Insider Trading
Essay Preview: Insider Trading
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Illegal insider trading consists of the buying and selling of security by insiders that have a certain amount of material that is still not released to the public. A security is a type of manageable interests that are a representation of financial value, usually within business; securities have been categorized between debt and equity securities, as well as between bearer and registered securities. The act of insider trading puts a corporation or to be more specific generous stock holders, company owners, and directors into a breach of fiduciary duty. Although we usually hear about the illegal part of insider trading there can also be a legal side of insider training as well. An example of insider trading would be if the CEO of a particular company sells a stock after discovering that the company will be losing a big government contract within the next month.
People within a company buy and sell their stock all the time, although it is usually illegal, insiders can sometimes buy and sell stock within their company. The security exchange commission or the SEC makes sure that these insiders report their actions within two business days that the actual transaction occurred. The SEC is a Government commission created by Congress to regulate the securities and markets within the business world as well as the regulation and protection of the United States corporate takeovers, and is made up of five commissioners appointed by the president and senate. An example of a proper way to show the SEC your transaction would be if an insider sold 10,000 shares on Monday June 12th, he or she would have to report this change by Wednesday June 14th. Changes in insider holdings are sent to the SEC electronically as a Form 4, which details a companys insider trades or loans . The SEC also has said that insider training usually consists of company directors, officials or any other individual with a stake of 10% or more within the company itself. If a insider wanted to buy a stock then they would not be able to sell this particular stock for a six month period, so usually when a insider does buy stock they are buying it because they think that the stock will rise and become perform well for a long period of time. The reason why illegal insider trading is such a big deal is because people within the company usually know something that a normal investor would not. A normal investor would not have access to the kind of information that someone outside the company would not be able to gain access to.
The biggest argument that brings about insider training is that these specific people should not be allowed to earn the amount of money at the expense of other people. Another reason is that insider trading is bad for the public and it undermines the publics confidence in the security markets. Why would the public want to invest with such companies when they fear that these companies would regularly gain a profit at their expense? Not only can insider trading hurt the public, but, it can also hurt specialists as well. An insider will sell securities to a specialist when the insider is the only person that knows that eventually these securities will be worth less than they are now. Once the price falls, the insider can purchase the securities back from the specialist at a lower price then when the specialist bought them causing the specialist to lose money.
Another interesting fact about insider trading is that within business it is not allowed but, if you look at all the other areas that consist of markets insider trading is used and even accepted. Such markets as: art, real estate, ranchers, and even commentators deal with inside information everyday. These buyers routinely profit from knowledge that most of the outside world does not know, or possess. Commentators rarely care on this particular type of trading, or trading ethics because these transactions can be controlled and regulated by using the information that the insider has received.
Although some financial economists and law professors do feel that illegal trading, because they feel that it makes the stock market more efficient. They believe this because at one point or another the inside information will make its way to the public, if this was not true then the insider would have no reason to trade on that specific stock. The economists and professors urge that if insider trading was legal then the bid on prices of stocks would go up or down before all the information is released. The result of this would be that the price would more fully reflect all the information both with the public and with the inside company.
Now that we have fully discussed the reasons why inside trading is not the right thing to do, we can now discuss some of the cases that have been talked about throughout the business world. One of the most famous cases was with Charles F. Fogarty and the Texas Gulf Sulphur. This was during the years of 1963 and 1964 and a executive vice president of Texas Gulf had knew that this company had made a exciting discovery. The Texas Gulf company had discovered a rich mineral lode in Ontario, but, unfortunately for the reason because there were concluding leases for mineral rights that were not ready to be made public just yet. While this was all happening the executive vice president had leaked the information to Fogarty so he went and purchased 3,100 shares in the Texas Gulf shares and earned 125,000 to 150,000 by 1991. Needless to say Fogarty was caught and prosecuted.
Another more important case that is actually recent would be the deal with Martha Stewart. June 4, 2003 Martha and her stock broker Peter Bacanovic were indicted on criminal accounts of Securities fraud from the SEC, as well as obstruction of justice and security. The reason why Martha Stewart was charged with insider trading was because after having sold almost 4,000 shares of her Imclone Systems stock. Imclone Systems is a company that focuses in developing biopharmaceutical drugs. The company was anticipating the approval of a cancer drug called “Erbitux” from the Food and Drug Administration. After the drug was disapproved for reasons of poor data and poor research design, founder and CEO Sam Waksal decided to take action and dump his shares of Imclone stock before the FDA disapproval. The relationship between Waksal and Martha Stewart is through Peter Bacanovic, both parties broker. In order to gain knowledge of what exactly Sam Waksal, Peter Baconovic, and Martha Stewart did, we must define the practice of insider trading.
Insider trading is defined as “trading in stock of publicly held corporations on the basis of material, nonpublic information” . The term “insider”,