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Martha Stewart: An Accusation of Insider Trading Essay

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Updated: Jan 6th, 2022

Introduction

Martha Stewart is well known for successfully pioneering a number of companies. Among the many companies she held shares in was ImClone systems. This paper will briefly explain the kind of business that ImClone systems does and the conflict that ensued the selling of shares by top executives after supposedly learning about Food and Drug Administration (FDA) announcement which was about to be made. The top executives were able to avoid huge losses by selling their shares in advance. Among those who sold their shares was Martha Stewart.

ImClone Systems

ImClone system founded in 1984 by Dr. Samuel Waksal is a biopharmaceutical company involved in research in the area of oncology. It is reported that in December 2001 the company was waiting the results of the review of a new drug, Erbitux, it had developed. It is reported that the founder of ImClone, Samuel Waksal, also had founded Scientia. At this time Waksal is said to have fired the president of Scientia. The fired president claimed that Waksal fired him because he (Waksal) “felt hampered in his ability to engage in illegal, unethical and fraudulent conduct” (Fanning 5). On his part Dr. Waksal claimed that the firing was due to the president’s compensation plan which would affect the investment plan of the company in future. It was reported that Waksal had heavy debts amounting to $80 million which were obtained with his ImClone shares acting as security.

Waksal Family had inside Information

It is reported that Waksal was informed that FDA was 99 percent likely to reject the drug. This was after an employee of the company had a meeting with the FDA in which issues facing the Erbitux were discussed. The meeting minutes suggested that the drug was likely to be rejected. It is reported that this information was not official and as such was not to be made public. Rejection of the drug by FDA would likely push down the shares price of ImClone’s shares resulting to huge losses especially for those who held huge shares in the company. It is likely that the knowledge of the information leaked from the meeting the ImClone employee held with FDA likely triggered the sale of ImClone shares held by major shareholders. It is reported that Harlan Waksal, ImClone CEO, sold his shares worth $50 million. It is reported that Harlan after learning that the drug was most likely to be rejected from Brian Markison informed his brother Samuel Waksal (Fanning 5).

Upon learning that the drug was likely to be rejected Samuel Waksal raced to sell all his shares in ImClone. It is reported that Samuel knew vital inside information. He knew that the announcement of the rejection of the drug would not be made till after the markets had closed. This was precisely two days away. It is also reported that he knew that there would be a blackout that day and this would make it impossible for business to be conducted. With this information he raced against all odds and ended up forging the ImClone General Counsel signature which was required to unload the shares. Some other Waksal family members were also said to have sold the shares they had in ImClone systems (Fanning 6).

Martha Stewart was Tipped

It has been reported that Martha Stewart while on her private jet on way to Mexico must have learnt about the attempt by the Waksal family to unload all the shares they had in ImClone systems. It is alleged that upon knowing this she made a call and her shares were traded by Douglas Faneuil at $ 58 a share (Fanning 6). Martha claimed that her selling of the shares was due to an order she had made early for the shares to be sold in the event their price went below $ 60. This has however been met with criticism and questions as to why the shares were not sold immediately they fell to $59.98 early.

My Opinion

Personally I believe that those who engage in unethical means in business should pay for the engaging in such. The Waksal family is a good example of such. Martha’s case though seems to be tricky is also a case of dishonesty. Though she claimed to have given a ‘stop loss’ order it has not been shown why the shares were not sold when the price fell to $59.98. During the court ruling it was shown that there was a falsification of documents to prove that the below $60 order sell existed (Adler 1). It is clear that somehow Martha Stewart had inside information on a likelihood of the fall in share price of the company. Such practices should be strictly dealt with to encourage a level playing ground for all the participants in field of business.

Conclusion

The Martha Stewart case is a classic example of how inside information is used to avoid losses. The case involved ImClone systems and its major shareholders. The Waksal family had a prior knowledge about a significant drug, Erbitux, which was to be rejected by FDA. This knowledge which was not yet public helped them unload the shares they held in the company just few days before the rejection announcement was made. Martha Stewart is alleged to have learnt from a tip about the rush within the Waksal family to sell their shares and acting on that information sold all the shares she had in the company.

Works Cited

Adler, Jonathan. Martha Stewart Scandal. Corporate Narc, n. d. Web.

Fanning, Eugene. Martha Stewart Living Omni media, Inc. An Accusation of Insider Trading. Centre for Business Communication, 2002. Web.

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