Martha Stewart is cold busted.

Unless her lawyers can do some serious sweet-talking, it seems certain that “America’s favorite homemaker” will soon be found guilty of insider trading. As you no doubt know, late last December, Martha sold her 4,000 shares of ImClone … just before an important announcement that crushed the share price.

Martha thought she could get away with it. Her alibi was airtight — or so she thought. But as it turns out, there are discrepancies in her story AND her broker’s story. The more you learn here, the more it smells funny. And the nail in the coffin may be that the sales assistant to Martha’s broker disputes both of their stories … and he may be the most legitimate, independent witness.

Here’s the gist of Martha’s insider trading scandal: ImClone CEO Sam Waksal has already been charged with insider trading for telling friends and relatives to sell ImClone at the same time Martha Stewart sold. Sam had a brokerage account with a broker that was a former ImClone employee. That broker was also Martha Stewart’s broker — the one she is accused of placing her insider trade with. Martha Stewart and Sam Waksal were friends. Iin fact, Sam dated Martha’s daughter. You get the picture …the circumstantial evidence against Martha is overwhelming. And now the hard evidence is beginning to stack up as well.

The real question here is: Is Martha Stewart that dumb?

By knowingly trading on inside information, Martha Stewart knew she was risking her reputation. She was jeopardizing her businesses. And she could go to jail. All for $60,000 — which is about what she would have lost if she didn’t trade on inside information. What’s $60,000 to someone competing with Oprah to be the richest self-made woman of our time (both closing in on a net worth of a billion dollars)? Nothing!

Martha traded on a “hot tip” from an insider. While it sounds glamorous, she’s in serious trouble.

When it comes to hot tips, it’s either a bum insider tip (which could cost you a bundle) or it’s a good insider tip … in which case you’re then guilty of insider trading. In either case, you really come out a big loser.

My one and only experience with what I believed was a “hot tip” happened during my early days in the financial world.

“Psst …” the guys at my brokerage firm whispered, “we know IBM’s earnings numbers are going to be bad tomorrow … so we’re all buying put options to capitalize as it crashes.” I caved in to the pressure and bought as well … and soon after I did, I was dreaming of where I would spend the money.

The whispers were right — IBM’s numbers were horrible. AND they were wrong — the share price soared as Wall Street cheered IBM’s restructuring plans. I’d never seen a pile of my own money vanish so quickly in my life. And it was a great lesson for me.

I learned that there is no such thing as a “hot tip” from an insider. I also learned that these guys really didn’t know anything. Oh, sure, they talked big … but they were just guessing. Time and again, they had great story after great story … and time and again, they lost money.

Then, not long after that, some guys in
the office got taken in for insider trading. They actually KNEW something! (It was very similar to the Martha Stewart case.) And what did it get them? A TON of trouble!

What great lessons for me to learn firsthand. And — fortunately — they didn’t cost me too much in the grand scheme of things.

The first lesson is that — no matter how “inside” the story sounds– most hot tips just don’t pan out. The second lesson is that your life gets turned upside-down in a hurry if an insider tip you act on actually turns out to be true.

So, ultimately, I formulated my own idea of the best investment tip: THERE’S NO SUCH THING AS A HOT TIP.

Either you lose money or you go to jail … those are the only two possible outcomes. So the next time someone passes along a hot tip that smells of insider information, politely thank him. But, please, don’t trade on it.

[Dr. Sjuggerud is the editor for “Dr. Sjuggerud’s True Wealth,” for more details on how you can subscribe to his publication please follow this link: www.agora-inc.com/reports/TWLT/TrueWealthETRPD]

Steve Sjuggerud

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