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. In other words, insider trading is also called insider dealing. It is strictly against the law.
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). 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, 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. And they announced that a fake bid for an Australian uranium miner, Bannerman Resources, to ramp its shares, only to dump the stock the day the takeover was included in the syndicate's crimes. Zhu started the insider trading since 2006 when he began his first job at corporate advisory firm Caliburn and at that time he made $81,483 on insider trades. After that, Zhu moved to Hanlong in 2010, as a vice-president and head of investment on a salary of $200,000. He set up a private trading syndicate that he would invest in the stock-market with some of his people who have same goals with him. They named the syndicate, "Golden Stone". Golden Stone lost $1.5 million on initial bad investments, Zhu went about trading on Hanlong's investments. And also, a false bid for Australian uranium miner Bannerman with the syndicate previously purchasing 1.25 million shares in the company at 61c in July 2012 is included. Hanlong made a bid for miner Sundance Resources for 50c a share on July 15 2012, with the men previously buying up $1.03m worth of Sundance shares. The group dumped the shares when the takeover bid was announced, netting $1.2m.
Discussion
Throughout the paper, first and foremost, an individual should know and aware with the term of insider trading and the parts of it in order to avoid being the victim of this unfair insider trading. Once an individual has the acknowledgement, then it will be easier to invest or making trades accordingly and in line with the laws.
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 sentenced to two years and three months in jail for 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 did not 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. The list of achievements arising from its most recent initiative begun in 2009 includes nearly 70 guilty verdicts of a broad range of officials in and out of Wall Street." 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. It comprises of two, the legal side and the illegal side of insider trading. Not only that, the paper includes scenario and example to further expand the comprehension of insider trading. Importantly the steps taken by government agency have been thoroughly discussed. Rules 10b5-1 and 10b5-2 had been included. Furthermore, significant penalties from different countries could be a bench mark for Malaysia in the future.
As for the case analysis and summary, it can be seen how harmful it could be to get involved in insider trading. The case showed that Calvin is very risky in decisions he made. He will jump from one career to another just to get more money. However, the syndicate called "Golden Stone" was a failure and Calvin had been prisoned for three years due to this. It can be seen that "Hanlong" helped Calvin to trade for more information. Alternatives that had been made as well is being briefly discussed here. Penalties of insider trading are scary and up to the standard to scare people off and to not smoke again.
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 nothing. 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 enforce and publish globally to prevent this unethical practices. Not only that, by not being one of the insider trading, an individual can shape their characteristics like good communication skills, to sociolize with your friends/.relatives as well as having good critical thinking skills.
