Grzebielski on Martha Stewart

Why Martha Stewart Did Not Violate Rule 10b-5: On Tipping, Piggybacking, Front-Running and the Fiduciary Duties of Securities Brokers, by Raymond Grzebielski, DePaul University - College of Law, was recently posted on SSRN.  Here is the abstract:

Martha Stewart settled insider trading charges brought by the Securities and Exchange Commission for her trading in ImClone stock. The article argues that, in fact, Martha Stewart engaged in no illegal insider trading when she sold her ImClone stock after her broker told her that an ImClone insider was trying to sell all of his significant ImClone holdings.

The article provides the Supreme Court's interpretation of the law of insider trading. There is no proof that Martha Stewart was aware of specific nonpublic ImClone information. Nor should her knowledge of an ImClone insider's sale order be sufficient to impute such knowledge to her. Consequently, she did not violate rule 10b-5 for trading as a tippee of nonpublic corporate information.

Martha Stewart also did not violate prohibitions on insider trading by participating in a breach of fiduciary duty by her broker. The broker's disclosure of the order to Martha Stewart may have violated some state law fiduciary duty. But a fiduciary duty only tangentially related to the insider trading should not give rise to a federal securities law violation. Nor should the employer's policies on confidentiality give rise to a breach of fiduciary duty since the broker was actually furthering his employer's financial interest.