Insider trading can be defined as an act of purchasing or selling shares of a company based on a material, private information. The U. S Security laws proscribe an executive of a company from using nonpublic information about his company thereby enriching profit from trading in that security. Securities and Exchange Commission Rule 10 b-5s  imposes prohibition on insider trading. Trading on shares can be carried over by insiders only after the information become public and this is to avoid unfair trade that could adversely affect the shareholders and general public.
Employees of a company would be binding by an agreement to preserve the shareholders interest first. If an employee acts upon insider information or tips and enrich unjustified profit, then this is against law. In December 2001, Martha Stewart was said to be involved in insider trading scam. It was alleged that Martha and senior executives of ImClone Inc disposed their holding in the company relying on an information that U. S Food and Drug Administration. [FDA] Authorities have declined to give their approval for a drug applied by ImClone.
SEC made a through investigation and finally filed a charge against Martha and senior executives of ImClone for engaging in Insider trading. Stewart was informed by her share broker that ImClone stock may decline as FDA may not accord its approval for new cancer prevention drug and Waksal, CEO of ImClone and his family already sold their substantial holding of ImClone. On hearing this, Stewart ordered that 3928 shares of ImClone held by her to be sold. After the news from FDA that application for new drug was rejected became public, ImClone share price dwindled by 16%.
It was alleged that Stewart was benefited to the extent of $ 45,673 due to this insider trading on ImClone shares. Waksal and Stewart were acted on unpublished information which were not available to public and thus made undue profits over the sale of shares relying on insider information. SEC imposed civil penalty of $ 45,673 on Stewart, the amount she profited from selling ImClone shares relying on insider information. Further, SEC imposed a prejudgment interest of $12,389 and levied a civil penalty of $ 137,020. SEC also imposed non-monetary penalties on Stewart.
Stewart was prevented from acting as director of public companies for five years and also imposed limitation for serving as an officer or employee of a public company and also prohibited her from engaging in activities like financial disclosure, financial reporting, internal control, audits, monitoring and complying with federal security laws. Stewart later informed that she had lost about $ 400 million dollars in legal fees, stock value and business opportunities from the time she was charged with insider trading. [Koch, 2004].