Insider trading has been heard and gained its popularity nowadays. To those people who are aware, they will definitely know the case of Enron as well as WorldCom. Not only that, Martha Stewart, a familiar name that had been known due to insider trading. First and foremost, it is very essential to grasp what actually insider trading means. Many people lack the knowledge and had been trapped in these unethical practices. According to Investopedia (n.d.), insider trading is the act of buying or selling the securities to the public by people who has the access to the confidential materials such as stocks or options in order to gain benefits. Once the information originated within the firm is leaked out, it would affect the prices of those securities. It is also called as insider dealing. To add, there are two terms when we talked about insider trading. This will be tipper and tippee. A tipper is the person who discloses the information to another person which the information has not yet been public but a tippee is the person who receives the information from the tipper that will lead the information to their friend regarding the share and they will use the information to buy or sell the share.
Type of Insider Trading
Insider trading can be classified into two, the legal and the illegal. It is all depends on when the trade is being made. It is considered legal when it involves buying securities within your own company. Based on Dachary Carey (2013), it is perfectly legal and fine to trade securities for a company that you are attached with. It is legal once the material information has been freely opened and susceptible to the public. However, there is a very thin line between legal insider trading and illegal insider trading. The Securities and Exchange Commission (SEC) still request and demand all documentations related to be submitted for recording purposes. As an investor, it will be beneficial to look at these records of transactions to see on how it is traded legally on the stocks.
On the other hand, it is considered illegal when the information possess by an individual is still non-public. This is biased to other investors since they do not have access to such comprehension. It is breaching the fiduciary duty while having the non-public information regarding the securities on hand (Investopedia, n.d.). Therefore, it includes knocking out other people when you have the competitive advantage. Brokers, directors and even family members can be charged of insider trading.
Scenarios of Insider Trading
To further understand what is insider trading and what is not, there will be few scenarios to picture it clearly. For instance, an individual overheard two businessmen talking about a particular company that he had stocks with, will lost quarterly earnings. Then the individual immediately sell his stock. From this scenario, it can be said that it is not illegal but it is unethical. It is basically okay that you accidentally overhear someone. However, moving on, let us say that, the same individual do not just overhear someone, he managed to access the company's financial database illegally and it is proven that he will not receive his quarterly earnings. Then he sells the information to others. First and foremost, accessing the company's financial database is wrong and breaching the law. The individual had been get himself in deceptive practices. Thus this scenario can be considered as illegal practices of insider trading. As we can see in the first scenario, the individual just happened to be where the information is revealed at the right timing whereas in the second scenarios, the individual has put an effort at obtaining deceptive information.
Examples of Insider Trading Cases
Based on The U.S. Securities and Exchange Commission (2001), some of case examples that have been brought by the SEC are those cases that against corporate executives, directors and even employees who have thorough information about the in and out of the company. Furthermore, friends, family members, and business acquaintances that traded significant information after getting to know about it. Not to forget, government employees and other people who took advantage of the confidential information.
Steps taken by government agency to protect traders
There are a lot of bodies who are taking care of trades. However, we will focus on The US Securities and Exchange Commission (SEC). The Securities Exchange Act of 1934 also known as SEC was first federal law to control securities trading and has been approved by Congress and the law has been signed by President Franklin D.Roosevelt. The law was created to control US securities market and also to protect the investors and it will maintain the market free from fraud. SEC's mission is "to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation" (The US Securities and Exchange Commission, 2001). They have act as government agency to control and had implemented two new rules namely Rules 10b5-1 and 10b5-2 to weaken the act of illegal practices of insider trading. SEC has made these rules as one of its priorities. Rule 10b5-1 states that a person is aware of trading non-public information while making the purchase or sale of the securities. Anyhow, the rule addresses some exceptions in certain situations and to ensure the trading of information is not a cause in the decision, this includes agreeable pre-existing plan, an agreeable contract from both parties as well as guidance that was made in good faith.
On the other hand, 10b5-2 rules clearly states regarding the "misappropriation theory" that applies to certain non-business relationships. In other words, it is the breaching issues between family and non-business relationship that can create liability, which it can give investor the privilege to receive confidential statement in accordance to duties of trust. By law, if an individual have knowledge that is not public, it cannot be used to trade decisions. Violating the duty of trust will be one form of illegal insider trading (Dachary Carey, 2013).
Insider Trading's Safeguards (Section 16 Requirements)
Section 16 of the Securities and Exchange Act (1934) crave all officers, directors as well as 10% owners or it can be called as "insider" to buy and sell the company's stocks within six months. The company has full rights on the profits gained. Hence, the desire to gain will be difficult and indirectly slowly removing insider traders. A company also has the duty to publish and acknowledge if there are any changes in the structure of the organization. This can be ownership positions and distribution of shares.
Significant Penalties
Based on the Securities Exchange Act of 1934, under sections 10(b) and 14(e), the SEC has the power to acquire a court order to violator. The violators will be charged and need to return their trading profits obtained. Not only that, SEC has the right to ask the court to increase the penalty imposed up to three times. Below is the maximum fine imposed by several countries for additional information; C:\Users\Farah Amelia\Desktop\Capture.PNG Source: Patrey Maney (2010)
Manage this issue
In business insider training must be provided to worker as well as refreshing their mind about awareness of the law. Not only that, to take charge and being responsible for their own work in order to not be caught for illegal insider trading. According to Tony (2010), market should not permit insider using non-public information to avoid insider getting harm in trust. This will give significant impact on economy such as capital as well as public cost. It will increase and affects the economy in a whole.
In addition to that, to manage this unethical issue, an individual taking charge of this insider needs to be closely monitored. It is best to totally not getting involved in illegal trading. It will consume time and tarnish your reputation as a lot of bad perceptions had been made. Hence it is very important to control and manage the flow of information. Information is valuable that it should not be shared with anyone who is not an insider (F. John. Rey, 2013).This is to ensure the best interest of the company itself. Each and every one also needs to be educated about the policy and how an individual can be considered as an illegal insider trading.
Summary of Case Analysis- Legal Affairs
The NSW Supreme Court sentenced Calvin Zhu, 31, for two years and three months in jail for insider trading with his syndicate members. Furthermore, The NSW Supreme Court included one more the syndicate's crime that they tried to ramp an Australian uranium miner, Bannerman Resources with a fake bid to discard the stock the day of taking charge. Zhu's first job was at a corporate advisory firm Caliburn and had involved in insider trading since 2006. At that time he made $81,483 on insider trades. After that, Zhu moved to Hanlong in 2010, taking the position of head of investment and a vice-president on a salary of $200,000. He organized a private trading syndicate that he would invest in the stock-market with some of his people who share the same goals with him. They named the syndicate, "Golden Stone" and they had lost $1.5 million on initial bad investments. So, Zhu and his syndicate members went about trading on Hanlong's investments and made a fake bid for Australian uranium miner Bannerman . This had caused 1.25 million shares that had been purchased in the company at 61c in July 2012. When the bid was made, Golden Stone sold their shares and this indirectly making Bannerman's share price rose up, hence Hanlong released its bid for Bannerman. Then Hanlong made a bid for miner Sundance Resources for a share on July 15 2012, with Golden Stone previously buying up $1.03m worth of Sundance shares. The group dumped the shares when the takeover bid was announced, netting $1.2m.
Discussion
To be a successful investor, evaluating a company that you will invest is very important especially, evaluating the company's current position or value. To evaluate a company, you might have sufficient knowledge and understanding on the basics of stocks, how the market operates, and so on. In addition, the investors should also focus on the corporation's risk-return relationships when enquiring shares.
According to the article, Calvin Zhu is jailed for two years and three months in prison due to insider trading. He made a lot of money by insider trading when he began his first job. And then when he moved to Hanlong with a salary of $200,000 in 2010, he made his team, named Golden Stone to do insider trading. Golden Stone didn't really go well and then he got caught finally. He could be involved in insider trading because he was with the people on the position of managing the company's invests, shareholders and stockholders
According to an article on Forbes (2012), "the government's crusade against insider trading has been among the most successful white collar crime-fighting measures in the nation's history". Beginning in 2009, almost 70 guilty verdicts had been involving quite a huge amount of officials in and out of Wall Street (Forbes, 2012). Golden Stone lost $1.5 million on initial bad investments, so he and his team went about trading on Hanlong's investments and also made a false bid for Australian uranium miner Bannerman.
To suspect or prevent that kind of crimes, a government has to practice some regulations. In the US, authorities have built cases by securing co-operation of Wall Street insiders and capturing private phone calls between traders on wire taps, or court-authorised secret recordings of phone calls. So they could see how many insider traders are there. In UK, the efforts of the regulators have stepped up to clamp down on insider trading, sometimes in conjunction with the US. (US steps up probes on insider trading, 2012) Furthermore, U.S Securities and Exchange Commission (SEC) adopted new rules that can prevent insider trading as above.
Conclusion
As a conclusion, insider trading is definitely terms that need to be extra careful with. It can benefit and harm an individual. As for us, we belief that insider should be abolished totally. It brings no good to anyone but just unfair and can create a situation whereby blaming each other is unhealthy. Due to insider trading, a lot of people are at the warzone to fight or to flight. Thus we personally think that insider trading should be seriously enforced and publish globally to prevent these unethical practices to spread. Not only that, by not being one of the insider trading, an individual can shape their characteristics like good communication skills, to socialize with your friends/relatives as well as having good critical thinking skills.
Appendix (Article)
LEGAL AFFAIRS- Hanlong exec jailed for insider trading
By Leo Shanahan. (2013).
Calvin Zhu, 31, was yesterday sentenced in the NSW Supreme Court to two years and three months in jail for insider trading, which included the formation of a syndicate with Hanlong's former chief executive and other senior executives to privately trade off the company's future investments.
The syndicate's crimes included a fake bid for an Australian uranium miner, Bannerman Resources, to ramp its shares, only to dump the stock the day the takeover was announced. Zhu's history of insider trading dated back to 2006, when he began his first job at corporate advisory firm Caliburn, during which time his wife opened a bank account in which Zhu would place his trades. While at Caliburn, Zhu made $81,483 on insider trades.
In his sentencing remarks judge Peter Hall said Zhu "knew what he was doing" was wrong at Caliburn and "was fully aware that he was breaching company policy and was acting dishonestly". Zhu then moved on to Credit Suisse, where he used his role as a consultant on two takeover bids to pass on information to his wife and friends to make trades in the affected companies.
But what Justice Hall characterised as the "most serious offence" occurred when Zhu moved to Hanlong in 2010, as a vice-president and head of investment on a salary of $200,000.With the company's then chief executive Steven Xiao -- who has since fled back to China -- the company's chief financial officer, Simon Yang, and chief operations officer Nelson Feng Chen, a private trading syndicate was set up whereby the men would invest in the stock market.
After the syndicate, called Golden Stone, lost $1.5 million on initial bad investments, Xiao and Zhu went about trading on Hanlong's investments. This included an audacious false bid for Australian uranium miner Bannerman at 61c in July last year, with the syndicate previously purchasing 1.25 million shares in the company.Once the bid was made and Bannerman's share price rocketed, the syndicate sold their shares and Hanlong dropped its bid for Bannerman.
Hanlong then made a bid for miner Sundance Resources for 50c a share on July 15 last year, with the men previously buying up $1.03m worth of Sundance shares. The group then dumped the shares when the takeover bid was announced, netting $1.2m. Justice Hall said that despite Zhu's good record, genuine contrition and his young family, he felt it necessary to impose a custodial sentence as it had "real bite" as a general deterrent to others. Zhu will be eligible for parole in May next year.
