Overview of Insider Trading

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Introduction On June 4, 2003, the Securities Exchange Commission announced that it was pursuing charges against investor Martha Stewart and stock broker Peter Bacanovic for securities fraud. The fraud occurred on December 27, 2001 when Stewart sold stock in ImClone Systems, after receiving an unlawful tip from Bacanovic, who at the time was working for Merrill Lynch. The SEC also accused the two of attempting to cover up the insider actions, and of making false statements regarding the ImClone trades to SEC investigators (SEC, 2003). Stephen Cutler, the SEC director of enforcement said in the SEC's press release about the charges that "It is fundamentally unfair for someone to have an edge on the market just because she has a stockbroker who is willing to break the rules and give her an illegal tip. It's worse still when the individual engaging in the insider trading is the Chairman and CEO of a public company." This statement and the philosophy behind it is a central part in the debate about the merits, not so much about the case against Stewart but against the prosecution of Stewart. The SEC sought redress not only in the form of monetary penalties and prison time, but it also sought to have Stewart removed from a position as officer of Martha Stewart Living Omnimedia (SEC, 2003). The Case ImClone was a relatively small pharmaceutical firm. At the time of the offense, ImClone was awaiting a decision from the Food and Drug Administration regarding the status of Erbitux,
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