Why should I care about the Martha Stewart case at my company?
Whether you think that Martha Stewart is guilty or innocent, or that the government should not have brought criminal charges against her, she made a number of preventable mistakes. Thanks to all the publicity around the case, employees and executives are now more curious about insider trading, and their interest is piqued.

Your efforts to teach executives and employees to "think twice" before trading in your company's stock will prevent them from getting fired, paying fines and maybe even going to jail, which will protect your company from major embarrassment and time committed to the investigations.

We have a great written policy and blackout periods. Isn't this enough?
It's a myth to think this is enough to prevent insider trading. Employees come across confidential information at work and quickly trade without thinking about whether they should. Even though your company has a detailed insider trading policy and blackout periods, people forget the rules or lose their values when they have a chance to quickly make money or prevent losing it. This kind of lapse is even more likely to happen if the information you learn is about a supplier or a customer, not directly about your own company.

Lower-level employees -- and even some senior executives -- may also mistakenly think the rules don't apply to them. Former ImClone CEO Sam Waksal, whose tipping and attempted sales started the chain of events that allegedly prompted Martha's actions, seemed to imply this misunderstanding of the law in an interview from his jail cell. ImClone had nicely drafted insider trading prohibitions. It sent an email enforcing a blackout/no-trading period in the days before the deadline of the FDA decision on its drug application.

Yet these procedures did not stop Waksal from trying to sell his stock, buying put options, encouraging his daughter to sell her stock and tipping other relatives to sell. His case provides a much clearer picture of common insider trading situations and violations than Martha Stewart's unique case.

What mistakes did Martha Stewart make that I can teach my employees and executives to avoid?
Other than the obvious alleged mistake of lying to government investigators and destroying or tampering with evidence, she fell into three traps.

First, Stewart claims she had a stop-loss order to sell ImClone stock when it fell below $60 per share. Yet no documentation of this arrangement exists, unless shown otherwise at trial. Whenever executives plan to sell stock in the future at certain prices or at certain times of the year, such as to pay for college tuition or a big house renovation, encourage them to write it down in a formal trading plan under SEC Rule 10b5-1.

Second, the brokerage firm that works with your company to handle option execution and stock trades by employees and executives cannot legally reveal what insiders are doing with their stock. Therefore, explain to your executives that should a broker tell them confidentially that his client, a big wheel at X company, is selling or buying his company stock before this appears in SEC filings (such as Form 144 or Form 4), or that his family members are trying to, they want to avoid any dealings with that broker.

According to the government, the assistant of Stewart's broker told her about the trading activities of Sam Waksal and his daughter just before Stewart decided to sell her shares of ImClone stock.

Third, revealing confidential information about other clients' trades, and encouraging others to piggyback on their trades, is a clear violation of NASD and brokerage firm rules. Even if Stewart is acquitted of criminal charges, she still has to explain in the SEC's civil case why, as a former stockbroker and CEO of a public company, she traded after being told this confidential information.

My executives and employees know about insider trading, so why should I worry about them getting into trouble for it?
Sometimes they can be too smart for their own good! Your smart executives and employees may believe they can draw any inferences they want about the future direction of any company's stock price from information they discover, even when they learn that information at their job or from some other non-public source.

Martha Stewart was never told that ImClone's FDA application was going to be rejected, which was the event that caused the stock price to fall. Instead, she inferred this result from non-public information about the stock sales of company executives and family members. "Why else would they be selling?" she must have thought, thus making the mental connection to the unannounced FDA action and prompting her to sell her stock. Knowing this information at the time of the trade, combined with no formal trading plan to sell the stock when it dropped below $60, remains the weakness of her defense.

Your executives and employees can think they reached a brilliant conclusion or that they are somehow entitled to use information that falls into their lap. But this will be hard to explain if the SEC or U.S. Attorney calls. In addition, drill home to executives and employees that any information they learn on the job about your company or another company belongs entirely to your company under the "misappropriation theory" of insider trading.

BRUCE BRUMBERG is editor of myStockOptions.com (www.mystockoptions.com) and co-editor of the NASPP's Stock Plan Advisor newsletter (www.naspp.com). He is also producer of Think Twice Insider Trading Prevention Videos (www.insidertradingvideos.com)
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FEI's flagship publication, Financial Executive magazine, has won another award -- an Eastern Regional gold (first place) award from the American Society of Business Press Editors (ASBPE) in their annual competition. FE won in the editorial division for its March 2002 special section on "Best Practices." This is the fourth juried award FE has won in the past two years. The award was presented in Boston on Monday, June 9.