I. A tipper receives a personal benefit when the tipper provides information to a relative and a tippee does not have to have actual knowledge of that personal benefit. Insider trading laws have been created through a combination of statutes, administrative rules, and court rulings. Section 10(b) of the Securities and Exchange Act of 1934 makes it illegal to use any manipulative or deceptive device in connection with the sale of a security. 15 U.S.C. § 78j (2012). The Security Exchange Commission has interpreted this statute to prohibit insider trading. In re Cady, Roberts & Co., 40 S.E.C. 907, at *3 (1961). The Supreme Court and other federal courts have agreed with this interpretation, and subsequently found corporate insiders liable for insider trading under both civil and criminal law. Dirks v. S.E.C., 463 U.S. 646, 653 (1983); Chiarella v. United States, 445 U.S. 222, 235 n.20 (1980). This Court based that interpretation on the fiduciary duty that existed between a corporate insider and a corporation. Dirks, 103 S. Ct. at 3261. In addition to corporate insiders (tippers), other individuals (tippees) can be held liable under insider trading laws if they trade on information given to them …show more content…
Newman involved two individuals who were only casually connected to each other and had only a minor relationship. Id. at 452. The decision did not address a case involving either relatives or close friends. Id. A subsequent Second Circuit panel interpreting Newman declined to extend the case to situations involving relatives because Newman acknowledged Dirks holding that personal benefits include gifts of information to relatives and friends. United States v. Salman, 792 F.3d 1087, 1093–94 (2d Cir. 2015). The Newman decision cannot apply to Dinofrio’s case because it concerns tippers and tippees who were relatives, not casual
What were the key criticisms levied by different interest groups against Enron and the Dabhol Power Project? Discuss whether these concerns were valid, given particularly India’s priorities and problems, as a transition economy.
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
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.
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
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.
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).
Section 303 prohibits an officer or director of an issuer to fraudulently influence, coerce, manipulate, or mislead the auditor. Section 304 requires executives of an issuer to forfeit any bonus or inventive based pay or profits from the sale of stock, received in the 12 months period after the date of issuance of financial statements subject to an earnings restatement (Claw-back Policy). Section 305 allows the SEC bar any person who has violated federal securities laws from serving as an officer or director of an issuer. Section 306 prohibits trading by officers and directors during blackout periods established between the end of a quarter and the earnings report date. Title III focuses on reducing fraud, mostly related to CEOs and CFOs of public companies. Before SOX and this requirement, CEOs and CFOs simply deny in any knowledge of knowing financial wrongdoing. Now, they require to take more responsibilities on what the company is reporting on financial statements. They have to sign off on financial statements that the financial statements are presented fairly to their best of knowledge and internal control of the company is efficient and
Bernard Madoff had full control of the organizational leadership of Bernard Madoff Investments Securities LLC. Madoff used charisma to convince his friends, members of elite groups, and his employees to believe in him. He tricked his clients into believing that they were investing in something special. He would often turn potential investors down, which helped Bernard in targeting the investors with more money to invest. Bernard Madoff created a system which promised high returns in the short term and was nothing but the Ponzi scheme. The system’s idea relied on funds from the new investors to pay misrepresented and extremely high returns to existing investors. He was doing this for years; convincing wealthy individuals and charities to invest billions of dollars into his hedge fund. And they did so because of the extremely high returns, which were promised by Madoff’s firm. If anyone would have looked deeply into the structure of his firm, it would have definitely shown that something is wrong. This is because nobody can make such big money in the market, especially if no one else could at the time. How could one person, Madoff, hold all of his clients’ assets, price them, and manage them? It is clearly a conflict of interest. His company was showing high profits year after year; despite most of the companies in the market having losses. In fact, Bernard Madoff’s case is absolutely stunning when you consider the range and number of investors who got caught up in it.
The U.S. Securities and Exchange Commission (SEC) differentiate insider trading into to legal and illegal behavior. The aspect of legal conduct involves members of corporations that purchase and trade stocks of their companies. This is common practice; however all transactions must be reported to the SEC (SEC, n.d.). This essay will focus on the illegal component of insider trading. Criminal investigation of insider trading will be discussed in addition to the prosecutions of various individuals who have been convicted of insider trading. Furthermore, the federal statute of insider trading will be examined in relation to Martha Stewart’s actions in selling her ImClone stock.
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...
If you have ever traded in the stock market, or have any knowledge about the stock market at all, you surely have heard the term “insider trading”. This term has a negative connotation to most people and is usually associated with illegal conduct. What most people do not know, is that insider trading can be conducted in a legal way. So what exactly is insider trading? It is defined as “the buying or selling of a security by someone who has access to material, nonpublic information about the security”. CEOS and employees of certain companies usually know, or can more easily obtain, information about the company that individual investors and outside people may not know. They may have an insight on future decisions the company is going to make
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,
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.
Enron and Arthur Anderson were both giants in their own industry. Enron, a Texas based company in the energy trading business, was expanding rapidly in both domestic and global markets. Arthur Anderson, LLC. (Anderson), based out of Chicago, was well established as one of the big five accounting firms. But the means by which they achieved this status became questionable and eventually contributed to their demise. Enron used what if often referred to as “creative” accounting methods, this resulted in them posting record breaking earnings. Anderson, who earned substantial audit and consultation fees from Enron, failed to comply with the auditing standards required in their line of work. Investigations and reports have resulted in finger pointing and placing blame, but both companies contributed to one of the most notorious accounting scandals in history. There remains much speculation as to what steps could and should have been taken to protect innocent victims and numerous investors from experiencing the enormous loses that resulted from this scandal.
The Enron Corporation was an American energy company that provided natural gas, electricity, and communications to its customers both wholesale and retail globally and in the northwestern United States (Ferrell, et al, 2013). Top executives, prestigious law firms, trusted accounting firms, the largest banks in the finance industry, the board of directors, and other high powered people, all played a part in the biggest most popular scandal that shook the faith of the American people in big business and the stock market with the demise of one of the top Fortune 500 companies that made billions of dollars through illegal and unethical gains (Ferrell, et al, 2013). Many shareholders, employees, and investors lost their entire life savings, investments,