Martha Steward's Insider Trading - Case Study Example

The paper “Martha Steward’s Insider Trading" is a dramatic example of a case study on finance & accounting. The financial world relies on the integrity of information to make numerous decisions. The participants in the stock market are not supposed to have asymmetric information. Asymmetric information occurs when one party has superior information compared to others (Investopedia, 2011). Since everyone is supposed to have equal access to information the Securities and Exchange Commission prohibits the practice of inside trading. An insider can be defined as a person who is restricted from some kinds of trading in a company’s stock because he has access to privileged information (Teweles & Bradley & Teweles, 1992, pg. 538). The action of inside trading violates the fiduciary duty of the board of directors and the executive management team to safeguard the interest of their shareholders. Insider trading gives an unfair advantage to a person in the stock market. That person can distort the price of common stocks by either selling or buying massive amounts of a stock based on privileged knowledge that can help that person illegally obtain above-normal profits from the transaction.

Martha Steward took advantage of a personal relationship with Sam Waksal, CEO of ImClone, to obtain privileged information concerning the rejection of FDA approval for its cancer drug Erbitux (Hoffman, 2007). She used that information to avoid losses in the market by selling all her ImClone stocks a day before the FDA rejected the drug. The stock price went down after the announcement. I believe that the shareholder's interests were jeopardized. The CEO of the company put the company at risk by revealing trade secrets to outsiders. Martha should have never received that information from Waksal. The firm has to question whether its CEO had incurred in similar unethical behaviors in the past to help him and his friends' profit in the market. The interests of the shareholders were jeopardized because its CEO violated the SEC mandates. He placed the company at risk of fines and civil lawsuits.    

The Martha Steward case affected a lot the investor community. The general public was discussed at the fact that a billionaire worth nearly $750 million dollars would have such low ethical standards to use insider information to further increase her fortune. The accounting profession was at a crossroads at the time of this scandal which occurred in December 2001. The following year the SEC and the US Congress passed new legislation called the Sarbanes Oxley Act (SOX) of 2002. SOX raised the accountability of corporate officers. Unscrupulous CEOs such as Sam Waksal after the passage of SOX are now liable for up to 20 years in prison if found guilty of fraud. Society learned how important it is to protect information from getting into the wrong hands. Inside trading is now viewed in a harsher manner by society. The business community after this case realized that corporations needed better internal controls to prevent leakages of information that can hurt the integrity of the stock market. I believe that another lesson that was learned from the Martha Steward case is that greed can poison anyone.