A case study in insider trading

Weve obtained an Economic Law 101 text that covers insider trading, a criminal offence. One case study involves the United States versus Martha Stewart, the American celebrity who just finished her own prison sentence for insider trading and other charges. This tough American cookie was found guilty on multiple counts, including perjury. To simplify the complicated legal proceedings, well follow the textbooks examples and definitions, plus some similar circumstances that may also apply. The plaintiff: The plaintiff is someone who makes a formal complaint against someone else in a court of law. In Stewarts case, the plaintiff was the Securities and Exchange Commission (SEC), which filed charges against Stewart for insider trading. The SEC is an independent regulator that closely monitors sales of big share lots in the stock market, to protect the interests of small shareholders against big-time investors who may take unfair advantage of insider information. Financial crime is considered a serious offence. Al Capone, the Chicago prohibition-era crime czar, went to jail only for tax evasion. The defendant: The defendant in a court of law is the person accused of having committed a crime or being sued by someone else. In this case, Stewart and her broker were accused of using illegal information to trade her shares. Stewart is a self-made entrepreneur worth hundreds of millions of dollars and a very popular public figure. Stewart has for years managed to glue her legion of fans to the television set. On her show, she would dress casually and advise her audience on how to live a great lifestyle; for instance, by setting the dining table just right and coming up with exotic recipes. The charge: The charge is an official accusation from the authorities that someone has committed a crime. The charge can involve, for example, insider trading, tax evasion or perjury, depending on what wrongdoing the plaintiff suspects a defendant of. Insider trading: Insider trading is the crime of buying or selling shares in a company with the help of information known only by those connected with the business. On December 27, 2001, Stewart sold almost 4,000 shares in the bio-pharmaceutical company ImClone Systems only days before the Food and Drug Administration rejected one of its products. Stewart was saved from the plummeting share prices immediately afterward. Her lawyers initially insisted that she was innocent, but she was still charged with having received an illegal tip that helped her decide to unload her stock with such extraordinary timing. If you sell shares before a takeover because the tender price is below the market price, then you, too, may be nabbed by the cops. Perjury: Perjury is the crime of telling a lie in a court of law after you have sworn to tell the truth. In June 2002, Stewart issued a statement denying any wrongdoing, saying her sale was based on a previous agreement with her broker. However, that September, the Justice Department launched an investigation into whether Stewart knowingly lied to the authorities. In

fact, Stewart would have walked away unscathed at least, from perjury charges if she had told the truth. Its debatable whether a defendant can use the excuse of human error to beat a perjury rap. But what if Stewart had claimed she had read the wrong statement in June, because her lawyers had, say, ticked the wrong box for the defendants statement to read in court? Celebrity trials: The judge tends to come under public pressure whenever a celebrity or other VIP is put on trial. Stewarts fans campaigned for her acquittal, calling her charge petty compared with her positive reputation (prior to the trial). However, celebrities and other public figures should serve as an example by upholding higher moral standards. Stewart served several months behind bars, because the authorities wanted to send a message that no one should be spared punishment for their financial crimes. Shortly afterward, the Enron executives were arrested. The convictions: Conspiracy: guilty. Making false statements: guilty. Obstruction of agency proceedings: guilty. The lessons learned: No one shall be spared their wrongdoing. As it turned out, this basic law course proved to be quite easy for students. Some of them even say they dont understand why regulators in some countries take so long to launch an investigation into, say, an irregular share trade whose features appear identical to what happened in Stewarts debacle.