She was a star in the USA, loved by many as the queen of home cooking and decoration. Her stardom opened many doors with some proving slightly too tempting. The queen of American home making used some of her contacts to enrich herself.
Martha Stewart, best known for her cook books and interior design television shows and magazine, fell from grace in 2004 when she was convicted of insider trading, costing her not only her freedom but also forcing her to rebuild her empire.
Who is Martha Stewart?
Also best known for her cooking and home decor work, Martha Stewart initially worked in a very different field for what she became known for. In the early days of her professional life, Stewart worked as a stockbroker. It was only after nine years, in 1976, that she was to set the foundation for her later career when she co-founded a catering business.
One year later, the partnership dissolved and Stewart struck out on her own. A chance encounter with Alan Mirken, the head of Crown Publishing, who, impressed with her work, asked her to write a cookbook. This, in fact, was the crucial changing point, with the rest being history. Martha Stewart became one of the most famous names in North America and build an empire around her cooking and design work.
Yet, this was all to come to a rather abrupt end when she, at this time a multi-millionaire, used inside information that she had received from her broker for her own gains.
What was Martha Stewart convicted for?
Insider trading. Martha Stewart was convicted of securities fraud and obstruction of justice. If you are not familiar with what insider trading is: in essence, it is the practice of using information from an inside source working for or with a company to make the decision on whether or not to buy or sell a stock, options, bonds, or any other financial asset for personal gains. An inside source can be top management or an employee with knowledge of an important upcoming strategic change, business deal, legal dispute, or regulatory decision that, unknown to the public, will have a significant effect on the business and thus affect the share price of the company.
But how did Martha Stewart profit from insider information? She held stocks in IMClonse System, a biopharmaceutical company that was acquired by Eli Lilly in 2008. IMClone Systems developed medicines for cancer treatments and diagnosis. Unknown to the public at the time of her trade, the company was to receive an adverse ruling by the Food and Drug Administration. When its cancer treatment drug Erbitux was not approved by the FDA, the stock plummeted. On December 28th, 2001, IMClone Systems' shares fell by 16%, but neither the founder Samuel Waksal and his family, nor Martha Stewart were affected by the price drop as all had sold their shares prior to the announcement. Stewart sold all her shares, totaling 3,928, one day earlier and consequently avoided losing more than $ 45,000.
Informed by her broker that the CEO and his family had sold all shares in anticipation of the adverse effect the FDA rule would have on the company's share price, Stewart acted and followed suit.
Her celebrity status led to a media frenzy. Few would have assumed that their favorite home and décor lifestyle guru possessed such financial acumen. But then again, she did start her career in finance.
After a six-week jury trial, Stewart was sentenced to five months in prison and two years of supervised release. In addition, she was fined $ 30,000. But this was not the end of the story. In a subsequent civil case, she was ordered to pay almost $ 200,000 in addition to her previous sentence. Not only was Stewart given a prison sentence and fined financially, the once proud CEO of her own empire was also banned from serving in an executive or board role for five years.
Since the insider trading scandal, however, Martha Stewart has clawed her way back and rebuilt her career and empire.
Who were the victims?
As this was an insider trading scandal, rather than a Ponzi scheme or a massive corporate financial or banking scandal, the impact was very contained. Martha Stewart and Waksal, who was sentenced to almost seven and a half years in prison were the only “victims” in that they had to serve time. Besides them there were no other victims in this case.