Effects of Illegal Insider Trading

756 Words2 Pages
bulb-icon

Recommended: Essay on the effects of insider trading on a corporation’s financial position and their ethical standing in the business community

"Insider trading" is a term that most investors have heard and usually associate with illegal conduct. But the term actually 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. When corporate insiders trade in their own securities, they must report their trades to the SEC.
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. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information. Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities. Insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.
Laws making insider trading illegal should be revoked. Please do not get me wrong, I believe insiders with access to information should ethically respect the confidentiality of agreements in their workplace along with their fiduciary duties. I believe that insider trading, based on material nonpublic information, benefits investors by more quickly introducing new information into the market. Insider trading is supposed to even the playing field, but eliminating insider trading as a crime will benefit all the investors in the market.
Insider trading can actually be considered an active good. A market...

... middle of paper ...

... if sales are up or down for Panera.
People argue that insider information can cause an unfair disadvantage for the smaller investors, but I believe fair only exists in someone’s fairy tale land. The markets will always be unbalanced. Some market participants have faster computers, better algorithms, smarter staffs and work for businesses that transact with investment banks that will offer favorable allocations in Initial Public Offering’s because they are better clients. In life, someone will always have the upper hand somewhere. The large investors thrive on information asymmetry, so eliminating the insider trading laws will likely affect those major market players.
Insider trading is a victimless act. So how is it a crime when there is no victim? When investors trade in the market, they don’t know who is on the other side of the trade as a buyer or a seller.

Show More
Related

  • Insider Trading: The United States V. Newman Case

    1106 Words  | 3 Pages

    The first way the public is affected is through an increase in the wealth gap. Those who are placed high on position of a popular company only get richer with insider trading. It is unfair because the public are missing out on the opportunity to reap the same benefits simply because they do not have the same access. The second way is that the confidence of investors is heavily diminished through insider trading. If a handful of investors are successful in the stock market because of the information they obtain, it leaves space for foul play to be assumed. Other investors in the market can accuse the whole thing of not being fair, and that is exactly what the Government is trying to avoid with the laws they have passed to restrict the unfairness in the stock

    Read More

  • Martha Stewart Case

    973 Words  | 2 Pages

    In other words, its buying and selling of securities that has obtained non-public material information, and in Martha’s case she was guilty of it. “However in an interesting legal technicality, Martha Stewart did not necessarily breach a fiduciary duty to the other investors, since she had no real obligations to inform other investors, which would be the case if she were an officer with company (US SEC, 2009). This being said, if she confessed her actions were wrong, she would not have been convicted of insider trading. Insider trading can be either legal or illegal due to the nature and the timeframe. This was not the road that Martha Stewart decided to take. ‘She instead chose to collide with her broker in an attempt to barricade a story about how there was a standing order for Ms. Stewart to sell her shares” (US SEC, 2009). Martha Stewart had knowledge on the ethics surrounding trading of stock having already been a CEO, she should have known what she was doing, but one can argue that due to her crazy work life, she simply did no think about it. It shows that she is not engaging in illegal behavior. “Martha Stewart displayed her morality lies when lying to the US authorities even thought this was obviously illegal and unethical; her action can also be analyzed through egoism philosophy where right or acceptable behavior defined in terms of consequences to the individual, regarding maximizing self0interest” (Carr, 2002). Martha Stewart thought she did everything right, but still did not bother to warn the shareholders. If insider trading had not taken place, it would be less of a crime, but her actions indicated unethical behavior and define lack of integrity, and lying to Federal investigators only made it

    Read More

  • Computer Fraud And Abuse Act (CFAA) Of 1986

    1015 Words  | 3 Pages

    The Sarbanes-Oxley Act was drafted to encourage and protect whistleblowers from retaliation after the fraud scandal that cause the collapse of Enron in 2001. In a 2010 Senate Report found that “external auditors detected only 4.1 percent of uncovered fraud schemes, “whistleblower tips detected 54.1% of uncovered fraud schemes in public companies” and were thirteen times more effective than external audits” (Turpan, 2016). Whistleblowers serve an important service to the public and are more effective than external audits. The CFAA has been used to by employers to retaliate against employees who act as informants for agencies like Internal Revenue Service or Security Exchange Commission to expose fraud. There employees, not to their financial gain, gather information as evidence of fraud by the company. With a broad interpretation of CFAA, the employee would "exceed their authority" and was "unauthorized" to access the information, therefore allowing the company to hide their illegal

    Read More

  • Disclosure of Executive Health Information: Balancing Investor Rights and Executive Privacy

    1796 Words  | 4 Pages

    U.S. Securities and Exchange Comission (2000). Selective disclosure and insider trading. Accessed on February 15, 2009 at: http://www.sec.gov/rules/final/33-7881.htm.

    Read More

  • Rogue Bank Case Study

    1362 Words  | 3 Pages

    Svoboda and Robles both broke the misappropriation and tripper (tippee) theory. In Bailey article, he mentions that the misappropriation theory requires courts to focus on whether a fiduciary relationship, or similar relationship with a "duty of trust or confidence," exists (2010, p.541), and tripper theory obtains an individual who received confidential information from the insider individual. Svoboda and Robles violated the fiduciary duties which are the duty of loyalty and care. When Svoboda brought in an outsider, Alena, to complete the task, he broke the duty of loyalty and care toward his company, but then was disloyal to Robles when Svoboda prepared his own trade security. Under Section 10b and rule 10b-5, if an individual using confidential information and then assist another individual, the individual is liable for the trading of the confidential information if they are aware of the fiduciary duties. As a tippee, Robles was liable for trade securities because he was aware of the policy of the Rogue Bank. Bailey (2010) provides an example regard to the SEC v. Texas Gulph Sulfur, when the Second Circuit held that an investor is prohibited from using non-public information to his advantage, regardless of how the investor received the information and the explanation for this situation was to ensure all investors were provided with equal

    Read More

  • Conscience In The Great Gatsby By F. Scott Fitzgerald

    880 Words  | 2 Pages

    There are many instances of insider trading that have taken place in the U.S. stock exchange. The Federal Reserve and The Federal Government have clearly stated that insider trading undermines the law and is illegal, but individuals insider trade anyway.

    Read More

  • White-Collar Crime

    1049 Words  | 3 Pages

    Most people consider this crime to consist of CEO’s manipulating their way to making a large fortune. This of course, is true most of the time in high-profile cases. For example, in late 2001 Enron Corporation executives confessed to overstating the company’s earnings. This lead to artificially inflating what the company was worth and deceived the investors. It took some time to unravel all the fraud put behind this devious act but shows how sophisticated white-collar crime can be. Although it’s usually associated with upper management of corporations, people from all different levels and occupations can perform this crime ("How White-collar Crime Works").

    Read More

  • AICPA Code Of Professional Conduct

    1359 Words  | 3 Pages

    The law requires auditors to report any fraudulent activities discovered during the course of an audit to the SEC. This is when Article I of Section 51 of the AICPA Code of Professional Conduct comes into play. The auditor may uncover illegal acts or fraud while auditing the financial statements of a company. In such instances, the auditor must determine his or her responsibilities in making the right judgment and report their discovery or suspicions of the said fraudulent activities. Tyco International is an example of the auditors’ failure to uphold their responsibilities. Tyco’s former CEO Dennis Kozlowski and ex-CFO Mark Swartz sold stocks without investors’ approval and misrepresented the company’s financial position to investors to increase its stock prices (Crawford, 2005). The auditors (PricewaterhouseCoopers) helped cover the executives’ acts by not revealing their findings to the authorities as it is believed they must have known about the fraud taking place. Another example would be the Olympus scandal. The Japanese company, which manufactures cameras and medical equipment, used venture capital funds to cover up their losses (Aubin & Uranaka, 2011). Allegedly, thei...

    Read More

  • Did Martha Stewart Engage In Insider Trading?

    303 Words  | 1 Pages

    Martha Stewart made ​​a kind of securities fraud known as "insider trading" which means using insider information to make a stock transaction. It is trading in the stock market, making improper use of inside information. This information, most of the time, is held by directors of listed companies and those who provide investment services or counseling.

    Read More

  • Different Types of Espionage

    2469 Words  | 5 Pages

    This acquisition of confidential or proprietary information undercuts profit potential, market share, undermine negotiations, or may even cause bankruptcy of the targeted company.4 The perpetrators of industrial espionage usually involves the employees, contractors or foreign intelligence. For example, a perpetrating company may pay (or bribe) the employees of the target company in exchange of confidential documents. There are also freelance employees who steal documents and files and sell it to anyone who may think of the i...

    Read More

  • Martha Stewart Case Study Summary

    1007 Words  | 3 Pages

    This case study is not about Ms. Stewart direct participation with illegal insider trading as the media had steered the public to believe. To begin, Ms. Stewart received a phone call from Ann Armstrong, her assistant, stating that Peter Bacanovic, her stockbroker, “thinks ImClone is going to start trading down.” (Arnold, Beauchamp, Bowie, 2013, p. 390) Although Ms. Stewart was not able to get a hold of Peter, she talked to his assistance, Douglas Faneuil,

    Read More

  • Insider trading

    614 Words  | 2 Pages

    Insider trading has been a commonly discussed topic since Martha Stewart was accused, tried, convicted, and served a prison term for her involvement with the Inclon trading scandal. However, the definition of the term “insider trading” is not necessarily always connected with illegal activity. As a matter of fact, in some jurisdictions, “insider trading is no crime. Traditionally, it has been an expected, and perfectly acceptable prerequisite of certain sorts of employment.”(Insider Trading). But since the latter part of the 1960’s, stricter enforcement of insider trading practices have been put into place because of financial scandals.

    Read More

  • Martha Stewart Insider Trading Case

    1687 Words  | 4 Pages

    The Martha Stewart insider trading case was a high profile case filled with uncertainty. In order to say whether or not Stewart handled her indictment responsibly, it is necessary to start with an assumption regarding her guilt or innocence. For the purposes of this paper, based on the information I have read about the case, and based on the fact that she was found guilty of all counts (although not all specifications) in her stock conspiracy trial (with the exception of the security fraud charge which was thrown out), I will assume that she is guilty. (courttv.com) Based on that assumption, there are several reasons that Martha Stewart did not handle her indictment responsibly which can be summarized in a recap of the charges: she lied about receiving illegal information leading her to sell her stock, she lied about having a prearranged agreement to sell her stock when it fell below $60 per share, she tried to hamper the investigation by providing false information, and she worked with her broker to obstruct justice and make false statements regarding the scandal. (chicagotribune.com) As the CEO of Martha Stewart Living Omnimedia (MSLO) and as a successful businesswoman motivated to protect her own personal interests, it might be easy to understand the temptation behind her decisions, but the discussion here will be based on whether or not her decisions were responsible.

    Read More

  • The Efficient Market Hypothesis

    774 Words  | 2 Pages

    ... the public and private sector. It uses both the weak form and semi strong from to make decisions. When an investor is given both public and private information the investor would not be able to profit about the average investor even if he was provided with new information at any given time. These investors are given name such as insiders, exchange specialist, analyst and money mangers. Insiders are senior managers that have access to inside information of that company. The security exchange commission prohibits that allow of inside information use to achieve abnormal returns on investments. An exchange specialist can achieve above average returns with specific order information on a specific equity. Analysts can analyze whether an analyst opinion can help an investor achieve above average returns. Institutional money mangers work handle mutual funds and pensions.

    Read More

  • The Importance Of The Stock Market

    2323 Words  | 5 Pages

    While the stock market keeps the world turning and the economy steady, the stock market is also being used in manipulative ways that are not always legal. What is the stock market? Businesses share part of the company by selling stock, or shares of ownership. When investors own shares of a company, that company is considered public because the general public has an ownership stake in that company. At the highest ranks of the companies are the board of directors, whose job it is to make sure the business’s managers are working in the best interests of the multiple owners and shareholders.

    Read More

More about Effects of Illegal Insider Trading

Open Document