Insider Trading illegal insider trading does not only happen when you are a memb
ID: 2778259 • Letter: I
Question
Insider Trading
illegal insider trading does not only happen when you are a member of the Board of Directors. Joe.
James, a part-time non-permanent word processor at two investment houses, learned all he needed to
know from the desks of co-workers, garbage cans, and from making copies of documents that
discussed impending mergers and acquisitions. Even though the documents referred to the companies
involved by code, James was able to learn their true identity by piecing together their industry,
historical stock prices, names of officers, and geographic location.
Once James knew who and when, he distributed the information to friends, family, and anyone who
would listen via an Internet chat room under the name "TheBin." What James did not know is that
among his many listeners were members of the Securities and Exchange Commission (SEC), the FBI,
and federal prosecutors. In fact, at any given time, 100 specially trained SEC employees are surfing
the Net, visiting chat rooms, and reading message boards looking for illegal inside traders. When they
identify a red flag, they forward the information to the Office of Internet Enforcement, a special
division of the SEC who helps build cases to pursue criminal charges and/or civil lawsuits.
The SEC is not the only surveillance group out in cyberspace. The exchanges monitor trading activity
as well. In fact, the American Stock Exchange was the organization who originally identified a problem
when they noticed unusual trading patterns prior to the public announcement of these mergers and
acquisitions. Once the SEC was notified, it was only a matter of time.
James directly told at least 10 people, but as with any valuable secret, the information spread like
wildfire. A friend of James’s, a waiter at a New York restaurant, made over $285,000. He told a patron
who profited by at least $445,000, which was certainly more than he earned in his former career as a
school teacher.
While his friends made millions of dollars, James was more conservative and profited by only $70,000-
$110,000, plus various non-pecuniary benefits such as cases of wine. This seems to be a small gain
given the hefty fines and prison time that is certain to follow.
It seems the Internet is affecting the stock market in all sorts of ways, both good and bad. It remains
to be seen if the perceived anonymity of the Internet acts as a breeding ground for the conveying of
private corporate information. One thing is for certain, however, the SEC is readying themselves by
continual efforts and manpower devoted to policing cyberspace.
Questions
1. Explain what is meant by non-public, or private, information? 8 mrks
2. How & Who can come into contact with private, or inside, information? 10 mrks
3. When does private corporate information turn into illegal insider trading? 10 mrks
4. Why is the Internet such a high potential breeding ground for inside information? 12 mrks
5. What should you do if you learn of inside information? 10 mrks
Explanation / Answer
Answer (1)
Information which meant for only internal circulation among a closed group of persons and is not for public consumption is known as non-public or private information. This information is meant for the use by only the identified members of the group and nobody else. Examples could be doctor’s discussion with patients, an email sent to a group of identified set of members and explicitly stating that this information is for the consumption of the group members only.
Answer (2)
Members of the group are naturally the first set of people who come into contact with the private information. Spouses and close relatives can get the inside information when the members of the private group accidentally or intentionally reveal the information.
Apart from this several other type of persons also can come into contact with private information like system administrators where the organisation has a policy of monitoring the electronic communications. Secretaries, data processors who are working with the private group can also come into contact with private or inside information. Even cleaners can come into contact with private information when the printer papers are discarded without shredding them. Apart from this, friends of the secretaries and other persons mentioned above can also get to know the inside information through disclosure of information by the secretaries, cleaners or data processors.
Answer (3)
When the private corporate information regarding say financial performance, mergers, acquisitions or any other information which affects the performance of the corporate is acted upon prior to the disclosure of the information to public is acted upon like buying or selling of the stocks, such activity is known as illegal trading. That is the initiator of such trade based on information which is not yet made public is entering into illegal trading activity.
Answer (4)
Internet proves an anonymous (not technically) opportunity to disclose inside information. The person who came into contact with such information can forward this to friends, relatives or acquaintances over internet without disclosing his identity or even disclosing his identity. This information is in turn can be forwarded by such receivers further to their other friends and chain can go on. Ultimately, the information is literally available to public even before the same is made public officially by the concerned corporate.
Answer (5)
It is illegal to trade and profit from inside information. If one comes into know of such inside information, it is better to alert the concerned authorities like the corporate concerned, stock exchange, SEC etc. about availability of such information. Also the person should not act on such information in any way.