Insider Trading
Insider trading can be defined as the purchase or sale of securities on the basis of information that has not been made available to the public (Miller & Jentz, 2011). There have been laws made to protect the public from being victims of insider trading. Insider trading gives employees of a company a trading advantage over the public and other shareholders (Miller & Jentz, 2011). The law is The Securities Exchange Act of 1934. The sections 10b and SEC 10b-5 were added to the law to prevent insider trading (Miller & Jentz, 2011). There are many cases of insider trading that can be traced back for centuries.
In the late 1700’s, William Duer is believed to have been involved in the first case of insider trading. In the 1920’s, when the stock market crashed, Albert H. Wiggin became a multi-millionaire (Beattie, 2013) thanks to what is now considered insider trading. According to Andrew Beattie, Mr. Wiggin shorted his company by 40,000 shares. However, in the 1920’s it was legal for him to short his own company. There were no rules against it at that time. In the mid 1980’s, one of the most famous cases of insider trading took place. The SEC brought charges against four business men. Michael Milken, Dennis Levine, Martin Siegal, and Ivan Boesky were charged with 98 charges involving insider trading among them. However, not all charges stuck to them (Beattie, 2013). A Wall Street Journal columnist, R. Foster Winans, wrote an article pertaining to a certain company’s stocks. Stockbrokers used his information to purchase the stock from the information he gave them before his article was published. It is also believed that Mr. Winans gained from the profits from the information he provided (Beattie, 2013). Another scanda...
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...the insider trading case against Mathew Martoma, I agree with the jury’s verdict. I don’t think it is fair for a person to have an advantage to make money over people that do not have knowledge of what is going on. There are many people who are victims of insider trading. I think insider trading takes place very often. I believe there are many people that have not been caught at it yet. I was also surprised to learn that insider trading was around in the 1700’s. I believe in the case of Martha Stewart, she truly thought she could get away with insider trading until she was convicted. I don’t think insider trading will ever go away. I believe in the future it will get much worse than it is now. Someone will always find a way to hide what they are doing. Then again, maybe the SEC will find new ways to catch all of the illegal activity going on with insider trading.
While the widely exposed and discussed trials of WorldCom's and Tyco's top executives were all over the media, one of the most interesting cases of securities fraud was happening without any public acknowledgement.
The novel Liars Poker by Michael Lewis is a very interesting firsthand account of an inside look into the investment banking world, in particular bond trading at the firm Solomon Brothers in the 1980s. Lewis took an interesting and roundabout way to end up on Wall Street, studying art history at Yale and bombing his interview with Lehman Brothers. But he eventually found himself at Solomon Brothers through a lucky encounter with two managing directors wives. Through his book, Michael Lewis conveys the inner workings of investment banks in the 1980s to the average person using his own experience at Solomon Brothers. The book goes into Lewis’s own rise in the firm, as well as the rise and fall of the entire Solomon Brothers Mortgage department.
The seriousness of insider trading was not brought to light until some time after the stock market crash of 1929. This specific event can be summed up as a day where many investors traded around 16 million shares
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.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
Jordan Belfort is the notorious 1990’s stockbroker who saw himself earning fifty million dollars a year operating a penny stock boiler room from his Stratton Oakmont, Inc. brokerage firm. Corrupted by drugs, money, and sex he went from being an innocent twenty – two year old on the fringe of a new life to manipulating the system in his infamous “pump and dump” scheme. As a stock swindler, he would motivate his young brokers through insane presentations to rile them up as they defrauded investors with duplicitous stock sales. Toward the end of this debauchery tale he was convicted for securities fraud and money laundering for which he was sentenced to twenty – two months in prison as well as recompensing two – hundred million in restitution to any swindled stock buyers of his brokerage firm (A&E Networks Television). Though his lavish spending and berserk party lifestyle was consumed by excessive greed, he displayed both positive and negative aspects of business communications.
"This is why the market keeps going down every day - investors don't know who to trust," said Brett Trueman, an accounting professor from the University of California-Berkeley's Haas School of Business. As these things come out, it just continues to build up"(CBS MarketWatch, Hancock). The memories of the Frauds at Enron and WorldCom still haunt many investors. There have been many accounting scandals in the United States history. The Enron and the WorldCom accounting fraud affected thousands of people and it caused many changes in the rules and regulation of the corporate world. There are many similarities and differences between the two scandals and many rules and regulations have been created in order to prevent frauds like these. Enron Scandal occurred before WorldCom and despite the devastating affect of the Enron Scandal, new rules and regulations were not created in time to prevent the WorldCom Scandal. Accounting scandals like these has changed the corporate world in many ways and people are more cautious about investing because their faith had been shaken by the devastating effects of these scandals. People lost everything they had and all their life-savings. When looking at the accounting scandals in depth, it is unbelievable how much to the extent the accounting standards were broken.
There is a long-lasting debate on whether emph{insider trading (IT)}, defined as trading in possession of material private information, should be allowed or forbidden and, even now, it is not clear what the optimal IT regime might be. IT regulation, and whether this regulation is enforced, differs across countries. For instance, IT laws are lax in Norway, and Mexico and strict in the US and Ireland; however, there have been enforcement cases in Norway and the US, but never neither in Mexico nor in Irelandfootnote{See cite{Beny:2005} and cite{FerreiraFernandes:2009}.}. There are differences in what is considered illegal IT between American and European regulations: in the US, under Rule 10b-5, anyone in possession of material inside information shall disclose his private information or abstain from tradingfootnote{The origin of this interpretation can be traced to emph{SEC v. Texas Gulf Sulphur Co}, although latter the Supreme Court limited the liability to the cases in which there is a fiduciary duty of the insider to the persons with whom he trades (emph{Chiarella v. US}), to tippees (emph{Dirks v. SEC}), and to the cases in which there is a fiduciary duty of the insider to the source of the information (the so-called misappropriation theory, endorsed by the Supreme Court in emph{US v. O'Hagan}).}; in Europe, directive 2003/6/EC on insider dealing and market manipulation requires ``inside information'' to be of a ``precise nature", and forbids both, trading in possession of inside information and the disclosure of this information, ``unless such disclosure is made in the normal course of the exercise of his employment, profession or duties".
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,
The stock market is an enigma to the average individual, as they cannot fathom or predict what the stock market will do. Due to this lack of knowledge, investors typically rely on a knowledgeable individual who inspires the confidence that they can turn their investments into a profit. This trust allowed Jordan Belfort to convince individuals to buy inferior stocks with the belief that they were going to make a fortune, all while he became wealthy instead. Jordan Belfort, the self-titled “Wolf of Wall Street”, at the helm of Stratton Oakmont was investigated and subsequently indicted with twenty-two counts of securities fraud, stock manipulation, money laundering and obstruction of justice. He went to prison at the age of 36 for defrauding an estimated 100 million dollars from investors through his company (Belfort, 2009). Analyzing his history of offences, how individual and environmental factors influenced his decision-making, and why he desisted from crime following his prison sentence can be explained through rational choice theory.
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.
During the 1920s, approximately 20 million Americans took advantage of post-war prosperity by purchasing shares of stock in various securities exchanges. When the stock market crashed in 1929, the fortunes of many investors were lost. In addition, banks lost great sums of money in the Crash because they had invested heavily in the markets. When people feared their banks might not be able to pay back the money that depositors had in their accounts, a “run” on the banking system caused many bank failures. After the crash, public confidence in the market and the economy fell sharply. In response, Congress held hearings to identify the problems and look for solutions; the answer was found in the new SEC. The Commission was established in 1934 to enforce new securities laws that were passed with the Securities Act of 1933 and the Securities Exchange Act of 1934. The two new laws stated that “Companies publicly offering securities must tell the public the truth about their businesses, the securities they are selling and the risks involved in the investing.” Secondly, “People who sell and trade securities must treat investors fairly and honestly, putting investors’ interests first.”2
“When a company called Enron… ascends to the number seven spot on the Fortune 500 and then collapses in weeks into a smoking ruin, its stock worth pennies, its CEO, a confidante of presidents, more or less evaporated, there must be lessons in there somewhere.” - Daniel Henninger.
Jordan Belfort is the notorious 1990’s stockbroker who saw himself earning fifty million dollars a year operating a penny stock boiler room from his Stratton Oakmont, Inc. brokerage firm. Corrupted by drugs, money, and sex, he went from being an innocent twenty – two year old on the fringe of a new life to manipulating the system in his infamous “pump and dump” scheme. As a stock swindler, he would motivate his young brokers through insane presentations to rile them up as they defrauded investors with duplicitous stock sales. Toward the end of this debauchery tale he was convicted for securities fraud and money laundering for which he was sentenced to twenty – two months in prison as well as recompensing two – hundred million in restitution to any swindled stock buyers of his brokerage firm. Though his lavish spending and berserk party lifestyle was consumed by excessive greed, he displayed both positive and negative aspects of business communications.
Have you ever invested in the stock market? If so, do you know where your money is really going? The stock market is a risky business and it can make or break people’s lives. The stock market is used to daily to keep America on its trembling feet; it’s also being used at this very moment to cheat people out of money for personal gain. This happens every day in the stock market and its evolving rapidly, super computers that can trade faster than a blink of an eye, social media trends that can predict share values, and intricate stock market schemes that are getting harder and harder to find and take down. 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.