Insider Trading
What is insider trading? According to our text, insider trading is the sharing of inside information by directors or officers to buy or sell securities at a profit. This inside information can be material, nonpublic, or factual data that only they have access. While people who work at a company can buy and sell their own stock, unless they report it to the SEC and do not violate any fiduciary duties owed the actions they take are considered illegal (Sukys, 2019).
There has been a lot of controversy on whether or not insider trading should be considered illegal or not. Most people are on the side of legalizing it. Personally, I do not believe it is a strictly black and white topic - with each situation comes different specific details that can change or effect the outcome of the action.
In the defense of legalizing insider trading, one of the biggest proponents is because there is no victim in the crime. While it may be an uneven playing field, there is no official victim because the "tipper" does not get hurt from the "tippee" benefiting from gaining profits (Roth, 2014).
This brings up another part - where is the line between proprietary research and insider information? If I were to go and gather my own research and came to the conclusion that sales were likely up for the business it would be considered proprietary research, while if someone from the sales department of a company told me their sales were up and I benefited, it would be considered insider trading (Roth, 2014). This is another reason why this topic is so "blurry" - additionally, for a small profit to myself compared to a large public profit, it is very unlikely that I would personally be investigated.
Finally, even if someone has "inside" information - that does not guarantee a profitable outcome. The market can be volatile when it comes to reaction. We may assume that it would react a certain way but it could curveball and change in a blink of an eye.
I would err on the side of "legalizing" insider trading. Again, this is not a black and white situation. I believe we do need regulations to ensure things are "fair". I would do this my making sure the SEC is involved and has knowledge of what is going on so there are no surprises.
References:
Roth, Carol. (2014). It's time to legalize insider trading. Retrieved from https://www.cnbc.com/2014/06/17/its-time-to-legalize-insider-tradingwall-streetcommentary.html
Sukys, P. (2019). Business Law with UCC Applications (14th ed.). New York, NY: McGraw-Hill.
Hi Loni,
ReplyDeleteI did some research on the Martha Stewart case from the early 2000’s and was quite surprised by what I learned. Firstly, Martha Stewart went to jail because of perjury and false statements made to the SEC, not because of insider trading. The insider trading charges were settled in 2005 with a fine of roughly $195,000, a five-year ban from serving a publicly traded company as a board member or director, and a ban until 2011 from serving as the CEO of her own company (Hoffman, 2007). While Martha Stewart is responsible for her own actions, her actions affected her ability to continue serving her company. The threat of employees committing insider trading is a risk that businesses need to consider as a business risk and proactively try to prevent.
Businesses need to regularly offer educational and training sessions to key employees, reminding them what constitutes as insider trading and the criminal charges they could face (Brumberg, 2004). Although companies do not face the direct threat of fines for insider trading, they risk losing key employees and receiving bad press. If it is a publicly traded company, bad press could lead to decreased stock prices. Brumberg (2004) urges companies that it is not enough to simply have insider trading policies; those policies must be discussed regularly, and training provided on an ongoing basis. Employees, even directors and executives, are human and may mistakenly think a piece of information is not insider information. It is possible, like in Martha Stewart’s case, a key employee is banned from serving in an executive role, which could be a significant hardship for a company.
In the Martha Stewart case, she received a tip from her stockbroker that the CEO of ImClone was selling his shares of ImClone and that she could consider selling hers as well (Hoffman, 2007). Stewart did not, however, receive the insider information that the FDA was rejecting an application for a cancer drug. While she did not directly receive the insider information, she received information that led her to deduce that a drop of share prices was likely, so that still constituted as insider information. Brumberg (2004) mentions that broker tips about insider trades should be avoided at all cost. Stewart’s broker should not have passed on the information, but she also should not have acted on it.
Angela Ingold
References
Brumberg, B. (2004). Preventing insider trading: What your company can learn from the martha stewart case. Directorship, 30(3), 16-17. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/236385397?accountid=40195
Hoffman, D. (2007). Martha stewart's insider trading case: A practical application of rule 2.1. The Georgetown Journal of Legal Ethics, 20(3), 707-717. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/227366705?accountid=40195