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Msg. 56346 of 62138 |
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BY JOSHUA KENNON But many investors are still unsure about what insider trading is, how it works, and why it's such a big deal, despite all the coverage. In simplest terms, some investors' desires to make money are strong enough to cause them to ignore key rules and regulations that are designed to keep the market fair for all investors.
The History Behind Insider Trading The U.S. Securities and Exchange Commission (SEC) became involved after the Securities Exchange Act was passed in 1934, but the Act didn't actually prohibit such trading. Nor did it even really define it, so the SEC was limited when it came to taking enforcement actions.1 That's changed significantly in the millennium. The SEC reports that it has filed insider trading complaints against hundreds of financial professionals, attorneys, corporate insiders, and hedge fund managers.2
The Definition of Insider Trading The trader must typically be someone who has a fiduciary duty to another person, or to an institution, corporation, partnership, firm, or entity. You can get into trouble if you make an investment decision based upon information that's related to that fiduciary duty if that information isn't available to everyone else.2 A fiduciary duty exists when one individual or entity has an obligation to act in another's best interest. Fiduciaries have duties of care, loyalty, good faith, confidentiality, prudence, and disclosure. Insider information allows a person to profit in some cases and to avoid loss in others, such as in the Martha Stewart/ImClone scandal.
When No Fiduciary Duty Is Present
Punishable and Non-Punishable Insider Trading
An Example: U.S. vs. O'Hagan Mr. O'Hagan eventually sold his options and realized a $4.3 million gain. He chose to acquire the options based on information that wasn't available to other investors. He did so without informing his firm. He was found guilty on 57 charges, but his conviction was overturned on appeal.3 The case eventually found its way to the Supreme Court where the conviction was reinstated in a 6-3 decision. The Court found that O'Hagan was guilty of "employing a deceptive device...in connection with the purchase of a security."
The Case of Barry Switzer Switzer was at a track meet when he overheard a conversation between executives concerning the liquidation of the business. He purchased the stock at around $42 per share and later sold it at $59 per share, earning about $98,000 in the process. The charges against him were later dismissed by a federal judge due to a lack of evidence. Switzer probably would have been fined and served jail time if one of his players was the son or daughter of the executives, and if they mentioned the tip to him off-handedly. The Supreme Court found that the tipper had not breached their fiduciary duty for personal gain.4 The line between "criminal" and "lucky" is admittedly blurred in some insider trading cases.
What Are the Penalties for Insider Trading?
Section 16 Requirements: Safeguards Company insiders are also required to disclose changes in the ownership of their positions, including all purchases and dispositions of shares.
 Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth. |
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