Insider Trading Essay
Our era aptly has been styled, and well may be remembered as, the “age of information. “Francis Bacon recognized nearly 400 years ago that “knowledge is power,” (Nickels &,McHugh 2011) “Insider trading is an unethical activity in which insiders use private company information to further their own fortunes or those of their families or friends”.
Insider trading is a term that includes both legal and illegal conduct. The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.
(Agnello & Donnelley 1975) Stated if every member of a community has unlimited access to the resources of the community, then the community’s resources soon will be used up unless they happen to be available in infinite supply. The system of private ownership of assets, by contrast, effectively can use the price system to ration the assets in such a way as to preserve them properly and to benefit all members of the community.
The Insider Trading Debate
Arthur Levitt stated in 1998 that more Americans were investing in the stock market than ever before and Americans had almost twice as much money invested in the stock market as in commercial banks. The illegal version of insider trading most of us think of; is the type of insider trading that achieved wide-spread in the 1980’s with the SEC’s civil cases and the United States Department of Justice’s criminal cases against Michael Milken and Ivan Boesky which inspired even Hollywood’s imagination with the movie “Wall Street”. It is the trading that takes place when those privileged with confidential information about important events use the special advantage of that knowledge to reap profits or avoid losses on the stock market, to the detriment of the source of the information and to the typical investors who buy or sell their stock without the advantage of “inside” information.
According to ( Manne 1966) “Some argue that insider trading is a legitimate form of compensation for corporate employees, permitting lower salaries that, in turn, benefit shareholders. It provides an incentive to innovation, some argue, by promising huge rewards for developing a plan or product that will lead to a precipitous rise in the stock”. (Easterbrook 1985). Found that “Members of the legal community denounce the practice of insider trading. They view insider trading as an unethical abuse of power by corporate officers and directors. people who have invested resources to develop their human capital to better assimilate information, or corporate officers and directors are always going to have superior access to information”.
The case of USA vs Raj Rajaratnam
An excellent example referring to insider trading would be the Raj Rajaratnam incident. (Belczyk & U.S. Attorney’s Office 2011). A federal jury in the US District Court for the Southern District of New York found that Galleon Group hedge fund founder Raj Rajaratnam orchestrated the largest hedge fund insider trading case in US history and convicted Rajaratnam on all 14 counts of insider trading including; five counts of conspiracy to commit securities fraud and nine counts of committing securities fraud from 2003 to March 2009. In just over 18th months, this office has charged 47 individuals with insider trading crimes; Rajaratnam is the 35 person to be convicted. On Oct. 2011 Rajaratnam was sentenced to 11 years in prison In addition to his prison term, Rajaratnam was sentenced to two years of supervised release and ordered to pay forfeiture in the amount of $53,816,434 and a $10 million fine. RAJARATNAM will surrender to authorities on November 28, 2011. (Richey 2011) On January 20, 2011 Danielle Chiesi was arrested in 2009 along with Galleon Group hedge fund founder Raj Rajaratnam.
After pleading guilty in connection with the case and was accused of communicating non-public information about IBM Corporation, Advanced Microdevices (AMD) and Sun Microsystems (now Sun-Oracle) in 2008 and 2009 to her superiors at New Castle Funds LLC, a Manhattan-based investment advisory company formerly part of Bear Stearns. Danielle was accused of using the information to reap more than $4 million in illegal profits for New Castle. Danielle Chiesi admitted to exploiting her access to valuable non-public information to reap $1.7 million in illegal gains. By sharing and conspiring to trade on inside information, Chiesi compromised the companies she sold out and distorted the market for their stocks. (Richey 2011)
Former IBM senior vice president Robert Moffat was sentenced to six months in prison in September and ordered him to pay a $50,000 fine for his role in the scheme after pleading guilty in March 2010. Former Intel Capital executive Rajiv Goel pleaded guilty to insider trading charges in February 2010. Rajaratnam, Chiesi, Goel and Moffat were arrested in October 19, 2009 and charged along with two other individuals and two business entities with insider trading. The complaint alleged that the individuals provided Galleon Group and another hedge fund with material nonpublic information about several corporations upon which the funds traded, generating $25 million in illicit gain.
Agnello & Donnelley, Property Rights and EJjiciency in the Oyster Industry, 18 J.L. & ECON. (1975) pg. 521
Easterbrook, Insider Trading as an Agency Problem, in PRINCIPALS AND AGENTS: THE STRUCTURE OF BUSINESS (Pratt & Zeckhauser eds. 1985). Pg. 330 Henry B. Manne, Insider Trading and the Stock Market (1966) (insider trading increases market efficiency because it produces desirable incentives on corporate managers). Retrieved from: http://www.sec.gov/news/speech/speecharchive/1966speech.shtml Jaclyn Belczyk & U.S. ATTORNEY’S OFFICE(2011) May 11, 2011. Retrieved from: http://jurist.org/paperchase/2011/05/us-hedge-fund-founder-convicted-of-insider-trading.php Jurist Legal News & Research (2011): Jaclyn Belczyk, Daniel Richey Retrieved from: http://jurist.org Testimony of Arthur Levitt Concerning Appropriation for Fiscal Year 1999; March 19, 1998 Before the Subcommittee on Commerce, Justice, State and Judiciary of the Senate Committee Appropriations. Retrieved from: http://www.sec.gov/news/speech/speecharchive/1998/spch221.htm Understanding Business Nickels, McHugh, McHugh pg. 101
United States Attorney Southern District of New York (2011), U.S. ATTORNEY’S OFFICE ELLEN DAVIS, CARLY SULLIVAN,JERIKA RICHARDSON,EDELI RIVERAPUBLIC INFORMATION OFFICE: Retrieved from: http://www.justice.gov/usao/nys/pressreleases/May11/rajaratnamrajverdictpr.pd
Insider Trading Essay
Introduction to Insider Trading
Insider trading represents trading in a security by a person who has rights to access to restricted material, which is not accessible to the general public. Insider trading includes someone’s capability to create agreements in not yet exposed information of trade prospects. Moreover, insider trading engages in creating economic investments on account of information others do not have and may not know how to get in common methods (Lectric Law Library, 2007).
In general, insider trading refers to illegal action. Illegal insider trading is the trading of a security by an insider who possesses knowledge that is non public. The action sets insiders in break of their fiduciary responsibility. As we can see in our mind’s eye, this is an exact blunder for anybody personally engaged with a corporation. An ordinary fallacy is that just directors and higher management can be conceited of insider trading. Anyone who has material and private information can entrust such an action. It is significant that almost anyone including stockbrokers, relatives, associates and employees, can be an insider (Lectric Law Library, 2007).
Practices of Insider Trading
Examples of illegal insider trading include many cases, such as the chief executive of a corporation trades a stock after finding out that the corporation will be losing a great government contract next period, or the president director’s daughter trades the corporation stock after learning from her dad that the corporation will be losing the great government deal, or a government bureaucrat understands that the corporation will lose a great government deal, as a result the bureaucrat sells the stock (Haddock, 2006).
However, that is type of information is exceptionally precious to investors. For instance, if insiders are purchasing shares in their own corporations, regularly they recognize something that ordinary investors do not. They possibly will pay money for because they observe big opportunity, because they suppose their stock is rated too low. Insiders could sell their shares for many reasons, but they pay money for them for simply one reason, which is they believe the price will go up. Insiders are banned from trading their corporation stock in the bounds of a six-month period. Consequently, insiders buy stock at what time they think the corporation will act in good health more than the continuing period (Machan, 1996).
III. Advantage and disadvantage of Insider Trading
If insider trading happens, the security’s expert cannot go on for an indefinite period without recovery the funds being lost to knowledgeable dealers. Consequently, experts will be adamant on bigger bid-ask extends if insider trading is allowed and arises over and over again. En route for investors, the bid-ask extend is a trading charge (Haddock, 2006).
It might reduce a security in relation to official documents of deposit, the government bonds, and others, if insider trading improved the share but did not anything else. Increasing new capital would be more expensive for a company which securities were issued to recurred insider trading. Therefore, all else being equal, insider trading makes it harder for a firm to raise money when opportunities to undertake new projects arise methods (Lectric Law Library, 2007).
However, insider trading might also have counterbalancing advantages. Insider trading is able to be gainful only if securities values change. So, insiders eager to deal on inside information can attempt to obtain the value to change by reducing the corporation’s costs, looking for innovative products, and so forth. At the same time as such accomplishments benefit the insider, they also help the company’s stakeholders as a group (Sternberg, 2000).
In fact, looking for advantage through cleverness and level-headedness is good business, and good business is as significant an expert mannerism as good quality treatment high-quality regulation, excellent education, and all that. Sequentially, expert ethics cannot censure that which is in agreement with ethics overall, for example strength and carefulness (Haddock, 2006).
Impact on business
Insider trading is frequently compared with market mistreatment. Mistreatment is fundamentally about creating market prices separate from the fair values. The not award of this mistreatment decreases the market effectiveness. But if insider trading carries prices nearer to their fair values, this will improve market effectiveness methods (Lectric Law Library, 2007). But only people with inside knowledge benefit from its new valuation of prices leading to a pack of confidence with non-insider investors.
Insider trading emerges imbalanced, particularly to investors outside a corporation who meet hard competition in the appearance of inside traders. Investors and finance managers deal with lesser returns in a similar way when markets are more competent because of the battles of inside traders.
It does not mean that insider trading is always being dangerous. Obviously, insider trading damages investors, but the benefits of the economy and the benefit of these expert dealers are not matching. Certainly, inside traders challenging with expert dealers is not different foreign goods challenging on the local market (U.S. Securities and Exchange Commission, 2006).
Taken as a whole, the findings illustrate that illegal insider trading has a harmful impact and influence in the region of market liquidity and that market creators use strength as the instrument to control incompatible information jeopardy throughout unanticipated insider trading periods (U.S. Securities and Exchange Commission, 2006).
Haddock, D. “Insider Trading”. 2006. Retrieved March 8, 2007 from http://www.econlib.org/library/Enc/InsiderTrading.html>
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Machan, T. “What is Morally Right With Insider Trading”. 1996. Retrieved March 8, 2007 from
Sternberg, E. “Insider Trading”. 2000. Retrieved March 8, 2007 from
U.S. Securities and Exchange Commission. “Insider Trading: Information on Bounties.” 2006. Retrieved March 8, 2007 from