Martha Stewart Committing the Crime of Insider Trading
The fact that Martha Stewart committed a crime by engaging in insider trading are beyond any reasonable doubt. When Samuel Waksal, co-founder of the ImClone Systems realized that the company’s stock shares would fall drastically in the coming days, both he and his daughter decided to sell all of their shares.
Although client information was supposed to be treated with utmost privacy, as written in the Merrill Lynch policies, the financial management and advisory company that was managing the Waksals’ shares went ahead and informed Martha Stewart of the decision by Sam Waksal and his daughter to sell their shares.
Under the Merrill Lynch policies, employees were not supposed to discuss the business affairs of any client with any other employee except when there was need to seek for additional information, this regulation means that the conversations between the two company’s employees: Douglas Faneuil and Peter Bacanovic, was against the company’s policies (Hoffman, 2007, 712).
The policies further stated that the company did not release client information except upon permission by the client or when required by law to do so. However, Bacanovic went ahead and informed Martha Stewart of the decision by the Waksals to sell their shares without their authorization, besides, the move was not permitted or required by law (Engelen & Liedekerke, 2007, 501).
Although Martha Stewart may not a part of the initial decision to inform her of the sell Waksals’ decision, she eventually got involved in the process when she received the message regarding the situation at ImClone and called Merrill Lynch to ask about the current share prices. She immediately instructed the firm to sell all of her 3,928 shares. She also called Sam Waksal for further information on the situation at ImClone.
She sold her stocks based on information received from her stockbroker and the company, information that was not available in the public domain, which made her guilty of insider trading. Although the two (Stewart and Waksal) maintained that they did not communicate for some time, call records indicated that they had had a 5-minute call on December 31.
The call most definitely focused on the situation at ImClone and of the decision of the Waksals to sell all of their shares, and helped her arrive at the decision to sell all of her shares (Koch, 2004, 36). Selling her shares based on information from both her stockbroker, who had policies against sharing client information, and the company implies that Martha Stewart was guilty of insider trading.
US Attorneys and the SEC Judgment of the Case
The decision by the US attorneys and the SEC to indict Martha Stewart stemmed from good judgment and compelling evidence presented throughout the prosecution period by prosecutor and witnesses. I believe that Stewart’s indictment was based on evidence of a serious crime.
Faneuil’s lengthy testimony revealed how Bacanovic had ensured that Martha received information regarding share sales by the Waksals, and when she finally got to receive the message from Merrill Lynch, she called back immediately to enquire for further information. The testimony also revealed how Bacanovic tried hard to cover up the situation at ImClone that had resulted into Stewart selling her shares.
To prove that the decision to sell her shares was based on insider information, Martha Stewart is said to have called Sam Waksal, who had been her friend for some time. The information provided both by Merrill Lynch and Waksal was not in the public domain, and Stewart used it to her advantage (McGee, 2008, 205).
The circumstances leading to the sale of shares by both the Waksals and Stewart stemmed from the fact that ImClone had failed to get the expected FDA approval of an antibody drug it had manufactured after many years of research.
Although Stewart’s defendants tried to paint her as someone who was being persecuted by the state due to her status, all the evidence seemed to point to someone who unfairly used her influence and status to engage in illegal dealings.
Her relationship with Bacanovic at Merrill Lynch enabled her to receive information that Sam Waksal and his daughter had sold all of their ImClone shares due to the firm’s bleak share prices in the near future. Apart from being friends, Bacanovic handled Stewart’s pension and personal accounts. He also handled accounts for her company, Martha Stewart Living Omnimedia (MSLO).
At ImClone, she had a long-time existing friendship with Sam Waksal since the 1990s and this enabled her to contact him at will to receive information that facilitated her decision to sell all of her shares (Washington Post, 2004). Therefore, Martha Stewart used her influence and status unfairly and in the end, her indictment did not come as a surprise regarding all the evidence presented during the trial.
Further evidence of Stewart’s knowledge that what she had done was wrong stems from her numerous attempts to block the course of justice through her staff at MSLO and her influence at Merrill Lynch, mainly through Peter Bacanovic (Shaw, 2003, 55).
To say that the prosecutors had a consciously or unconsciously had additional motives for pursuing the case are simply outrageous since the prosecution presented evidence that clearly to Stewart engaging in insider trading and using her influence and status to receive insider information and to block the course of justice.
Conspiracy and Obstruction of Justice: Jury Decision
Martha Stewart engaged in numerous activities aimed at obstructing justice that only seemed to point out to her guilt regarding insider trading. First, she blatantly claimed that she had made an agreement with her broker to sell ImClone stocks when they fell below $60, and that her decision to sell the shares was purely based on the information that the ImClone shares were trading at $58 per share.
It was later found that the “@60” had been added after December 27, and her defendants tried to cover up that addition. The judge found out that alleged agreement had been a lie and was only meant to justify the sale of her shares, and acted to obstruct justice (Shaw, 2003, 57).
Martha Stewart and Peter Bacanovic also engaged in numerous activities aimed at covering up the fact that she had received insider information from him. In one example, Bacanovic is said to have threatened Faneuil against saying anything about the dealings between the two.
When Faneuil was interviewed by the FBI, he stuck to what Bacanovic had told him regarding the $60 stop-loss order. Consequently, Bacanovic rewarded him with an extra week of paid vacation. It is obvious that Stewart knew of the activities between Bacanovic and Faneuil as they were aimed at protecting her image.
Stewart also instructed her staff at MSLO to alter the message of Bacanovic’s call that had informed her of the Waksal’s stock sale. In a testimony by one of her staff members, Ann Armstrong, Stewart is said to have first altered, then instructed her to restore the wording of the phone message.
These alterations were undertaken to support her statements relating to her communications with Bacanovic (Jennings, 2004, 45). Armstrong also said that Stewart knew that what she had done was wrong but was determined to cover up everything and obstruct the course of justice.
On a number of occasions, Stewart provided false information to the investigating team about her innocence to mislead prosecutors and push up her company’s share prices. For instance, she insisted that she had not talked to Faneuil on December 27 when she had infact been informed of the Waksal’s share sale by Faneuil.
She also mentioned that although she had talked to Bacanovic, she could not remember if he had said anything relating to the Waksal’s. This was obviously a misleading statement. Her statement of the agreement to sell ImClone shares when they fell below $60 only served to obstruct justice further.
On the Fairness of the Punishment
Stewart was sentenced to 8 months in prison and another 5-month home imprisonment, she was also ordered to pay a $30,000 fine. She was also put on a 2-year probation. She served her sentence from September 29 and was released on March 5, where she proceeded to serve her home confinement at her home.
In my opinion, this sentence was not enough since she caused suffering of a number of investors and the imprisonment and fine was not enough to deter similar occurrences in the future (Moore, 1990, 171).
ImClone stocks fell by 30 percent after she had sold her shares upon advice by Merrill Lynch staff and Sam Waksal. She deserved a longer jail term and a heavier fine since the $30,000 fine she paid was nothing compared to the huge loses she brought to ImClone Systems and its shareholders.
A heavier fine would deter future offenders, especially those who are wealthy, from engaging in insider trading. Besides, all profits from Stewart’s insider trading activities should have been withdrawn.
Peter Bacanovic also received an 8-month prison sentence, 5-month home imprisonment, and a $ 4,000 fine. He also served a 2-year probation. I feel the sentence and fine imposed on Bacanovic were appropriate and can prevent similar events from occurring in the future. Since he was not the main beneficiary of the insider trading scheme, the sentence was just appropriate. Daniel Faneuil was only fined $2,000.
This light sentence stemmed from the fact that he provided vital information regarding the case and had a lesser role in all insider trading activities carried out by Bacanovic and Stewart. His evidence was very important in the indictment of Stewart and Bacanovic, and outlined the extent to which insider trading occurs. Therefore, his sentence was appropriate.
Reference
Engelen, P., & Liedekerke L. (2007). The ethics of insider trading revisited. Journal of Business Ethics, 74(4), 497-508.
Hoffman, D. (2007). Martha Stewart’s insider trading case: A practical application of rule 2.1. The Georgetown Journal of Legal Ethics, 20(3), 707-718.
Jennings, M. (2004). The ethical lessons of the Martha Stewart case. Corporate Finance Review, 8(6), 41-47.
Koch, E. (2004). Martha guilty? Surely you jest. Columbia Journalism Review, 43(1), 36 -37.
McGee, R. (2008). Applying ethics to insider trading. Journal of Business Ethics, 77(2), 205.
Moore, J. (1990). What is really unethical about insider trading? Journal of Business Ethics, 9(3), 171.
Shaw, N. (2003). Cloning Scapegoats: Martha Stewart does insider trading. Social Text Winter 2003 21(4 77): 51-67
Washington Post. (2004). A Chronology of Imclone and Martha Stewart. Washington Post. Web.