Stewart, 68, in June 2004, was fined $30,000 and sentenced to five months in prison, resulting from Securities Exchange Commission (SEC)’s investigation into her alleged insider trading.
Insider trading is a type of corporate imorality because it lacks financial transparency and equality to all the stakeholders. It refers to major shareholders and executive employees’ use of privileged information to gain profits or avoid financial losses. Doing so is unethical because it lacks fairness and automatically excludes the smaller shareholders.
A company’s insiders comprise directors, senior executives and major shareholders. Major shareholders are individuals who own at least 10% of a company.
Insider Trading
Stewart, on Dec. 27, 2001, after a tip from Douglas Bacanovic, her former Merrill Lynch broker, sold her 3928 Imclone shares. Samuel Waksal, Stewart’s friend, ran ImClone Systems. Bacanovic also brokered for Waksal.
Bacanovic, through his assistant, informed Stewart about the Federal Drug Administration (FDA)’s disapproval of the cancer drug Erbitux - one of Imclone’s viable products. A day later, Imclone announced FDA’s rejection of Erbitux, sending its shares tumbling 23% to $10.86 a share.
Natural as Stewart’s actions may seem, SEC’s Act classifies such conduct as illegal. Stewart’s transaction prevented a $228,000 loss. A jury comprising eight women and four men returned a guilty verdict on all counts; one of conspiracy, two of falsifying statements to SEC investigators, and one of obstruction of justice. The Mar. 5, 2004, verdict cost Stewart; her net worth plunged $85 million from $420 million.
Stewart’s company, Martha Stewart Living Omnimedia (MSO), headquarted in Manhattan, Ny, comprises a lifestyle magazine, a television show, and household products ranging from paint to linen. Kmart Corporation retails the household products. “I didn’t cheat the little people….We’re all little people. I didn’t cheat anybody out of anything,” said Stewart maintaining her innocence during an ABC 20/20 interview with Barbara Walters, in July 2004.
Martha Stewart's Obstruction of Justice
Stewart lied to SEC investigators about her ImClone sales, stating that she and Bacanovic held a prior agreement to sell her stock whenever its value fell below $60 per share. Bacanovic’s documents, the SEC found, were altered to suggest pre existence of the agreement. Also, Stewart amended Bacanovic’s Dec. 27, 2001, phone message and later instructed her assistant to revert it back to the original message. Later, Bacanovic testified (under SEC oath), restating the agreement’s preexistence.
MSO shares dropped 36% to $10.94, as a result of Stewart’s, Jun. 17, 2004 sentence. Magazine advertiser and subscriber withdrawals forced MSO to retrench 200 employees.
Bacanovic was fined $4,000 and also served five months in prison. Stewart did not testify during the trial and her $30,000 fine is the maximum allowed. Waksal, whose family sold Imclone shares, pleaded guilty to securities fraud. He is serving a seven-year prison term.
Are all people little people?
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