Imclone Case

¶ … Clone case came to the attention of the SEC because it involved the CEO of ImClone, Sam Waksal, who had the same stockbroker as Martha Stewart, and the two were friends. Waksal found out at about an FDA ruling that was going to negatively affect the value of ImClone shares, and sold his shares on the basis of this information. That alone is insider trading, because Waksal was in a privileged position within the company, and traded on information that had yet to be released publicly.

The relationship between Waksal and Stewart, along with the broker, brought the case to the attention of the SEC. Undoubtedly, the high profiles of the individuals involved was a factor. The specific issue here was insider trading, yet ultimately Stewart was never convicted on that. Waksal was, because he was the insider. Stewart was in a position to receive this privileged information, but she was the beneficiary of the trade, not Waksal, so her actions were not strictly insider trading in the letter of the law, only the spirit.

Stewart ended up convicted of securities fraud, obstruction of justice and other counts. She had not been cooperative with the regulators, but they were unable to prove that she had traded on the basis of privileged information. By law Stewart should have been prosecuted. The integrity of the financial system is of critical importance to ensuring efficient and effective capital markets.

Stewart was on the board of directors of the New York Stock Exchange, so had a duty of care to the NYSE and SEC to hold the highest ethical standards. But any breach of the law is fair game for prosecution and Stewart was convicted on nine counts. This is entirely opinion, speculative of course, but I believe that being famous did make things worse for Stewart.

The SEC likely saw an opportunity to show that it was serious about enforcing the rules, and Stewart's position with the NYSE made it doubly important. Stewart's crime, financially, was not particularly serious, but the SEC needed to make sure that there was no impression that a rich and famous person could simply flaunt the law.

The tenor of public discussion about business ethics was harsh at the time and investors were losing faith in the regulation of the financial markets, so the SEC could not let a visible person get away with anything. The prosecution was fair but the SEC had no choice to make a public target of Stewart because it had to send a message to the investing community. Stocks change price based on pretty much any factor you can name.

Internal factors are always critical, but sometimes there are external factors like the state of the economy that play a role as well. Even just the expectation that things are going to change will affect the price of a stock. If the expected future cash flows are affected in any way, the price of the stock will change, and different people have different views about a stock's future so prices are subject to constant change. I do not own stock. I would take into account.