Martha Stewart: Organization Ethics of Insider Trading

Topics: Martha Stewart, Stock market, Stock Pages: 7 (2450 words) Published: March 26, 2011
Insider trading mostly occurs by individuals close to the upper level management of an organization. This type of unethical behavior undermines the stability of the organization. In the ImClone scandal where Martha Stewart was indicted for her involement, the stability of her company suffered and the companies and people associated with Ms. Stewart suffered as a result of her decision. In this essay I will examine the parties that were privileged to knowing ImClone’s stock was going to drop and those who did not know. I will look at the effects of Ms. Stewart’s action, what she could have done different, and the consequences of her actions. Ethical and public issues must be considered when a business executive makes a decision that could affect the entire company.

The Organization Ethics of Insider Trading
On December 27, 2001, Martha Stewart made a decision that changed her life, and the decision jeopardized the livelihood of her stakeholders. Ms. Stewart received a call from her stockbroker’s assistant letting her know that Dr. Samuel Waksal was trying to sell his holdings in ImClone. Dr. Waksal was the chief executive officer and founder of ImClone, and he had just received notice from the Food and Drug Administration that the drug Erbitux did not receive approval to be used as a cancer drug. Stock in ImClone was at a high due to expectations of Erbitux getting approval, and once the news of it not getting it reached the public, Dr. Waksal knew that the price of its stock was going to decline. (Carroll & Buchholtz, 2009, p. 814) This is an example of insider trading. “Anytime a company executive or employee buys or sells stock in the company that person works for, an inside trade has occurred.” (Newkirk, 1998) In this essay I will explore who the ‘insiders’ were that knew that the stock was in danger, and the people who did not know. I will examine how Martha Stewart’s decision affected her company, Martha Stewart Living Omnimedia, and what she could have done differently. The concept of insider trading is when a person has knowledge, positive or negative, that can impact a company’s stock price and a trade is made based on that knowledge. Insider trading is illegal. Martha Stewart “acted on inside information when she sold 3,928 shares in biotechnology company ImClone Systems”. (White, 2006) The Securities and Exchange Commission (SEC), the federal agency that has the responsibility of regulating stock trading in the United States, alleged in its case against Ms. Stewart that she received an illegal tip from her broker Peter Bacanovic. The tip was that Dr. Waksal and his family members were selling their shares of ImClone stock. Bacanovic was the broker for Dr. Waksal and for Ms. Stewart. (White, 2006) When insider trading takes place, there is a select group of privileged people who have information about the stock’s possible rise or fall. In the case of ImClone, Dr. Waksal let certain individuals, his father, his daughter and his broker’s assistant, know that a change was about to take place with ImCone stock by attempting to sell his shares. These are the people that the investigation revealed did ImClone stock trading on the day before the news become public. Martha Stewart found out about the news when Bacanovic’s assistant, Douglas Faneuil, notified her that Dr. Waksal was selling his holdings. (Hurtado, 2004) Each person who sold their holding in ImClone on December 27, 2001 with knowledge of the possible decline participated in insider trading. The other individuals that owned holdings in ImClone were not privileged to that information, they did not have an inside advantage. The two parties who knew ImClone’s stock was going down and the people who did not know have several things in common. They all felt that ImClone’s stock was a good investment and they were all about to loose money once the FDA’s decision was made public. The difference...

References: Carroll, A. B., & Buchholtz, A. K. (2009). Business & society: Ethics and stakeholder
Clark, Josh. (2009). How Insider Trading Works.
Hoffman, Drew. (2007). Martha Stewart 's insider trading case: a practical application of
Rule 2.1
Hurtado, Parricia. (2004). Broker’s assistant fined $2,000 for part in Stewart scandal.
Newsday (Melville, NY)
Martha Stewart Living Omnimedia Reports Third Quarter 2010 Results. (2010). PR
Newkirk, Thomas C. (1998). Insider trading- a U. S. perspective. Securities and
Exchange Commission
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