The Trial of Martha Stewart

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...