From Boesky to Martha Stewart: 5 Famous Insider Trading Cases

In investing, using non-public information for personal gain is called insider trading. Although the practice is illegal, many have attempted this market manipulation to avert huge losses or earn riches. Today, we will analyze five famous insider trading cases, from Martha Stewart to Ivan Boesky, which ended with substantial fines and even prison sentences. 

What is insider trading?

MNPI is any information that can significantly affect the decision to buy or sell a security that is not legally public domain and is known to a limited group of people. Most famous insider trading cases involve high-ranking officers or government officials.

Legal vs. illegal insider trading

Insiders acting on non-public information to trade company securities constitutes a breach of trust and, most often, a law violation. The only legal form of insider trading is described in detail by the financial authorities.

In the United States, the U.S. Securities and Exchange Commission’s (SEC) Rule 10b5-1 provides a framework for insider trades based on a pre-existing contract or written and legally binding plan for trading after a period of time. 

For example, a board member with retirement plans can make a written order to sell a pre-set amount of the company’s shares every three months. This way, even if they receive insider information, such insider trading would be legal.

Famous insider trading cases

There’s no debate about it: the following examples were definitely illegal and had serious repercussions on those involved. Here are some of the most famous insider trading cases:

Martha Stewart & Sam Waksal (ImClone Systems)

For a good reason, Martha Stewart’s ImClone Systems’ stock sale is likely the most widely known insider trading case.

In December 2001, the Food and Drug Administration (FDA) failed to approve ImClone’s cancer drug Erbitux. Sam Waksal, the company’s CEO, learned this information before the FDA made it public. His close family and he tried to sell tens of millions of dollars worth of shares before the stock price inevitably plummeted.

Waksal was sentenced to seven years and three months in prison, with an order to pay over $4 million. Although Martha Stewart was not charged with insider trading, she was found guilty of conspiracy, obstruction of justice, and making false statements to investigators. She was sentenced to five months in prison, five months of home confinement, and a $30,000 fine–a tarnished reputation was just collateral.

Jeffrey Skilling (Enron Corporation)

The Jeffrey Skilling insider trading case is inherently tied to Enron, an American energy company that filed for bankruptcy due to Skilling’s role as Enron’s CEO.

Under Skilling’s leadership, the company adopted a complex accounting practice and aggressive investment strategy that allowed Enron to inflate profits and conceal debt through special purpose entities (SPEs). In other words, the company thought it did not need any “assets” to substantiate its investments.

In 2001, Enron’s financial shenanigans became known to the public, leading to the largest bankruptcy in the U.S. at the time. Jeffrey Skilling knew this would happen and sold about $60 million of Enron stock before the bankruptcy while encouraging others to invest in the company. 

In 2006, Skilling was convicted on 19 counts of conspiracy, securities fraud, and insider trading. He received 24 years of jail time, later reduced to 14 after an appeals agreement. Ultimately, he was barred from serving as an officer or director of any public company.

His case received notoriety due to controversial statements and attitudes expressed while at the helm of Enron, including a joke in which he compared the energy crisis-embroiled California to the Titanic and a claim in an interview that his company was “on the side of angels.”

As a direct consequence of Skilling’s actions, the U.S. Congress introduced the Sarbanes-Oxley Act of 2002 to improve transparency and prevent financial fraud. 

Dennis Levine (Drexel Burnham Lambert)

The key figure in one of Wall Street’s most prominent financial scandals in the 1980s, Dennis Levine, developed a sophisticated scheme to profit from his knowledge of ongoing company mergers and acquisitions.

An investment banker at Drexel Burnham Lambert, Levine built a network of financial experts that he used to obtain MNPI. He operated through a Bahamian subsidiary of a Swiss bank, Bank Leu, to avoid detection and earned over $12.6 million between 1980 and 1986.

Numerous people in this long practiced “piggybacking” or copying Levine’s trades. Although Bank Leu maintained its long tradition of secrecy and the Bahamas had some of the strictest bank secrecy laws, many of his trades went through a broker at Merrill Lynch (who also practiced piggybacking). The brokerage discovered the scheme and forwarded it to the SEC, leading to Levine’s downfall.

Levine pleaded guilty to securities fraud, tax evasion, and perjury, returning all profits, paying a hefty fine of $362,000, and serving two years in prison. He also agreed to cooperate with the authorities and exposed his insider trading network, leading to other cases, including those of Michael Milken and Ivan Boesky. 

Ivan Boesky (Ivan F. Boesky & Company)

Another famous Wall Street insider trading case is that of Ivan Boesky, who became rich by betting on corporate takeovers while possessing MNPI. Initially a link in the long insider trading chain of Dennis Levine, Boesky himself turned into an informant for the financial authorities.

In fact, Boesky made millions by trading confidential data about mergers and acquisitions through the established network of insider information traders, for example, the $136 million from the Beverly Hills Hotel sale. He had founded his stock brokerage company with $700,000 in 1975; by 1986, he acquired $50 million in illegal profits.

His activities came to light in 1986 when Dennis Levine gave him off to the SEC. Facing prosecution, Boesky became an informant and ended up paying a $100 million fine and serving two years of prison time.

Michael Milken (Drexel Burnham Lambert)

Once again on this list is an insider trading star from the 1980s and, once again, Drexel Burnham Lambert. Michael Milken, the head of the high-yield bond department at the infamous investment bank, revolutionized the use of “junk” bonds to finance corporate takeovers.

As part of his aggressive investment strategy, Milken frequently crossed the boundaries of the law, including using confidential information to pursue profitable trades and facilitate illicit deals. People from the exposed insider traders network, including Ivan Boesky, exposed these methods to the SEC.

In 1989, Milken was indicted on 98 counts of racketeering and fraud, including securities fraud and insider trading. One of the charges was that Boesky paid Drexel $5.3 million in 1986 for Milken’s share of profits from illegal insider trading. He was sentenced to 10 years in prison. His sentence was later reduced to two years, and he was fully pardoned by President Donald Trump in 2020. 

The bottom line

Out of many famous insider cases, we chose five prominent and relevant ones to show you how exactly the SEC’s efforts to pursue and sanction illegal insider trading work. It should be noted here, however, that not all insider trading is prohibited. On the contrary, some rules guide legal insider trading, and these trades are regularly reported to the public–if you know where to look.

If you want to enrich your investing strategy with insider trading, specialized trackers like Finbold Signals make all this more simple and effective. Take advantage of this resource today and start making better-informed trading decisions.

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.

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