Martha Stewart is an author, editor, and a homemaking advocate. Over the last two decades Stewart has held a prominent position in the American publishing industry. She was the author of several books, hundreds of articles on the domestic arts, editor of a national homekeeping magazine, host for two popular daytime television programs, and commercial spokeswoman for K-Mart (Wikipedia). At the height of her career, Stewart’s success came to an abrupt hault as she encountered many hardships that were responsible for her undesireable reputation and diminished trust in the business world.
In December 2001 Stewart held 3,928 shares in ImClone, a New York-based biotech firm. On ...view middle of the document...
The Securities Exchange Commission alleged that, based on her conduct, Martha Stewart violated Section 10(b) and SEC Rule 10b-5 of the Securities Exchange Act of 1934 and Section 17(a) of the Securities Act of 1933.
Section 17(a) of the Securities Act of 1933 states that it shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly to 1) employ any device, scheme, or artifice to defraud 2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, or 3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser (Securities Lawyer’s Deskbook).
Section 10(b) is one of the most important sections of the Securities Exchange Act of 1934. This section prohibits the use of any manipulative or deceptive device in violation of SEC rules and regulations (Miller/Jentz, 655). The SEC has declared the insider trading rules under section 10(b) of the Securities Exchange Act of 1934. The SEC ensures that those charged with the administration of other people’s money must not use inside information for their own advantage (Bainbridge).
SEC rule 10b-5 of the Securities and Exchange Commission makes it unlawful, in connection with the purchase or sale of any security, to make any untrue statements of a material fact or to omit a material fact if such omission causes the statement to be misleading (Miller/Jentz, 655). SEC rule 10b-5 applies in virtually all cases concerning the trading of securities, whether on organized exchanges, in over-the-counter markets, or in private transactions (Miller/Jentz, 658). In order for liability to arise under rule 10b-5, the following elements must be satisfied: 1) there must be a material misrepresentation or omission 2) The fraud must be affected by the use of the mails or means of instrumentalities of interstate commerce 3) The fraud must occur in connection with the purchase or sale of a security 4) The fraud must be the cause of the loss 5) The fraud must be the proximate cause of the loss 6) The fraud must be made with scienter (Bainbridge).
Section 10(b) and SEC Rule 10b-5 cover not only corporate officers, directors, and majority shareholders but also any persons having access to or receiving information of a nonpublic nature on which trading is based. Increasingly, liability under Section 10(b) and SEC Rule 10b-5 is being extended to include those persons who trade on inside information acquired indirectly (Miller/Jentz, 658). Two theories have been developed that impose liability on those suspected of insider trading and other securities frauds. The first theory is the Tipper/Tippee theory which directly applies to the case of SEC v. Martha Stewart. In order to be held...