INTRODUCTION
Martha Stewart was indicated for Securities Fraud. However, she was acquitted of the charges, but instead found guilty of obstruction of justice and making false statements. As a result of the finding of guilt, she served five months in federal prison. There are many opinions concerning the evidence presented in the case against Martha Stewart for violation of the Securities Act. Some legal scholars claim that she was guilty of insider trading while others claim the court properly found the evidence lacking and her actions not in violation of the securities law. Presented in this paper are two scholarly journal articles that have opposing views of the Martha Stewart case. After a review of each, clearly the article supporting the court’s acquittal is appropriate. From a review of the legal opinions concerning Martha Stewart’s case, the court properly ruled in acquitting her of any violations of the Securities Act.
ARTICLE ONE: Martha Stewart did not engage in the illegal act of insider trading.
In a law review article by Ray J. Grzebielski entitled Why Martha Stewart Did Not Violate Rule 10B-5: O Tipping, Piggybacking, Front-Running and The Fiduciary Duties of Securities Brokers, the author portrays Martha Stewart’s innocence. Martha Stewart was investigated for securities fraud concerning the sale she made of ImClone stock. She was not indicted for securities fraud but rather for obstruction of justice and making false statements during the investigation. Martha Stewart sold ImClone Systems Corp. stock upon hearing from her securities broker that ImClone’s president sold all his stock. Coincidently (or not), the next day, ImClone stock fell dramatically. Martha Stewart avoided a very substantial loss as a result, as did the ImClone executive. The executive was obviously guilty of securities fraud, however, the case against Martha Stewart was different.
The investigation of Martha Stewart by the Securities Exchange Commission and the Department of Justice followed allegations that she violated rule 10B-5 o the 1934 Securities Exchange Act. This law provides that:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange. . . To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement (as defined in section 206B of the Gramm-Leach Bliley Act), any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
The United States Supreme Court clarified this rule in three cases. In Chiarella v, United States, 445 U.S. 222 (1980), in order for a violation of the rule to occur, a fiduciary duty must be breached with the failure “to disclose material nonpublic information” . In Dirks v. SEC, 463 U.S. 646 (1983), the Court held that a tippee does not have a fiduciary relationship necessary to violate the rule of law, however; a tippee may be in breach of the duty if he or she is a participant in the breach of duty of the insider who provide the information . In United States v. O’Hagan, 521 U.S. 642 (1997), the Court held that misappropriation of confidential information concerning securities trading is a breach of duty and violation of this law. To sum up, the Court determined that a violation of rule 10B-5 occurs when a fiduciary duty owed by a corporate insider is beached when he trades on material nonpublic information without disclosure, and an individual that relays material nonpublic information for trading purposes may also be in violation of the law.
Martha Stewart did not partake in any of these types of activities in violation of the Securities Act. She was not an insider with ImClone nor was she a tippee as she was not aware of the reason for the sale made by the ImClone executive. A trader, upon hearing of someone else’s impending sale, is free to sale as well. This type of piggybacking is not a knowing participation as the seller is not aware of any breach of duty by an insider. Insiders may trade stock as long as they are not aware of material nonpublic information.
Martha Stewart legally traded ImClone stock. Her finding of guilt and prison sentence were due to her obstruction of the investigation into her trading of the ImClone stock. Martha Stewart told investigators that her sell of her ImClone stock had been prearranged due to a stop loss orderr. The truth was that Martha Stewart was told that ImClone executives were selling their stock and that she should as well. The public disclosure as to why she sold the ImClone stock had an effect on Martha Stewart’s company stock. Whether this was intended, has never been determined, but prosecutors did claim that her public statements that were lies led investors to trade shares of her company.
ARTICLE TWO: Martha Stewart Violated Rule 10B-5 of the Securities Act
In a journal article by Joan MacLeod Heminway entitled Martha Stewart Saved! Insider Violations of Rule 10B-5 For Misrepresented or Undisclosed Personal Facts, the rule applicable to Martha Stewart’s case is analysed in a manner very different than the way in which the previous article analysed the rule. The author makes the claim that Martha Stewart violated the Securites Act when she made the false public announcement about the sale of the ImClone stock. In analysing the law, the author alleges that in order for a violation of the Securities Act rule 10B-5 three elements must be present: manipulation or deception, that is in connection with the purchase or sale of a security, with scienter. The article claims that Martha Stewart violated these key elements needed to determine that a violation of the Securities Act occurred.
First, Martha Stewart made four public statements that were “manipulative and deceptive” and were meant to affect the market of her own company stock. The dissemination of the information is considered material because of Stewart’s executive status. Stewart’s actions were fraudulent and deceptive in respect to those who trade the Martha Stewart brand in the public market.
Second, there is a connection between her statements made concerning her sale of the ImClone stock and any sale or purchase of Martha Stewart stock. The Supreme Court has determined that a fraudulent scheme and a breach of a fiduciary duty is the same as the requirement that the act be in connection . Martha Stewart’s disclosure of her reason for the sale of her ImClone stock was a fraudulent scheme in concection with the sale of securities because it increased the value of her own company stock.
Third, Martha Stewart had the required state of mind, or scienter, in committing the violation of the Securities Act. Martha Stewart actions were deliberate when she made the false announcement that affected her own stock value.
Focusing on Martha Stewart’s announcement rather than her actual sale of the ImClone stock is a diversion from the facts. She was investigated for the sale of the ImClone stock and found to have not violated the law in regards to this action. The author in this article, and other critics of Martha Stewart’s actions were merely conducting an extensive hunt to find a violation due to the name and reputation of Martha Stewart.
CONCLUSION
The two articles discussed above provide two versions of the story behind Martha Stewart’s actions and two different approaches to the rule of law regarding insider trading. Fortunately for Martha Stewart, the judge agreed with the first article, which is a better source of information both to fact and law regarding the case of Martha Stewart. Martha Stewart was convicted of lying to investigators about the reason she sold the ImClone stock, not of violating the law pertaining to securities.
Martha Stewart was indicated for Securities Fraud. However, she was acquitted of the charges, but instead found guilty of obstruction of justice and making false statements. As a result of the finding of guilt, she served five months in federal prison.
There are many opinions concerning the evidence presented in the case against Martha Stewart for violation of the Securities Act. Some legal scholars claim that she was guilty of insider trading while others claim the court properly found the evidence lacking and her actions not in violation of the securities law. From a review of the law in regards to insider trading and the above journal articles the court properly ruled in acquitting her of any violations of the Securities Act.
The judge in the case of Martha Stewart had to address the issue of whether Martha Stewart was in violation of the Securities act when she sold her ImClone stock based on a tip from her stock broker. The law holds that in order to violate the act, the seller must have had a fiduciary duty in regards to the nondisclosure of the information that led her to sell the stock. Martha Stewart did not have a fiduciary duty as required. Thus, the judge made a proper ruling by acquitting her of the allegations.
Martha Stewart was found guilty, however, in federal court and sentenced to five months in prison. The guilty verdict was based upon the failure to tell the truth about the reason she sold the stock. Had she had not been dishonest about her actions that led to the sale of the ImClone stock, Martha Stewart would have been acquitted of all charges against her. Instead, she had to resign from the board of directors of her company. Her name and image was tarnished forever and resulted in a massive decline in the stock of her company.
REFERENCES
Grzebielski, R. J. (2007). Why Martha Stewart Did Not Violate Rule 10B-5: On Tipping, Piggybacking, Front-Running and the Fiduciary Duties of Securities Brokers. Akron Law Review.
Heminway, J. M. (2006). Martha Stewart Saved: Insider Violations of Rule 10B-5 for Misrepresented or Undisclosed Facts. Maryland Law Review. Retrieved from http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=1003&context=wle_papers&sei-redir=1&referer=https%3A%2F%2Fscholar.google.com%2Fscholar%3Fstart%3D10%26q%3Dmartha%2Bstewart%2Bguilty%26hl%3Den%26as_sdt%3D0%2C28#search=%22martha%20stewart%
Langevoort, D. C. (2006). Reflections on Scienter (and the Securities Fraud Case Against Martha Steward that Never Happened). Georgetown University Law Center. Retrieved from http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=1003&context=wle_papers&sei-redir=1&referer=https%3A%2F%2Fscholar.google.com%2Fscholar%3Fstart%3D10%26q%3Dmartha%2Bstewart%2Bguilty%26hl%3Den%26as_sdt%3D0%2C28#search=%22martha%20stewart%
Leite, J. (2012, May 15). What Martha Stewart Did Wrong. Retrieved from Covering Business: http://coveringbusiness.com/2012/05/15/what-martha-stewart-did-wrong/
O'Rourke, J. S. (2004). Martha Stewart Living Omnimedia Inc.: the fall of an American Icon. Public Relations Review. Retrieved from https://www.researchgate.net/profile/James_Orourke/publication/248527934_Martha_Stewart_Living_Omnimedia_Inc._the_fall_of_an_American_icon/links/549048bd0cf225bf66a828f4.pdf
Seigel, M. L., & Slobogin, C. (2005). Prosecuting Martha: Federal Prosecutorial Power and the Need for a Law of Counts. Pennsylvania State Law Review. Retrieved from http://discoverarchive.vanderbilt.edu/bitstream/handle/1803/6597/Prosecuting%20Martha.pdf?sequence=1
