Illegal insider trading is when nonpublic corporate information has influenced a trade when someone buys or sells. When someone uses this information it allows them to gain an unfair advantage over other investors causing the market to gain or lose money. If insider trading were allowed then people that invested would no longer feel confident to invest. The legal way to gain an advantage over other investors would be for them to obtain skills in analyzing and understanding accessible information. According to the Securities and Exchange Commission, "Under Rule 10b5-1, the SEC defines insider trading as any securities transaction made when the person behind the trade is aware of nonpublic material information, and is hence violating his or her duty to maintain confidentiality of such knowledge"(Reem Heakal).
An insider consists of someone who is accessible to information that has not yet been released to the public. These include CEO’s, executives, and directors that are exposed to the information. Insiders that also may have to keep quit consist of Accountants and Investment Bankers. According to the article by Reem Heakal, "In the second part of Rule 10b5-2, the SEC has outlined three nonexclusive instances that call for a duty of trust or confidentiality: (1) when a person expresses his or her agreement to maintain confidentiality, (2) when history, pattern and/or practice show that a relationship has mutual confidentiality and (3) when a person hears information from a spouse, parent, child or sibling (unless it can be proven that such a relationship has not and does not give rise to confidentiality)" (Reem Heakal).
It all began about a year after Martha Stewart sold 3,928 ImClone shares in late 2001 a day before a rigid slow down sent the stock tumbling. The stock market world was waiting for the FDA to make a decision on Erbitux. The pharmaceutical company ImClone was denied for a new drug Erbitux, which the company promised to be a cancer drug. Marta Stewart received information from her broker Peter Bacanovic to sell her stock. Bacanovic unlawful inside tip was that other clients of his which included CEO of ImClone Samuel Waksal and his daughter, where selling all of their stock in ImClone that was held by Merrill Lynch. Waksal knew at the time of his order to sell that the FDA was not going to approve the Erbituz application. Under Merrill Lynch’s policies the information of Waksal sale was confidential and "under Merrill Lynch policies, which prohibited employees from disclosing client transactions or effecting client trades on the basis of other client transactions"(SEC.gov). Bacanovic broke sec guild lines and his own company policy by telling Marta to sell her shares in ImClone. Bacanovic had his secretary tell Marta Stewart that Waksal and his daughter had sold all of their shares in ImClone that were being held at Merrill Lynch and then Marta instructed Bacanovic to sell all of her shares in the company. The following morning news broke that the FDA did not approve Erbitux and the share price of ImClone dropped 16% to 46 dollars per share. By selling the stock when she did it allowed her to avoid losses of $45,673. The question that needs to be asked in this case is whether or not Martha used insider information in order for her to gain an advantage over everyone else which she claimed she did not hear any information about the Waksals selling any of their shares in ImClone. The SEC states that Marta not only received this information about the Waksals sale of their shares but she and Bacanovic also went on to lie about the sale of Marta's stock and make up an alibi about their reason for selling the stock. Bacanovic told the commission that he and Marta had earlier had come to the conclusion to place a sell order on her stock if the price of the stock fell below 60 dollars per share.
Martha and her broker Peter Bacanovic were indicted on nine criminal counts from the SEC. Jurors found Stewart guilty on four counts of conspiracy, obstruction and making false statements. They also convicted former Merrill Lynch broker Peter Bacanovic on counts of conspiracy, making false statements and obstruction of agency proceedings. He was sentenced to five months in prison and was banned from working in securities forever. Stewart pleaded not guilty to the charges because she said she had a standing order to sell her shares of ImClone if they fell below 60 dollars. Sam Waksal was sentenced to seven years and three months in prison for securities fraud, conspiracy, obstruction of justice, perjury, bank fraud, and wire fraud. “WAKSAL pled guilty to two counts of securities fraud, and one count each of conspiracy,
Obstruction of justice, perjury, and bank fraud that had been charged in a 13-count Indictment that was filed on August 7, 2002”(US Attorney). Waksal was also fined 4.5 million dollars, 3 million as a fine and another 1.5 million dollars as a result of improperly avoiding New York sales tax on purchasing art.
When Martha was indicted, she resigned as CEO and chairman of Martha Stewart Living Omnimedia. “Stewart resigned from the board of Martha Stewart Living Omnimedia. Stewart had already resigned from the boards of The New York Stock Exchange and Revlon Cosmetics” (Wikipedia). Also on the day that she was indicted, the SEC filed a complaint for charges of insider trading.
According to Courttvnews, “The panel of eight women and four men found Stewart, 62, guilty of conspiracy, obstruction and two counts of lying to investigators for covering up the circumstances surrounding her Dec. 27, 2001, stock trade of biotech company ImClone. Her well-timed sale came a day before the FDA made public its decision to reject the application for a cancer drug manufactured by ImClone, and just after learning that the company's CEO, Sam Waksal, was dumping $7.5 million worth of his stock”( Rochelle Steinhaus). Martha could have had up to twenty years in jail for what she has done. According to the article in CNN, “She received a lenient sentence within the federal guidelines: 5 months in prison, 5 months of home confinement, two years of supervised probation, and a $30,000 fine”( Krysten Crawford). A settlement with the Securities and Exchange Commission is going to cost Martha Stewart $195,000. Also among the results of her civil insider trading charges, she's banned from serving as a director of a public company for five years.
Since the trial with Martha Stewart, she has had many fines including one that tripled the amount of money that she could have lost in her shares with ImClone. Her company signed a seven year contract with Kmart in June of 2001, ending in 2007. The deal was to market Martha Stewart Everyday products such as gardening supplies, home decorating and house wares. Kmart then sued Martha Stewart’s company, Martha Stewart Omnimedia, in February 2004 claiming them to have “double-counted” royalty payments and advertising. Seven months after they began the lawsuit, Kmart filed for bankruptcy protection and closed 600 of their 2,100 stores nationwide. On April 26, 2004 Kmart withdrew their lawsuit against Martha Stewart Omnimedia making a deal with the company that extended their seven year contract until March 2009.
Since Stewart’s release from prison in March of 2005, she has made a highly-publicized comeback through television, published materials, merchandising and satellite radio. She resumed her daytime television show, Martha, which was nominated for an Emmy in six categories for the 2006 awards, including Best Host and Best Show. Stewart was given a spinoff of the hit TV series The Apprentice, called The Apprentice: Martha Stewart. The show received poor ratings which some claim is due to its hour competing with the hit TV show Lost and was not brought back for a second season. Stewart has also contributed much of her home, gardening and craft knowledge to NBC’s The Today Show. On November 16, 2006 Stewart made a guest appearance on NBC’s new series Ugly Betty, teaching a friend how to prepare a turkey.
In addition, Stewart released a book in October 2005 called The Martha Rules. The book was about starting and managing a new business. Her company released Martha Stewart Baking Handbook a month later and then in October of 2006 Clarkson Potter published Martha Stewart’s Home keeping Handbook, a guide book to looking after a house. (Wikipedia)
Martha Stewart Living, her company that makes home goods for Kmart, expanded their products with a line of ready-made home furnishings. Stewart’s line of interior paint was made available at Sears’s stores. She has also developed a plan to build 650 houses nationwide ranging from $200,000 to $400,000, designed after her New York and Maine homes. Martha Stewart Living is also making a line of up-scale house wares for the Macy’s owned stores Federated Department Stores. Martha Stewart Omnimedia also released a 24-hour satellite radio show with Sirius in November 2005 where Stewart hosts a weekly call-in show. (Wikipedia)
I would say that Martha Stewart was made an example of because of her carelessness, greediness, and power. They used her poor judgment to show other companies and people in powerful positions that it is not ok to perform insider trading no matter how large or small the amount of money gained. The SEC did act properly by exposing her crime to the nation; I think that where Marta relay went wrong is when she lied to the SEC. All Marta had to do was fess up when the SEC asked her about her sale in the shares of ImClone she would have only received a slap on the wrist and that would have been it. When she began lying and making false alibis to the SEC they had no choice but to give her a more severe punishment. She let her greediness and desire to gain more power and money then she was already given to cloud her judgment and cause her to make a poor decision. I do feel the sentence given to Sam Waksal was appropriate and that he deserves to spend seven years in prison. He was trying to dump more shares than he actually was able to when he found out his company’s stock was most likely going to take a big hit. He gave his shares to his daughter to share which shows he put some though into how he would be able to get away with it. This to me shows he had no bad feeling because he thought he was going to be able to make out with some cash and save himself. What he did was wrong and he deserved the sentencing that was handed down to him.

Works Cited
Defining Illegal Insider Trading. http://www.investopedia.com/articles/03/100803.asp. October 8, 2003. Reem Heakal 2007.
Martha: I cheated no one. http://money.cnn.com/2004/07/16/news/newsmakers/martha_sentencing/?cnn=yes. Krysten Crawford. July 20, 2004.
Martha Stewart Insider Trading Charges. http://en.wikipedia.org/wiki/Martha_Stewart_Insider_Trading_Charges. Wikipedia. (March 2007).
Martha Stewart. http://en.wikipedia.org/wiki/Martha_Stewart. Wikipedia. (March 2007).
Martha Stewart faces prison, uncertain future. http://www.courttv.com/trials/stewart/verdict_ctv.html. Rochelle Steinhaus. Tuesday, March 20, 2007.
U.S. Attorney of the State of New York. http://www.usdoj.gov/usao/nys/pressreleases/June03/waksalsentencepr.pdf. (June 10, 2003)
U.S. Securities and Exchange commission press release. http://www.sec.gov/news/press/2003-69.htm (June 4, 2003)