Case Study on Martha Stewart: Insider Trading

Submitted to: Dr. Supriti Mishra

Submitted by: Japkirat Singh Oberai Shiva Krishna Padhi Suman Sekhar Pradhan (012) (018) (022)

Introduction
Martha Stewarts Insider Trading Scandal is one of the widely discussed cases in corporate ethics. Insider trading refers the illegal selling or buying of stock by the insiders of the company. Insider trading took place based on the non-public information in possession of the corporate insiders . Martha Stewart was accused of insider trading after she sold four thousand shares of ImClone. The sale was made just a day before that the price of the stock decreased significantly. Investigation was made and she was found guilty of lying and obstructing the justice. However, Martha Stewart has always denied the charges against her. As a result of the scandal, the company suffered significant financial loss (News-Max , 2003). Despite the scandal, Martha Stewart has pleasant image among many of her fans. This essay discusses how Martha Stewarts Insider Trading Scandal affected the business and what was the role of Martha's image in this situation. Bacanovic and Waksal were also convicted of federal charges and sentenced to prison terms. Stewart also paid a fine of $30,000.

Question and Answers :

Q1. Has Stewart engaged in insider trading? Is this a case for insider trading at all? i. ii. Is Martha on a trial for covering up a crime which she did not commit? Why did she do what she did? Stewart says that this is a small personal matter blown out of proportion. Is she right?

Ans : - Martha Stewart was very close to her company. The image of the company was largely dependent on her personal image. Thus, her personal image was a big issue for the company. And, it was proved when the stock price of the Omni-media declined by 70% as a result of the scandal. Martha denied her involvement in any activities that may be considered as wrong. She tried to defence her position stating about stop loss order. She stated that there existed a stop loss order that direct her broker to sell the share if it declined below the $60 per share. But, ultimately she failed to provide any evidence that can prove the existence of the stop loss order . Moreover, Martha Stewarts decision to maintain innocence and to be silent on the issue raise question about her image. She denied facing the issue in front of public. Her silence made the people to believe that she was hiding something or she might not be honest in her actions. As a result, Marthas honesty and credibility in corporate dealings was questioned. And, it also affected the company. As Martha and the company were very closely related, many believed that the company cannot go on without the image of Martha. Martha Stewart build a strong image that she was a popular name all over America. She believed that the company can go well without her image.

Stewart says that this is a small personal matter blown out of proportion. She is not right because first of all if she was right she did not told the false statement. She tried to hide his crime to save her company share to feel down, because she knows that her company image is totally attached with her. So to save her company she deliberately told false statements.

Q2. Analyze this case and the above question in the context of insider trading laws in India. Ans:- Stewart conducted unethical behavior by conducting insider trading actions and the misleading of her companies shareholders. She had also continued her unrighteous path by deceiving the government and misleading them to believe that she had an agreement with her brokers to sell ImClone stock if it fell below $60. These actions indicate un-ethical behavior and define the lack of integrity that made Stewart strongly guilty. According to the Indian context of insider trading There should be preservation of Price Sensitive Information Employees/directors shall maintain the confidentiality of all Price Sensitive Information. Employees/Directors shall not pass on such information to any person directly or indirectly by way of making a recommendation for the purchase or sale of securities. Price Sensitive Information is to be handled on a need to know basis, i.e., Price Sensitive Information should be disclosed only to those within the company who need the information to discharge their duty. No company shall deal in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information. A person is deemed to be a connected person, if such person - is a merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manager, Investment Advisor, sub-broker, Investment Company or an employee thereof, or is member of the Board of Trustees of a mutual fund or a member of the Board of Directors of the Asset Management Company of a mutual fund or is an employee thereof who have a fiduciary relationship with the company. She would not have been held liable in the Indian context if the broker would have only suggested her to sell the same according to the market, as the broker has the right to suggest his customers about the market and guide them in a proper way. But here he (broker) is stating and disclosing the fact that the owner himself is selling the shares which is unlawful in the eyes of law in India. Stewart also had informed her friend the same.