In 2015, Martha Stewart sold her brand name for just a fraction of its original worth.
Many have attributed the devaluation to Stewart’s widely reported legal troubles concerning
insider trading.
In 2004 she was sent to prison for 5 months for related charges.
So, what did Martha Stewart do wrong?
What exactly is insider trading?
Well, in 2001, Stewart allegedly obtained non-public knowledge that a particular stock
investment was about to lose money, and she dumped the stock early.
This kind of knowledge is also known as “insider information."
It is only available to high level executives or major shareholders in a company, known
as corporate insiders.
While corporate insiders are allowed to trade any stocks, they must register potentially
conflicting trades with the Securities and Exchange Commision . It’s illegal to use
insider information to profit from potential stock changes.
This disadvantages public stockholders, and betrays investor trust, which is vital to
the health of the stock market.
However, just because insider trading is illegal, doesn’t mean people don’t still do it.
There are usually huge amounts of money on the line and the risk of getting caught is
often very low.
A study cited by the New York Times in 2014 claims that a quarter of all public-company-deals
involve some kind of insider knowledge.
But the SEC has limited resources, so they only pursue the largest, and most legally
viable cases.
They can also be slow to respond to reports of illegal activity, taking more than 2 years
on average to announce litigation.
Additionally, many criminal charges aren’t legally viable because the divide between
intentional insider trading and pure coincidence is often murky.
Many traders simply claim they got “lucky” to have sold off their stock before it devalued.
This gray area is one of the reasons that Martha Stewart was never actually convicted
of insider trading itself.
She went to prison because she was caught lying to federal investigators about her role
in the scandal.
The SEC does its best to monitor suspicious trades.
They act on tips or complaints, and they have market surveillance tools that track when
large purchases or sales of stock happen.
If they do make a conviction, any insider tip-givers or tip-receivers can get 25 years
in prison.
Individuals may also be fined up to $5 million dollars, and companies may be fined up to
$25 million dollars.
The largest aggregate fine for insider trading in history happened in 2014, where multiple
guilty parties working with a hedge-fund group faced penalties totalling $1.8 billion dollars.
Insider Trading is one of the most common “white collar” crimes, perhaps because
it often seems to be victimless.
But a prominent US attorney involved in many wall street executive prosecutions, says “nothing
could be further from the truth...The market is a victim."
And the loss of trust in the public stock market will hurt the entire country’s economy.
Ever wondered what it would take to crash the stock market?
We’ve got a video on some of the worst market crashes in history!
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