So how does insider trading work in the real world? Well, let’s take a look at two fairly recent famous insider trading cases, one concerning Martha Stewart, and the other Mike Milken – both billionaires.

According to the SEC, Martha Stewart sold approximately 4,000 shares of ImClone stock (a biopharmaceutical company) on December 27, 2001, one day before the Food and Drug Administration ("FDA") announced that a drug made by ImClone failed to get approval. The day after she sold the stock, on December 28, 2001, the stock dropped in price by 18% and she avoided a loss of approximately $46,000. But Martha wasn’t the only one to sell around this time. In fact, many of the other insiders at ImClone also sold their stock around this time in December, including the Samuel Waksal (the founder of ImClone), Aliza Waksal, Jack Waksal, John Landes (ImClone’s lead attorney), Ronald Martell (Vice President), and Peter Bananovic, Martha Stewart’s broker. They all each sold millions of dollars worth of stock, only to watch the stock plummet shortly thereafter.

Martha Stewart denied the insider trading charges brought against her, and said she did nothing wrong. However, a jury found otherwise and convicted her of 4 criminal counts including making false statements, conspiracy, and obstruction of justice. But the insider trading charge was dropped. She was sentenced to five months in prison, and two years probation for her criminal acts.

Mike Milken, one of Forbe’s 500 richest people, was indicted on 98 counts for insider trading in 1989. Milken’s attorneys entered a plea bargain with the prosecution, and Milken plead guilty to 6 violations (none of which were insider trading) and was sentenced to 10 years in prison. However, after only 2 years he was released from prison for good behavior.

These were both very brief overviews of some famous individuals who were at least indicted for insider trading. But neither Stewart nor Milken were actually convicted of insider trading, even with all the evidence that the prosecution had against both individuals. As you can see, in real court cases, where most insiders are wealthy, it’s not easy to prove that insider trading occurred.

Next, let’s explore the differences between insider trading and misappropriation.