Martha Stewart's stockbroker, Peter Bacanovic informed Stewart that two of his clients, Samual Waksal, CEO of the biopharmaceutical company ImClone and Waksal's daughter, had just sold all of their ImClone Stock. They knew the FDA was about to reject Erbitux, a key cancer drug InClone has developed.
After receiving the information about Waksal's transaction, Stewart instructed her broker to sell all her shares of ImClone stock. The next day, the FDA announced it's rejection. Stewart avoided a $45,673 loss
18 months later, the Securities and Exchange Commission (SEC) filed charges against Stewart and her broker.
The grand jury did not indict Martha on insider trading, however, she was convicted of the four remaining counts against her. She was sentenced to five months in a minimum security prison.
Prohibits fraud associated with the purchase or sale of all securities.
It shall be unlawful for any person, directly or indirectly, by use of any means or instrumentally of interstate commerce or of the mails, or of any facility of any national securities exchange...
a. to employ any device, scheme or artifice to defraud
b. to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of circumstances under which they were made, not misleading, or
c. to engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
A preliminary drilling in November 1963 suggested that the land held great amounts of copper and zinc. This information was supposed to be kept secret; not even officers and executives at TGS were supposed to know about the results of the drilling.
During the time from November 1963 to March 1964, certain directors received "tips" and purchased TGS stock or options to buy shares a fixed price.
When the drilling began in November 1963, these people had owned 1,135 shares of TGS stock and posses sed no calls, thereafter they owned a total of 8,235 shares and possessed 12,300 calls.
The SEC brought suit against TGS and 13 of its directors, officers, and employees for violation of section 10b of the exchange act and SEC rule 10b-5, seeking an injunction to prevent TGS from publishing misleading press releases and requesting rescission of TGS's purchases and stock options.
Anyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it in order to protect corporate confidence, or he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains disclosed.
Verdict: All transactions in TGS stock or calls by individuals apprised of the drilling results were made in violation of rule 10b-5. Reversed in favor of SEC.