares. If both Stewarts and Bacanovics actions had been entirely innocent and kosher, they would have cooperated with government investigators in late June, 2002 instead of pleading the Fifth Amendment against self-incrimination. That is not the behavior of innocent individuals. Instead it’s the behavior of those that are afraid of getting caught and losing grip of their
story. That’s exactly what happened. Martha Stewart may not have been found guilty on charges against insider trading, she was however guilty of lying to the FBI, the SEC and lying to investors. Specifically, the charges she faced were obstruction of justice, conspiracy, and securities fraud. Based upon these charges I believe she served a fair sentence for the crimes she committed. Judge Cedarbaum was fully aware that this ordeal would not be over for Stewart after sentencing. She had said to Stewart during the sentencing that she believed that Stewart has suffered and will continue to suffer. Where injustice comes into play is when Bacanovic receives an almost identical sentence to Stewart. Based upon his actions in the case and his lack of responsibility to his clients and the company he worked for, Bacanovic should have received a much longer prison sentence and higher fine than the one Stewart faced. No matter how messy all of this looks, it still doesn't amount to simply an insider-trading case. What that would take is someone coming forward to prove that Martha Stewart actually knew information from inside ImClone. If Bacanovic told her that it simply looked like a good time to trade but didn't say why, for example, she did nothing wrong in the lines of illegal insider trading.