Martha Stewart was accused of being tipped off by her stockbroker, Peter Bacanovic, regarding a probable decline in the share price of ImClone Systems Inc. She then proceeded to sell her shares in the company a day before the prices came down. The sale was detected by the authorities due to its unusual nature leading to a wide publication of the matter. After the matter was adjudicated, Martha was not found culpable. However, the case raises a fundamental ethical concern about whether there is moral wrongdoing in her being tipped off regarding the impending fall in the share price. One main issue that arises out of the case involves the problem of a conflict of interest on the matter.
Moreover, the information provided to Martha is generally unjust since it seeks to defeat the integrity of the financial system. Insider trading is an unfair practice that favors only a few people, given that the information is not provided to all market participants, who can then act on it independently. Martha received helpful information alone and, therefore, acted unfairly and in bad faith by knowingly selling the shares to a person who had no inside information.
In financial management, insider trading is looked at in a negative way, and it is discouraged by authorities. Incidents of insider trading are unethical and harmful to fair trading practices. The practice causes negative effects in the wider financial market due to the distortion of the required rules of engagement. Insider trading distorts market efficiency as it leads to erroneous securities price formation.
According to Kelly (2017), insider trading lowers the buoyancy of the capital market, including causing depressed liquidity. Insider trading causes harm to colleagues who are not informed by the insider. It does not promote the interest of small players in the financial market and deters part of a company’s income that would be supposed to go to shareholders.