Introduction

According to Google, insider trading is the illegal practice of trading on

the stock exchange to ones own advantage through having access to

confidential information. In 2001, Martha Stewarts stock broker used insider

trading in regards to Stewarts stocks in a company called ImClone Systems.

Some people believe Stewart knew of the illegal practices of her stock

broker, while others believe she did not know. In 2004, Stewart was

convicted of conspiracy and obstruction of justice. She was not found guilty

of insider trading because there was no enough evidence to convict on that

charge. The situation that landed Stewart 5 months in prison, 5 months on

house arrest, and a fine of $30,000 started in December 2001.

Summary

Douglas Faneuil was the assistant to Peter Bacanovic, a stockbroker.

Faneuil answered a call from Aliza Waksal, daughter of the co-founder of

ImClone Systems. She wanted to sell her shares within the company. This

was a huge red flag and Faneuil called Bacanovic immediately. He let

Bacanovic know that she was not the only Waksal to call asking them to sell

all their stock back. Bacanovic told Faneuil to call his other client, Martha

Stewart, and have her sell her stock back too. This was a big issue because

Faneuil and Bacanovic should not have told Stewart about their other clients

selling of stock. When Stewart found out Waksal was selling, she called him

demanding to know why. Waksal was involved in insider trading at this point.

He had inside information about a drug that was not going to pass through
the FDA. This would affect the company greatly and cause people to lose

money. He tipped off friends and family to sell their stock too.

The Securities and Exchange Commission was tipped off about

suspicions of insider trading in ImClone from a supervisor of Faneuils, Merrill

Lynch. Bacanovic told Stewart and Faneuil that the reason why Stewarts

shares were sold back was because of a prearranged agreement that if

ImClone shares dropped under $60 per share, Faneuil was to sell the stock

off. This was their story during a number of interviews. After a few months,

Faneuil came forward and told the truth. There was no prearranged

agreement. He pled guilty to a misdemeanor charge for lying to the

government. Bacanovic and Stewart were charged with conspiracy,

obstruction of justice, making false statements, conspiring to conceal

evidence, and they were accused of lying to government attorneys to

hamper an investigation (196). Stewart was also charged with securities

fraud. She could face up to 30 years in prison and a fine of $2 million.

The trail began in 2004 where both parties pled not guilty. The star witness

for the government was Douglas Faneuil. He told the jury what really happen

between the three of them. The defense tried to make Faneuil and unreliable

witness, but it did not work. Experts took the stand to prove that alterations

were made to paperwork from Bacanovic. The jury deliberated for three

days. Stewart and Bacanovic were found guilty of lying and conspiring to lie

to conceal the fact that she had been tipped with insider information. The

people that took the stand for the governments defense, were found
credible to the jury. This included Faneuil. Stewart was given her sentence, of

5 months in jail, 5 months on house arrest, and a fine of $30,000 (200).

Analysis

Martha Stewart was in the wrong for lying to the government. I do not

believe she knew of the insider trading with ImClone. She trusted the wrong

guy, aka her broker, and it almost cost her a lifetime in prison. The person

who was most at fault in this situation was Bacanovic, the stockbroker. He

received information about another client, the Waksals, and used that

information to help Stewart avoid losing money. The second that they met up

to get their stories straight was the problem. Stewart tried to cover up what

happen to protect Bacanovic. I am not sure if she realized that at the time,

but that is how it looked. If she had been honest and straight forward with

the government, she probably would not have been convicted of anything.

Especially since she was only found guilty of conspiracy and obstruction of

justice. The judge was right in the sentence that she gave Stewart. The judge

stated, I believe that you have suffered, and will continue to suffer,

enough. (200). The sentence that was given out, was not a harsh one. I

think it was fair and just, especially because her broker got a similar one and

they were found guilty of the same thing. The broker should have been

charged with more because it was his job to protect Stewart without breaking

the law. He clearly broke the law when he told his assistant to call Stewart

and tell her to sell. Faneuil received only a $2,000 fine because he
cooperated with the government. I found that to be fair because he had the

courage to speak up.

Conclusion/ Recommendation

If I was on Stewarts team, I would have recommended that she come

forward long before the charges were filed. The only thing Stewart did wrong

was trust the wrong person. She put her trust in Bacanovic and stayed loyal

to him. However, he was the one using insider trading. If I were the

prosecution, I would have offered Stewart immunity to turn on Bacanovic. He

used his position to break the law. He did a far worse thing than Stewart did.

That would have proven a point to brokers everywhere dealing with stocks,

to not break the law with insider trading.