Why Lying Is Actually Worse than Insider Trading…

In Business Tips, Litigation & Lawsuits, White Collar Criminal Defense by Larry DonahueLeave a Comment

In 2004 Martha Stewart spent five months in a federal prison in Alderson, West Virginia.  After she served her time she still had to fulfill two years of unsupervised release, pay a large amount of money in fines to the SEC and step down as CEO from her company, Martha Stewart Living Omnimedia.  To this day, most Americans incorrectly believe that Martha Stewart’s prison time was a result of Insider Trading.  Such is not the case.  Charges of Insider Trading against Martha were dropped.  The charges that stuck were those of obstruction of justice and making false statements to the SEC and FBI.  Martha Stewart is essentially a convicted liar, not Inside Trader. 

Martha Stewart acted on gossip.  What landed her in jail was lying about it.

It all started with a stock broker at Merrill Lynch by the name of Peter Bacanovic.  He was a broker to Martha as well as for a gentleman by the name of Sam Waskal, who owned a company called ImClone.  When ImClone failed to receive the FDA approval of their primary product, Erbitux, Sam ordered Peter to sell 5 million dollars worth of his ImClone stock prior to the FDA’s disappointing announcement being made public.  What Sam asked Peter to do is a text book example of Insider Trading.  He made a stock purchases or sale based on knowledge or information that was not public and privy only to him, as a corporate insider.

Peter, being not only a helpful stock broker but a friend to Martha Stewart, instructed his assistant at Merrill Lynch to call Martha and give her the “heads up” that Sam was selling a large amount of ImClone stock.  This tidbit of information was of interest to Martha since she was the owner of ImClone stock.  While neither Peter nor Martha knew exactly what was prompting Sam to sell such a large amount of stock, they decided to follow suit.  Now, for Stewart to have been successfully prosecuted for Insider Trading, she would, by definition, have had to have known that she was acting on a piece of non-public information that was only known to company insiders, like Sam.  Since Stewart was not associated with ImClone via employment or a board membership, she really did not have access to non-public or insider information. So, making an Insider Trading charge stick became problematic for prosecutors.

Arguably, what Martha did or should have known was that her decision to sell her shares of ImClone was based on a “shady tip” that conflicted with her stock broker’s professional duty, (that duty being to keep his mouth shut about what his other clients are buying, selling and discussing with him)  Prosecutors felt that Peter and Martha, both, should have been savvy enough to know that the motivation for Sam to suddenly sell his stock in ImClone was probably based on some information he knew only because of his “insider knowledge” regarding matters of the company; even if they were not aware exactly what that insider knowledge was.

The Investigation

The investigation pressed on and both Martha and Peter were extensively questioned.  Maybe Martha panicked under pressure when talking to authorities about the situation. Maybe she felt she could talk her way out of the problem as her role of a successful CEO had prepared her for such critical discussions. Whatever the motivation, she ended up spinning a web of lies to try to protect herself and Peter.  (Specifically, that there had been a pre-existing agreement to sell her ImClone stock should the price fall.)  Ultimately, her attempts to protect herself against an Insider Trading charges backfired and led instead to her being charged with obstruction of justice and conspiracy.       

For his part in the scandal, Sam went on to serve prison time for participating in and profiting from Insider Trading.   Peter went on to serve prison time and pay fines for his role in the debacle as well.   As for Martha, as well documented in the media, she went to prison.    

Welcome to Club Fed

At the end of the day, there are many lessons to learn from the “tip” that landed America’s favorite homemaker in Club Fed.  The most important being that “lying” to the FBI includes anything that is said to any agent, regardless if you are under oath at the time the statements are made or not.  The second tip would be to not try to spin a story to try to cover up any wrong doing you may or may not have participated in.  Despite all the press the ImClone case had in 2003-2004, such high-profile individuals such as Michael Flynn, Bernie Madoff and former Governor Rod Blagojevich have repeated Martha Stewart’s mistakes themselves and landed themselves in prison as well for similar issues.

[Read the Newsweek Article: WHAT DO MICHAEL FLYNN AND MARTHA STEWART HAVE IN COMMON? A LIST OF PEOPLE CHARGED WITH LYING TO THE FBI]

If you find yourself a party to an Insider Trading investigation, even if you feel like you have not done anything illegal, it is important to do two things right away.  First, call a lawyer and second, say nothing until you have had time to consult with your attorney.  Learn lessons from those who have already paid the price:  Lying to the FBI or any law enforcement agent is always a bad idea, even if you think it will somehow help your case.   Let an experienced lawyer advise you on your options and what you should and should not do.  It could literally save you years in prison. 

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