Insider trading has been a component of the United States market since the 1700s when William Duer used his role as assistant secretary of the Treasury to steer his bond investments. Insider trading is generally exigent for the SEC to spot, and detecting it requires plenty of speculation and deliberation of possibilities. Below are several incidents of historically climacteric moments of insider trading.
1. The Homemaker and Hoaxer: Martha Stewart
In December of 2001, the Food and Drug Administration (FDA) proclaimed that it was dismissing ImClone’s cancer drug, Erbitux. Since the medication constituted a significant portion of ImClone’s unsold goods, the company’s stock plunged remarkably. The plummet impacted many pharmaceutical investors, but the family and friends of CEO Samuel Waksal were, surprisingly, not among them. Among those with the unusual instinct for predicting the FDA’s choice days before the proclamation was the homemaking authority herself, Martha Stewart. She put up 4,000 shares when the stock was still trading in the high $50s and collected nearly $250,000 on the deal. The stock would then plunge drastically to just over $10 in the ensuing months.
Stewart insisted she had a pre-existing sell order with her broker. Still, her story continued to fall apart, and public disgrace ultimately pressured her to quit as the CEO of her own business, Martha Stewart Living Omnimedia. Waksal was taken into custody and fined over $4 million and sentenced to more than seven years in prison in 2003. In 2004, Stewart and her broker were found guilty of insider trading as well. Stewart was fined $30,000 and sentenced to a minimum of five months in prison.
2. The Market Crash Millionaire: Albert H. Wiggin
Throughout the ‘20s, a good deal of Wall Street professionals, and even some of the ordinary people, knew Wall Street was a scam machine or rigged game which was run by powerful investing groups. Suffering from an epidemic of manipulative rumors and a lack of disclosure, people thought momentum investing and coattail investing were the only feasible courses of action for generating any profit. Sadly, numerous investors found that the coattails they were riding were diversions for concealed sell orders that left them high and dry. Nevertheless, while the market continued to rise, these complications were regarded as insignificant prices to pay to reap big rewards at a later time. In October of 1929, those big rewards turned out to be yet another group of concealed sell orders.
Following the crash, the public was angry, confused, hurt, and longing for retribution. Albert H. Wiggin, the esteemed head of Chase National Bank, appeared to be an improbable suspect until it was exposed that he sold 40,000 shares of his own company with the intention of buying it later at a lower price – a grave conflict of interest.
By using completely owned family businesses to conceal the trades, Wiggin developed a position that granted him an invested interest in tearing down his company. At the time, there were no laws or regulations that specified that you could not short your own company, so Wiggin legally generated $4 million from the 1929 crash and the shakeout of Chase stock that ensued.
Not only was this a legal maneuver at the time, but Wiggin also accepted a pension worth $100,000 a year for life from Chase National bank. Public outcry eventually pressured him to decline the retirement, but Wiggin was not the only individual with immoral conduct as similar revelations led to a 1934 revision of the 1933 Securities Act that was much stricter toward insider trading to inhibit such scenarios. It was suitably nicknamed the “Wiggin Act.”
3. The Corruptible Columnist: R. Foster Winans
Even though not extremely profitable in terms of finances, the case of the Wall Street journalist R. Foster Winans is still considered a landmark case for its peculiar result. Winans was known as the writer of the “Heard on the Street” column, profiling a specific stock. The stocks that appear in the column often improved or worsened depending on Winans’ opinion in the column. Winans divulged the material of his column to a group of stockbrokers, who utilized the suggestion to acquire stock positions before the column was published. The brokers then made effortless financial gains and reportedly shared some of their illegal profits with Winans.
Later on, Winans was seized by the SEC and became involved in the middle of a very dicey lawsuit. Since the column was an individual opinion of Winans instead of material insider information, the SEC was coerced into a peculiar and hazardous strategy. The SEC charged that the information in the column was the property of The Wall Street Journal, not Winans. Due to this, the Journal could technically engage in the same practice of trading its content without any legal trouble, while Winans was convicted of a crime.
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