Financial Institutions Report ² insider trading

INSIDER TRADING

SUBJECT: FINANCIAL INSTITUTIONS SECTION: D SUBMITTED TO: SIR SHARIQUE AYUBI SUBMITTED BY: QURATULAIN SIRAJ 8726 MARIA KHAN FAWAD
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Financial Institutions Report ² insider trading

LETTER OF TRANSMITTAL
February 1st, 2011 Sir Sharique Ayubi, Instructor of Financial Institution, Institute Of Business Management (IoBM), Karachi. Respected Sir, Subject: REPORT ON INSIDER TRADING This letter is pertaining to the report that shows the history, process and practices of the Insider Trading in Pakistan & worldwide . Now this report is complete, it can be viewed for assessment. This report has been prepared as a part our course requirement, Financial Institutions in order to understand the basic working as well as the shortcomings of one of the Financial Institutions here in Pakistan. Thank you for giving the opportunity to prepare this report. We hope this report will fulfill your expectations from us regarding this course. Sincerely, Quratulain Siraj 8726 Maria khan Fawad

2|P ag e INSTITUTE OF BUSINESS MANAGEMENT

Financial Institutions Report ² insider trading

ACKNOWLEDGEMENT
We would first like to thank Almighty Allah who gave me the strength to complete this report. Then we are grateful to my teacher Sir Sharique Ayubi for teaching us the curriculum of Financial Institutions . His versatile knowledge in this field and the unique teaching style has developed my knowledge and cleared many concepts regarding the finance institutions. Sir Sharique Ayubi demonstrated the real financial existence, providing us with practical cases from daily routine life, as well as those available in the financial world. We are all the most grateful to him for assigning this research work, which has helped me to evaluate the trend in the insurance industry and to see where it is lacking. Moreover we are also thankful to him for his guidance and help which he has extended during the course for this report. Finally we bestow our appreciation to all those who have directly or indirectly supported us with their assistance and guidance to complete this research work and to those who helped us in making this report more meaningful by participating in the survey and sharing their views regarding the services of the insurance industry.

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........................ 13 The legal versus the illegal .............................................................................................................................................................................................................. 16 Common law............................................ 29 References «««««««««...... 26 Atiq Raza Pays $3m Fine.................................................................................................. 16 SEC regulations .................................................................................................................................................................................................. 27 JS GROUP IN CRIME:......................... 21 REAL LIFE EXAMPLES & CASES:....................................................................................................................... 17 Court decisions ................................................................................ 12 LEGAL TRADING: .................................................................................................... 19 ARGUMENTS FOR LEGALIZING INSIDER TRADING: .......................................................................................... 25 Credit Suisse Banker Charged With Insider Trading :...................................................................................................................................................... Settles Insider Trading Charges (Jan 2008): .....................................................................................................................................................................................................................................................................................««««««««««««««««««««««««30 4|P ag e INSTITUTE OF BUSINESS MANAGEMENT .................................................................................................................................................................................................................................................. 5 INTRODUCTION: ................................................................................................................................ 15 DISADVANTAGES OF INSIDER TRADING: ................................................................................ 28 CONCLUSION: .......... 13 ADVANTAGES OF INSIDER TRADING:................................................................................................................................................ 22 Insider Trading Can Now Touch Many Corners of the World: .............................................................................................. 12 ILLEGAL TRADING:...... 2 ACKNOWLEDGEMENT .............................................................................................................. 3 WHAT DOES INSIDER TRADING MEAN?.............................................................................................................................................................................................................................................................................................................. 17 THE PENALTIES FOR INSIDER TRADING .................................................................................................................... 5 Various definitions: .................................Financial Institutions Report ² insider trading Table of Contents LETTER OF TRANSMITTAL........................................................................................................................................................................................................ 26 2 Insider Trading Cases Take Center Stage (white collar watch) ............... 27 Galleon Chief and Associate Indicted in Insider Case ...................................................................................... 9 WHO IS AN INSIDER: ............................................... 15 LAWS GOVERNING INSIDER TRADING: .................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................. 10 NOT AN INSIDER: ............................................................................................................... 16 American insider trading law............................................................................................................................................. 11 TYPES OF INSIDER TRADING: .................... 28 Martha Stewart .....................

as insiders have an insight into the workings of their company.Financial Institutions Report ² insider trading INSIDER TRADING WHAT DOES INSIDER TRADING MEAN? INTRODUCTION: Investopedia explains Insider Trading can be illegal or legal depending on when the insider makes the trade: it is illegal when the material information is still nonpublic-trading while having special knowledge is unfair to other investors who don't have access to such knowledge.. In most countries. Directors are not the only ones who have the potential to be convicted of insider trading. it may be wise for an investor to look at these reports to see how insiders are legally trading their stock. usually within a few business days of the trade.g.S. trading conducted by corporate officers. and large shareholders may be legal.. However. Insider trading is the trading of a corporation's stock or other securities (e. bonds or stock options) by individuals with potential access to non-public information about the company. or significant shareholders (in the U. Illegal insider trading therefore includes tipping others when you have any sort of nonpublic information. key employees. While "legal" insider trading cannot be based on material non-public information. directors.g. Insider trading is legal once the material information has been made public.[1] In the United States and several other jurisdictions. still requires all insiders to report all their transactions. The SEC. or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company. People such as brokers and even family members can be guilty. trading by corporate insiders such as officers. however. Many investors follow the summaries of these insider trades in the hope that mimicking these trades will be profitable. directors. defined as beneficial owners of ten percent or more of the firm's equity securities) must be reported to the regulator or publicly disclosed. key employees. So. about 5|P ag e INSTITUTE OF BUSINESS MANAGEMENT . if this trading is done in a way that does not take advantage of non-public information. the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation. at which time the insider has no direct advantage over other investors. some investors believe corporate insiders nonetheless may have better insights into the health of a corporation (broadly speaking) and that their trades otherwise convey important information (e.

Many companies continue to grant stock options after IPO. When you get closer to IPO. If you are a founder of a company. there are at most 4 times during a year when an insider can sell stock anyway. If you see insiders in fairly young companies selling stock. Joe might have vested options on a million shares. 6|P ag e INSTITUTE OF BUSINESS MANAGEMENT . and has thus sold 1% of his stock to buy a new house. either by selling very cheap stock they've had a while. or even an early employee. sometimes readers get very excited if they see that Joe Blow. although insiders are often wrong. Normally. is cashing out. Obviously. the imputed meanings are rather different The timing of sales also means relatively little. and it is easy for other events to knock this down to 1-2. you will likely get some stock options. so they can trade their stock. although the prices are of course much higher. it is advantageous to spread this out. or own stock at minuscule prices (i. Illegal insider trading is believed to raise the cost of capital for securities issuers. I've heard of cases where people got stuck for 2 years post-IPO not being able to sell any stock. Insider purchases and sales are closely watched. Silicon Valley financial advisors tell people to sell some stock every year for tax reasons. thus decreasing overall economic growth.. this rarely means very much. That is. greater commitment to the corporation by officers purchasing shares. but they used to strongly encourage actual purchase of some of that stock. which tends to force some different strategies. or by same-day exercise of a stock option and selling the resulting stock. in order to have stock that could get favorable capital gains handling when sold 6 months after IPO. CEO.. has sold 10.000 shares and now owns 0. The list of stock still owned strangely doesn't mean very much either. It is illegal to trade your own stock in a company based on this information but it is also illegal to give someone that information. for better or worse.Financial Institutions Report ² insider trading the pending retirement of an important officer selling shares. etc.10/share on stock you hope will be worth at least $10 at IPO. What is not obvious from the paper is whether our friend Joe has no options left. at least 2 years in advance of a potential IPO. any above gets a NonQualified Option treatment. as only a certain amount per year gets the favorable Incentive Stock Option (ISO) treatment. which is usually adjusted via splits or reverse-splits to be in the $10-$30 range.. a tip. this might be worth investigating as a BUY signal . However. If you see insiders buying a lot of stock on the open market. stock option pricing gets closer to an IPO price. From taxtreatment.) I don't know how the rules are now.) Insider trading is only illegal when a person bases their trade of stocks in a public company on information that the public does not know. Another example is insider sales. like $. or even 0. and about to leave.e.

. where pure-supercomputer companies have occasionally had crazed fluctuations because some $20M machine got held up a week). and takes longer than you'd expect. but insiders do not usually both buy and sell their stock in within the same 6 months. or even fairly early in. and shipped in the last 2 weeks. for example. In some parts of the computer business. You exercised the options . no trades are permitted until the quarterly report appears. so people quite often have no idea at this time whether they'll make the numbers or not. the government shutdown and its effects on buying and export licenses is a bit strange.Financial Institutions Report ² insider trading If you have been in a high-tech startup.] It is especially difficult to get money out if you are an insider. and the lawyers will tell you that you shouldn't trade then. I'm still working on some I got in 1985. Insiders may make no trades when forbidden by covenants that are part of IPOs or merger deals. but there used to be a terrible trap where you (a) sold some stock (b) then. Insiders should avoid trades when in possession of material information that might affect the stock. This may be actually true in some businesses. and should ask the lawyers about extra rules that aren't laws but offer some insurance against lawsuits. There is usually a minimum of a 6-month block after an IPO. at least partly because it might or might not happen. This may knock out some of the 4 months. It is far more complicated. but whose import stuck.] 7|P ag e INSTITUTE OF BUSINESS MANAGEMENT . to avoid lawsuits. (This leaves insiders just 4 months per year. and is not yet public. where the Christmas season is crucial. in some retail businesses. whose details I forget.) During month 1. Company officers must be especially careful about lawsuit issues. and lawsuit issues. and may be difficult to predict a year in advance. For instance. plus a few days for market to digest the results. [Years ago. slightly less than 6 months later. advisors mentioned some horror stories.. that is. it is personally dangerous to say: "I expect to sell stock 9 months from now... Right now. but not others. an awful lot of business is booked during month 3. tax laws such as alternate minimum taxes. I don't know if this rule is still around. to get that money out without giving it to the IRS :-) [I do first-in-first-out on option exercises . I think the rule has been mellowed to allow purchase of options and sell them off. and probably 3 after a merger." Don't count on it. This is especially true for high-end machines (like supercomputers.. given SEC rules. were reminded that you had options expiring.. it is likely that much of your net worth exists in stock ownership and options of that company. Theoretically. Insiders usually do no trades in month 1 and month 3 of a quarter for the following reasons. Similar weirdnesses go on. by the beginning of month 3 you know how the quarter will be. and blam some computer at SEC nails you for illegal trading. somebody might be negotiating a merger or some really major sale.

" But in general. if an insider needs some money quickly. that is. s/he cannot call their broker and sell some stock in the company on the spur of the moment. the whole mess might be paraphrased as: "You are in a maze of twisty little rules. the rules (explicit and implicit) strongly discourage insiders from trading (mixtures of buying and selling) their own stock very often. and of course.e. you might go either route. all alike. since insiders usually have stock options. that means they mostly sell. then you need to come up with $100. you can do one of two things. then sell it. what insiders do is use existing money. When you exercise an option (i. Non-qualified option treatment forces this. or quite often. The only way to get that might be to sell some shares you already own. and the recommended percentage was 10%. as you have to sell enough to cover the purchase. this will get a little more rational.e. i.. First. and sell less. It may be that with the changes to stockholder lawsuit rules. So if the current stock price is $20. If what you have is vested options. Unlike "regular" people. you might purchase the stock and keep it for a year. But if your option price is $10 and you want to buy and hold the shares. lawyers have recommended extreme paranoia regarding lawsuits. In fact. They advise this for diversification.000. some executive employment contracts have some really complicated agreements.Financial Institutions Report ² insider trading When considering the rules mentioned above. financial advisors tell people that. no matter how well they think the stock will do over the long run. If your option price is $. as described above. We once had a "class" in this. just a general idea. but that was years ago. Finally. borrow money with the options as security . and to spread it out to lessen the effects of the alternative minimum tax. and you have 10. which has often caused people trouble later on. but also placing restrictions on buying or selling stock. often involving loans made the company to the executive to buy stock (so they can buy it when they aren't allowed to sell any to get the money to buy it with). note that you may not be allowed to sell when you'd like to. This gets tricky. so they have the cash available. Further complicating the picture for an ousider trying to interpret the moves of insiders. you are subject to later price fluctuations. for good reason. AND get 8|P ag e INSTITUTE OF BUSINESS MANAGEMENT . you might buy shares and hold them. thus keeping some shares.. in doing so. If you are an insider. keeping the difference. plus some other rules about taxtreatment on pre-IPO stock options.000 options. they cannot even be guaranteed that a window of opportunity to do so will necessarily be predictable.. incurring a normal tax liability on the difference between option price and exercise price. thus getting more favorable capital-gains treatment (at least sometimes) on any gain. Or. then you might exercise some. cover the tax liabilities.10.. as it has been. you might do a same-day exercise. (So. purchase the stock). and was not a hard rule. spend $1000. they should sell some % of what they have left every year. purchase the stock and immediately sell it.) Now on to the mechanics of exercising options as an insider. Of course.

there are often key executives who do not have large stock positions (either owned or vested options). This means that they'd better sell off enough stock to cover the loan. it was banned. Thus. and the taxes incurred from selling the stock. Actually own zero shares. You get $200K (sell 10.. assuming you want to buy and hold the shares. they are required (or encouraged by interest on the loan) to do so. After the excesses of the 1920¶s. It takes work to know whether or not a sale is substantial.. Here. Probably approximately 40% goes to IRS and (here) California. the subsequent decade of depression. leaving $60K in cash to actually do something with. leaving $100K. wanted to buy a nice house. with serious penalties being imposed on those who engaged in the practice. That way the insider trading is not kept a secret and anyone 9|P ag e INSTITUTE OF BUSINESS MANAGEMENT . not by short-term price fluctuations. an executive may have an employment contract that includes an $X loan (where I've heard of $X in the millions). And these are basically driven by SEC rules. insiders were not founders or early employees. where they moved to the area. Do same-day exercise once or twice a year. any employees who have significant stock positions and/or legal advice that restricts the timing of sales). and the deal is that within N months of being allowed to exercise options. A slightly different pattern shows up in more-established companies where stock options are not as widespread. not just legal insiders. and the resulting shift in public opinion. Various definitions: Insider trading was not considered illegal at the beginning of the twentieth century. legal advice. for many insiders (and in fact. moderate sales by insiders . Insider trading is legal when these corporate insiders trade stock of their own company and report these trades to the U. Bottom line: founders often actually own lots of stock. Thus. a Supreme Court ruling once called it a ³perk´ of being an executive.000 shares @ $20). the natural state of affairs gets to be (as the absolute cost of options goes up): y y y Have a bunch of vested options that account for a big chunk of one's net worth. For instance. when most people hear the term ³insider trading´ they think of the illegal version. in fact. The only way to figure this stuff out is to backtrack through the annual reports and read the fine print. simply don't mean much. sometimes so do early employees. pay $100K (exercise the options @ $10).S. and tax laws. Securities and Exchange Commission (SEC). but other officers and actually. the term ³insider trading´ can also mean the perfectly legal buying and selling of stock by a company¶s corporate insiders. and they may decide their stock is undervalued and buy a bunch on the open market. But.Financial Institutions Report ² insider trading some actual cash out! I'll continue with the example. However.

) However. WHO IS AN INSIDER: A company insider is someone who has access to the important information about a company that affects its stock price or might influence investors decisions. Insider trading is commonly restricted or prohibited by law. for example. (In the Martha Stewart ImClone scandal. if this trading is done in a way that does not take advantage of non-public information. and large shareholders may be legal. The Vice President of Sales. nonpublic information about the security.´  Insider trading occurs when someone makes an investment decision based on information that is not available to the general public.  It can also be defined as ³The practice by which a manager or other insider uses material information not yet disclosed to other shareholders or the outside world to make profits by trading in the firm¶s stock. the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation. In some cases. trading by corporate insiders such as officers. knows how much the company has sold and whether it will meet the estimates it has provided to investors. Others within the company also have material information. avoid a loss.Financial Institutions Report ² insider trading can find out a corporate insider¶s opinion of his or her company. the latter happened to be the case.  In other words.g. it is the trading of a corporation's stock or other securities (e. It¶s also called insider dealing. This is called material information. directors. The company executives obviously have material information. in others. or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company. The accountant who prepares the sales forecast 10 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . the information allows them to profit. key employees.Here are few definitions:  Business dictionary defines it as Buying or selling the securities of a publicly traded firm by an insider to benefit from insider information. In most countries. bonds or stock options) by individuals with potential access to non-public information about the company.  Investopedia explains Insider Trading as the buying or selling of a security by someone who has access to material.

as defined above. Second. If the company is developing a new product that could be a big seller. provided the information they have is material. or someone hired to handle the material information? In a word it¶s "No". are also insiders. First. that¶s illegal.Financial Institutions Report ² insider trading spreadsheet and the administrative assistant who types up the press release also are insiders. are considered insiders. lawyers. financial or development teams. So are some of the financial analysts. The SEC includes in its definition of insiders those who have "temporary" or "constructive" access to the material information. if the CEO of a company buys or sells 500 shares he or she is required to notify the SEC within two days of the trade. The individuals in Investor Relations and/or Public Relations who prepare the public announcements also are insiders. if the CEO knows the company is not going to get a big contract and sells before telling the world. you are now every bit as much an insider as he is. This remains true regardless of how many times the 11 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . if it is smart. This list could include brokers. The top sales people usually also are insiders. being an insider means being subject to severe limits on when you can trade in the company stock. Other individuals who are not employees. limits the number of people who have access to material information and. If the President of a company tells you that the company's best hope for a breakthrough product isn't going to get regulatory approval. bankers. although a regional sales manager who only sees his or her own region's results may not be one. with respect to that information. This is done for a couple of reasons. therefore. The SEC classifies key employees and directors as insiders and requires them to register their trades of company stock with two trading days. However. The company's senior management are insiders. but with whom the company needs to share material information. It is equally illegal for you to do so because you are now a "temporary insider". they want to limit the likelihood that anyone will "leak" the information. usually only the middle month of each quarter. etc. For example. It is illegal for him to trade based on that knowledge before it becomes public knowledge. the key people in the Research & Development team would also be considered insiders. That information is public and available to any investor. A public company. NOT AN INSIDER: So does that mean you are not an insider unless you are on the company's management team. As long as the insider is trading on information that is generally available to the public no laws are broken.

even if you stole the information. TYPES OF INSIDER TRADING: LEGAL TRADING: Legal trades by insiders are common. and during this period the insider comes into possession of material 12 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . US law restricted trading such that insiders mainly traded during windows when their inside information was public. When corporate insiders trade in their own securities. the barber. based on that knowledge. Prior to 2001. baby sitter. doctor and you are all "temporary insiders". Anyone who has material information is prohibited from trading. The US Supreme Court ruled recently. who tells her doctor. directors. who tells her baby sitter. However. But the term actually includes both legal and illegal conduct. as employees of publicly-traded corporations often have stock or stock options. adopts a written. binding plan for trading in the future.[3] SEC Rule 10b5-1 clarified that the U. they must report their trades to the SEC. if a corporate insider plans on retiring after a period of time and. until the information is available to the general public. "Insider trading" is a term that most investors have heard and usually associate with illegal conduct.Financial Institutions Report ² insider trading information is passed. such as soon after earnings releases. These trades are made public in the US through SEC filings. Possession of material information makes you an insider. prohibition against insider trading does not require proof that an insider actually used material nonpublic information when conducting a trade. The legal version is when corporate insiders²officers. Insiders have an affirmative defense if the insider can demonstrate that the trades conducted on behalf of the insider were conducted as part of a preexisting contract or written. as employees of publicly-traded corporations often have stock or stock options. and employees²buy and sell stock in their own companies. possession of such information alone is sufficient to violate the provision. These trades are made public in the US through SEC filings. mainly Form 4. binding plan for trading in the future then the trade is legal. binding plan to sell a specific amount of the company's stock every month for the next two years.[3] For example. as part of his or her retirement planning. who tells you. Rule 10b5-1 also created for insiders an affirmative defense if the insider can demonstrate that the trades conducted on behalf of the insider were conducted as part of a preexisting contract or written. and the SEC would impute an insider in possession of material nonpublic information uses this information when conducting a trade. that this even applies to someone with no ties to the company.S. If the president tells his barber. Legal trades by insiders are common.

Insider trading violations may also include "tipping" such information. securities trading by the person "tipped. 13 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . if the insiders are buying the stock. the term "insider trading" actually includes both legal and illegal conduct. while in possession of material. ILLEGAL TRADING: Rules against insider trading on material non-public information exist in most jurisdictions around the world. and makes the most serious efforts to enforce them. Reports of transactions by insiders are filed with the SEC on Forms 3. Visit Yahoo Finance and select a security. The legal version is when corporate insiders²officers. they must report their trades to the SEC. Here is the insider trading page for Citigroup for an example. nonpublic information about the security.Financial Institutions Report ² insider trading nonpublic information about the company. Rules against insider trading on material non-public information exist in most jurisdictions around the world. and makes the most serious efforts to enforce them. Most of the internet based financial quote sites have insider trading information for each particular security. Many investors and traders use this information to identify companies with investment potential. the theory being. buy and sell stock in their own companies. including the criminal case against Martha Stewart have enforced that view. then select the menu choice for Insider Transactions. though the details and the efforts to enforce them vary considerably.[4] The legal versus the illegal "Insider trading" is a term that most investors have heard and usually associate with illegal conduct. However. The United States is generally viewed as having the strictest laws against illegal insider trading. directors. and the SEC has an excellent overview of these forms and the requirements for filing of same. though the details and the efforts to enforce them vary considerably. so it is a good idea to buy the stock. In other words Illegal insider trading refers generally to buying or selling a security. The United States is generally viewed as having the strictest laws against illegal insider trading. 4 and 5." and securities trading by those who misappropriate such information. Recent government actions. in breach of a fiduciary duty or other relationship of trust and confidence. they must know more about their company than everyone else. When corporate insiders trade in their own securities. any subsequent trades based on the original plan might not constitute prohibited insider trading. employees and large shareholders.

securities trading by the person "tipped. directors. but that discussion is left for another day. The theory behind the prohibition on insider trading is that it undermines investor confidence in the fairness and integrity of the securities markets. who traded the securities after receiving such information. to include trading by individuals whose "relationship of trust" is so remote as to be non-existent. and used to trade. and employees who traded the corporation's securities after learning of significant. and Other persons who misappropriated. while in possession of material. Employees of law. Friends. business associates. banking. brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded. directors. Government employees who learned of such information because of their employment by the government. Thhe SEC claims that the detection and prosecution of insider trading violations as one of its enforcement priorities. or instruction that was made in good faith. Employees of financial printers who learned of the information during the course of their employment. the trader is guilty of insider trading. or about the company's stock. in breach of a fiduciary duty or other relationship of trust and confidence. nonpublic information about the security. The rule permits persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade. and took advantage of. contract. The rule also sets forth several affirmative defenses or exceptions to liability. While myself. The SEC adopted new Rules 10b5-1 and 10b5-2 to resolve two insider trading issues where the courts have disagreed. Examples of insider trading cases that have been brought by the SEC are cases against: y y y y y y Corporate officers. and employees. Insider trading violations may also include "tipping" such information. confidential information from their employers. the law today is that if material information about a company. 14 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . and other "tippees" of such officers. family members.Financial Institutions Report ² insider trading The insider trading definition that we are concerned about is the buying or selling of a security. such as pursuant to a preexisting plan. and most other securities attorneys believe that the concepts of insider trading have been expanded beyond all permissible bounds. and all investors must be aware of the potential danger in trading on a "tip" from someone who knows non-public information regarding a security. Rule 10b5-1 provides that a person trades on the basis of material nonpublic information if a trader is "aware" of the material nonpublic information when making the purchase or sale." and securities trading by those who misappropriate such information. is obtained in violation of any duty to any person. Over the last 10 years the SEC and the courts have greatly expanded this definition. confidential corporate developments.

This rule provides that a person receiving confidential information under circumstances specified in the rule would owe a duty of trust or confidence and thus could be liable under the misappropriation theory. If so. 2. both society and the firm benefit through increased price accuracy. as agents. 3. Perhaps the greatest benefit of insider trading is that it causes equity prices to disclose all relevant information as quickly as possible. 3. Nothing herein is intended as legal or financial advice. If so. Insider trading undermines public confidence in the securities markets. 2.Financial Institutions Report ² insider trading Rule 10b5-2 clarifies how the misappropriation theory applies to certain nonbusiness relationships. Insider trading is an efficient way of compensating managers for having produced information. they will not be nearly as willing to invest. the firm benefits directly (and society indirectly) because managers have a greater incentive to produce additional information of value to the firm. It violates the fiduciary duties that corporate employees. Insider trading causes the market price of the affected security to move toward the price that the security would command if the inside information were publicly available. Insider trading can injure a firm if the trading elevates prices that the firm itself has to pay. If people fear that insiders will regularly profit at their expense. ADVANTAGES OF INSIDER TRADING: 1. The reason is that insiders who know that a corporation¶s management is engaged in accounting fraud that artificially gives a temporary boost to the firm¶s market value can benefit by selling the firm¶s shares short. Insider trading is an effective compromise between the need for preserving incentives to produce information and the need for maintaining accurate securities prices. 5. DISADVANTAGES OF INSIDER TRADING: 1. owe to their principals. If you are contacted by a regulatory agency regarding trades that you made. and the facts of a particular matter can change the application of the law. The law is different in different jurisdictions. 4. you should contact a securities attorney before speaking to the regulators. Please consult an attorney or your financial advisor before acting upon the information contained in this article. the shareholders 15 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . Insider trading carries severe civil and criminal penalties. Another benefit of insider trading is that it lessens the need for corporate whistle blowers.

SEC Rule 10b-5.S.S. prohibits fraud related to securities trading. The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 provide for penalties for illegal insider trading to be as high as three times the profit gained or the loss avoided from the illegal trading. Insiders may pursue their personal interests rather than those of the firm or shareholders. insider trading laws. Thomas Newkirk and Melissa Robertson of the U. Under Section 10(b) of the 1934 Act. insider trading prohibitions are based on English and American common law prohibitions against fraud. which puts it in Zone A under the U.S.Financial Institutions Report ² insider trading 4. 6. Securities and Exchange Commission (SEC) summarize the development of U. Insider trading may also harm the corporation in takeovers situations. rather than the benefits the acquisition may contribute to the firm's wealth. This means that first-time offenders are eligible to receive probation rather than incarceration. Insider trading harms the issuer of the affected securities. well before the Securities Exchange Act was passed. 7. officers.[9] Common law U. LAWS GOVERNING INSIDER TRADING: American insider trading law The United States has been the leading country in prohibiting insider trading made on the basis of material non-public information. Section 17 of the Securities Act of 1933[10] contained prohibitions of fraud in the sale of securities which were greatly strengthened by the Securities Exchange Act of 1934. and also managers may consider the possible profit from insider trading. 5.[8] Insider trading has a base offense level of 8. or stockholders owning more than 10% of a firm¶s shares. Sentencing Guidelines. Insider trading increases the costs of a takeover.[12] 16 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . In 1909.S. Insider trading amounts to theft of property belonging to the corporation and therefore should be prohibited even in the absence of harm to investors or the firm. the United States Supreme Court ruled that a corporate director who bought that company¶s stock when he knew it was about to jump up in price committed fraud by buying while not disclosing his inside information.[11] Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits (from any purchases and sales within any six month period) made by corporate directors.

Carpenter (1986) the U. since they acquire the fiduciary duties of the true insider. are also regulated by the SEC under its rules on takeovers and tender offers under the Williams Act. Repide that a director upon whose action the value of the shares depends cannot avail of his knowledge of what his own action will be to acquire shares from those whom he intentionally keeps in ignorance of his expected action and the resulting value of the shares. ordinary relations between directors and shareholders in a business corporation are not of such a fiduciary nature as to make it the duty of a director to disclose to a shareholder the general knowledge which he may possess regarding the value of the shares of the company before he purchases any from a shareholder. In SEC v. a federal circuit court stated that anyone in possession of inside information must either disclose the information or refrain from trading. the company must make a public disclosure "promptly. by reason of the special facts.Financial Institutions Report ² insider trading SEC regulations SEC regulation FD ("Fair Disclosure") requires that if a company intentionally discloses material non-public information to one person. nobody was liable for insider trading violations in his case. it must simultaneously disclose that information to the public at large. (1966). investment bankers and others who receive confidential information from a corporation while providing services to the corporation. In United States v. rather than for personal gain. SEC that tippees (receivers of second-hand information) are liable if they had reason to believe that the tipper had breached a fiduciary duty in disclosing confidential information and the tipper received any personal benefit from the disclosure. In the case of an unintentional disclosure of material non-public information to one person. Texas Gulf Sulphur Co. the Supreme Court of the United States ruled in the case of Dirks v. yet there are cases where. the Supreme Court of the United States ruled in Strong v. Even though in general. Constructive insiders are also liable for insider trading violations if the corporation expects the information to remain confidential. or similar practices.[14] In 1909.) The Dirks case also defined the concept of "constructive insiders."[13] Insider trading.S." who are lawyers. such duty exists. Supreme Court cited an earlier ruling while unanimously upholding mail and wire fraud convictions for a defendant who 17 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . In 1984. (Since Dirks disclosed the information in order to expose a fraud. Court decisions Much of the development of insider trading law has resulted from court decisions.

O'Hagan. resulting in profits of over $4 million. 642. The Court specifically recognized that a corporation¶s information is its property: "A company's confidential information. the Wall Street Journal.[16] The Court rejected O'Hagan's arguments and upheld his conviction. O'Hagan was a partner in a law firm representing Grand Metropolitan.[15] The court ruled in Carpenter: "It is well established. a fiduciary's undisclosed..Financial Institutions Report ² insider trading received his information from a journalist rather than from the company itself. 521 U. and thereby violates 10(b) and Rule 10b-5.S. while it was considering a tender offer for Pillsbury Co. the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those who entrusted him with access to confidential information. the SEC enacted Rule 10b5-1. in breach of a duty owed to the source of the information. the justices were evenly split. Foster Winans was also convicted. In that widely publicized case. in upholding the securities fraud (insider trading) convictions. in breach of a duty of loyalty and confidentiality...qualifies as property to which the company has a right of exclusive use. defrauds the principal of the exclusive use of the information. In 1997 the U. O'Hagan used this inside information by buying call options on Pillsbury stock. Under this theory.constitutes fraud akin to embezzlement ± the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another. as a general proposition.. when he misappropriates confidential information for securities trading purposes. The "misappropriation theory" holds that a person commits fraud "in connection with" a securities transaction." In 2000. on the grounds that he had misappropriated information belonging to his employer. so that he did not commit fraud by purchasing Pillsbury options. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company's stock. Supreme Court adopted the misappropriation theory of insider trading in United States v. self-serving use of a principal's information to purchase or sell securities.S." However. that a person who acquires special knowledge or information by virtue of a confidential or fiduciary relationship with another is not free to exploit that knowledge or information for his own personal benefit but must account to his principal for any profits derived therefrom. O'Hagan claimed that neither he nor his firm owed a fiduciary duty to Pillsbury. The journalist R. The undisclosed misappropriation of such information in violation of a fiduciary duty. which defined trading "on the basis of" inside information as any time a person trades while aware of material nonpublic 18 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . 655 (1997). Winans traded in advance of "Heard on the Street" columns appearing in the Journal.

The CFA Institute in its code of ethics states that analysts should make every effort to make all reports available to all the broker's clients on a timely basis.[19] Punishments and Rewards Associated With Insider Trading According to the SEC website there are almost 500 civil enforcement actions each year against individuals and companies that break securities laws. or STOCK Act" was introduced that would hold congressional and federal employees liable for stock trades they made using information they gained through their jobs and also regulate analysts or "Political Intelligence" firms that research government activities. The Securities Exchange Act of 1934 in the United States allows the Securities and Exchange Commission to give a person a reward ³a bounty´ to someone who gives the Commission information that results in a fine of insider trading. the Securities and Exchange Commission (SEC) has moved to ban insider trading violators from serving as an executive at any publicly traded company.Financial Institutions Report ² insider trading information ± so that it is no defense for one to say that she would have made the trade anyway. and issue recommendations to traders. Security analysis and insider trading Security analysts gather and compile information. Nevertheless. Insider trading is one of the most common laws broken. THE PENALTIES FOR INSIDER TRADING Depending upon the severity of the case. talk to corporate officers and other insiders.[17] This information may include non-material nonpublic information as well as material public information. banned from sitting on the executive or board of directors of a public company and even jailed. except in an effort to make that information available to the general public. The person can be fined. analysts' reports may contain a variety of information that is "pieced together" without violating insider trading laws. Thus their activities may easily cross legal lines if they are not especially careful. Analysts should never report material nonpublic information. In May 2007. a bill entitled the "Stop Trading on Congressional Knowledge Act.[18] The bill has not passed. 19 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . insider trading penalties generally consist of a monetary penalty and jail time. This rule also created an affirmative defense for pre-planned trades. which may increase in value when properly compiled and documented. The punishment for illegal insider trading depends on the situation. under the mosaic theory. In recent years.

After the firm began representing Grand Metropolitan PLC. Barry Switzer. Significant Penalties: Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 give the SEC the authority to seek a court order requiring violators to give back their trading profits. In 1988. 20 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . it seems. however. directors and 10% owners) buys the corporation's stock and sells it within six months. He purchased the stock at around $42 per share. In order for the SEC to prosecute someone for insider trading. is almost entirely blurred in such cases. This test of duty. was significantly weakened by the Supreme Court's United States vs. then-Oklahoma football coach. the conviction was overturned on appeal. By making it impossible for insiders to gain from small moves. Section 16 of the Securities and Exchange Act of 1934 requires that when an "insider" (defined as all officers. making around $98. which planned to launch a tender offer for Pillsbury. The case eventually found its way to the Supreme Court where the conviction was reinstated. After being found guilty on fifty-seven charges. On the other hand. The line between µcriminal¶ and µlucky¶. much of the temptation of insider trading is removed. all of the profits must go to the company.Financial Institutions Report ² insider trading What Constitutes Criminal Insider Trading Just what constitutes insider trading? The question is much trickier than it seems. Company insiders are also required to disclose changes in the ownership of their positions including all purchases and dispositions of shares. resulting in a four million dollar gain. James O'Hagan was a lawyer at the firm of Dorsey & Whitney.000 in the process. they must prove that the defendant had a ³fiduciary duty´ to the company and / or intended to personally gain from buying or selling shares based upon the insider information. Switzer probably would have been fined and served jail time if one of his players was the son or daughter of the executives. Following the announcement of the tender offer. and mentioned the tip to him off-handedly. based on precedence in other cases. and later sold at $59. O'Hagan ruling. Section 16 Requirements: Safeguards against Insider Trading: In order to prevent illegal insider trading. Mr. was prosecuted by the SEC in 1981 after he and his friends purchased shares in Phoenix Resources. The charges against him were later dismissed by a federal judge on a ³lack of evidence´. an oil company. Switzer was at a track meeting when he overhead a conversation between executives concerning the liquidation of the business. the options soared. O'Hagan acquired a large number of options in the company.

Don't allow insider trading. Milton Friedman.Financial Institutions Report ² insider trading The SEC can also ask the court to impose a penalty of up to three times the profit the violators realized from their insider trading. In addition to the financial penalties. Don't share material information with anyone who is not an insider. Make sure everyone in the company understands the circumstances under which they might become "temporary insiders' and how they must treat that situation. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that. Don't engage in it yourself. Frank H. because the buying or selling pressure itself is information for the market. It is in your company's best interest to prevent insider trading so you don't have the SEC investigating you. seeks to make defrauding shareholders a felony punishable by up to 10 years in prison. there are criminal penalties. laureate of the Nobel Memorial Prize in Economics.[21] Other critics argue that insider trading is a victimless act: A willing buyer and a willing seller agree to trade property which the seller rightfully owns. A bill in the US Senate. in general. Even if the company and all its officers eventually are cleared by the SEC of any wrong doing. the investigation itself can have lasting detrimental effects on the company. Daniel Fischel. Many now feel those penalties are not strong enough and are working to increase them substantially. Legalization advocates also question why "trading" where one party has more information than the other is legal in other markets. Manage This Issue: Police your insiders yourself. by more quickly introducing new information into the market. with no prior contract (according to this view) having been made between the parties to refrain from trading if there is asymmetric information. said: "You want more insider trading." Friedman did not believe that the trader should be required to make his trade known to the public. not less. They claim that insider trading based on material nonpublic information benefits investors. Henry Manne. For example. Make sure all insiders understand the responsibility this places on them. ARGUMENTS FOR LEGALIZING INSIDER TRADING: Some economists and legal scholars (e.[20] Milton Friedman. but not in the stock market. such as real estate. for instance.g. if a geologist knows there is a high likelihood of the 21 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . Easterbrook) argue that laws making insider trading illegal should be revoked. Thomas Sowell.

or bank account passwords. y Friends. business associates. There are very limited laws against "insider trading" in the commodities markets. e.g. 1792.S William Duer.S. for no other reason. corn. y Government employees who learned of such information because of their employment by the government. A British-born entrepreneur. analogous activities such as front running are illegal under U. brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded. circumstances can occur when the geologist would be committing fraud if. steel. if he had been hired by Farmer Smith to assess the geology of the farm. REAL LIFE EXAMPLES & CASES: Examples of insider trading cases that have been brought by the SEC are cases against: y Corporate officers. For example. a commodity broker can be charged with fraud if he or she receives a large purchase order from a client (one likely to affect the price of that commodity) and then purchases that commodity before executing the client's order in order to benefit from the anticipated price increase. he may be entitled to make Smith an offer for the land. etc. than that the concept of an "insider" is not immediately analogous to commodities themselves (e. without first telling Farmer Smith of the geological data. and other "tippees" of such officers. Punishment for communicating about a development pertinent to the next day's stock price might seem to be an act of censorship. However. history. banking. family members.g.[22] If the information being conveyed is proprietary information and the corporate insider has contracted to not expose it. wheat.S. Appointed by Alexander Hamilton in 1789 as the Assistant Secretary of the Treasury. confidential information from their employers.Financial Institutions Report ² insider trading discovery of petroleum under Farmer Smith's land. and employees. and buy it. because he owes a duty to the farmer. and y Other persons who misappropriated. directors. Real-life insider-trading crimes committed in U.[14] Nevertheless. and employees who traded the corporation's securities after learning of significant. He getting enough inside 22 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . Advocates of legalization make free speech arguments. he did not disclose the information. he has no more right to communicate it than he would to tell others about the company's confidential new product designs.. commodity and futures trading laws. and took advantage of. is considered to be the first inside trader in U.). confidential corporate developments. directors. y Employees of law.. who traded the securities after receiving such information. formulas. if.

000 shares of his own company using family corporations to hide the trades. when Attorney General's office were informed that he would be charged with insider trading. He also got a $100. had dumped his own shares. 1986.69 million in the takeover of Nabisco. Foster Winans. During his tenure.000 a year pension for life from the bank. Wiggin. R.Financial Institutions Report ² insider trading information to make bets on bank stocks. Dennis Levine. he served eight months of an 18month sentence and paid a $5. 1929. 23 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . were indicted on nine criminal counts of insider trading. a writer for The Wall Street Journal in the early 1980s. had shorted 40. Martha Stewart. Essentially. Brant and others before publication. an investment banker Levine turned himself in to the New York City.000 fine for misusing the Journal's information. Levine ended up with being sentenced to two years. which would have lost Stewart $45. Wiggin made $4 million from the 1929 crash. which he then intended to sell for profit. the company¶s former CEO. but was ultimately never convicted of insider trading. and ImClone's stock price dropped 16 percent. 1987. which he later declined after public outrage. Peter Bacanovic. Boesky to three years. While his tips made his coconspirators almost $1 million. ImClone CEO Sam Waksal. Albert H. In 2006 Stewart settled with the SEC with serving five months in federal prison for covering up information during the FBI investigation. She had sold her ImClone Systems stock in 2001 after Bacanovic advised her to because another client of his. the head of Chase National Bank. his knowledge also helped stock trader Ivan Boesky earn more than $50 million. Since there were no laws against this in 1929.673. While the Enron case was primarily an accounting scandal²the company lied about its debts and losses to cover up its deterioration² insider trading was certainly one of the many charges filed against the guilty parties. Wiggin built up a position that made it profitable for him if his company failed. he decided to make money off his knowledge by leaking information to stockbroker Peter N. Levine earned $2. was convicted of fraud and conspiracy. cowrote "Heard on the Street. 2003 and her broker. Duer tipped off his friends and traded his own portfolio before leaking information that would drive up prices. The next day. and was still sentenced to 24 years and four months in jail. ImClone announced that the FDA had refused to file its license application for a new cancer drug. Jeff Skilling." a financial column so influential that it could move markets. Leveraging companies inside information.

He was sentenced to 18 months in prison. Google. had access to the schedules of the CEOs and co presidents.000. They used the information to make about $690.000 fine Mark E. and settled out of court in 2007. admitted he told inside information to New Castle Funds consultant Danielle Chiesi. Christopher Balkenhol who went on to buy $448. The crime also implicated 12 other people. He is sentenced with the longest prison term imposed so far was six and a half years. The government said Jackson and Callahan made over $19. "The Wall Street Journal " columnist was convicted in 1985 of giving information to two stockbrokers about stocks he was planning to write about in the "Heard On The Street" column. Balkenhol made $82. Lenowitz has been secretly cooperating with an expanding federal investigation of insider trading on Wall Street for more than two years. IBM and AMD. former IBM executive.445. and was privy to several confidential merger meetings. 24 | P a g e INSTITUTE OF BUSINESS MANAGEMENT .000 each in profits each. Printing company worker William Jackson and stockbroker Brian Callahan were convicted of insider trading in 1990 for using stock information in "Business Week" magazine before it was distributed to the public. the arbitrageur paid $100 million to the Securities and Exchange Commission to settle insider-trading charges that he netted $50 million in illegal profits. The other players in the case. paying a $198. who was the secretary for Oracle CEO Larry Ellison.000 worth of shares in one of the companies Oracle was planning to purchase. Lenowitz (2007). a former hedge fund manager named Mark E. R. They were ordered to repay personal profits and were fined $37. They have been indicted for securities fraud and using stock tips to earn millions of dollars from illegal trades of tech company stocks including Intel.000 in profits. including stockbroker Kenneth Felis²and Winans¶ roommate. Ivan Boesky. Robert Moffat.Financial Institutions Report ² insider trading Carolyn Balkenhol. with whom he allegedly had an intimate relationship. After she shared this information with her husband. Foster Winans. David Carpenter²were also convicted. including Raj Rajaratnam. Boesky pleaded guilty to a related charge and was sentenced to 3 1/2 years in prison in 1987.000 fine. Moffat was sentenced to six months in jail and charged a $50.

) Style guru and media magnate Martha Stewart was also charged in the case. During the last one year.S. Messrs. As the process unfolded. In 2004 she was convicted of obstruction of justice charges relating to her sale of ImClone stock. James McDermott was convicted of insider trading in 2000 for giving information about pending bank industry mergers to his mistress and an adult-movie star . including insider trading and fraud. Two banks were also issued warning letters for non-compliance of the securities laws. Throughout the acquisition process. at a substantial premium. Ltd. price manipulation. other irregularities KARACHI: The Securities Market Division of the Securities & Exchange Commission of Pakistan (SECP) has detected 22 cases of violation of laws. (Feb. a relief defendant and also tipped three friends. 44 members of the Karachi Stock Exchange and six members of the Lahore Stock Exchange were issued warning letters for possible violations. She was sentenced to 10 months. was involved at each key stage of the process which led to the acquisition announcement. split between prison and home confinement. Waksal sold ImClone stock after finding out regulators had rejected an application for the company's new cancer drug . whose shares were traded on NASDAQ. Mr. Bruyette & Woods. Macdonald purchased shares of Memry in his business account and in the account of a long time friend for whom he regularly traded. Erbitux. Bruce Bohlander. 2010). subsidiary.McDermott was sentenced to eight months in prison and fined $25k while Gannon received a three-month term. an Israel company with a U. the Securities Market Division had detected 22 cases of insider trading. wash trades. Former ImClone CEO Samuel Waksal was sentenced to 87 months in prison and fined $3 million after pleading guilty to six counts. including Defendant Robert Maresca. 2. the corporate secretary and vice president of human resources. Thus. 2008 25 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . Moreover. Macdonald and Maresca consented to the entry of permanent injunctions prohibiting future violations of the antifraud provisions of the Exchange Act. Insider Trading Can Now Touch Many Corners of the World: Macdonald is a pillow talk case in which defendant Bruce Macdonald is alleged to have misappropriated inside information from his wife. Levinberg involves a question of duty. traded for his account and that of a friend and tipped others on Memry Corporation stock trading. The complaint is based on the acquisition of Scopus Video Networks. by Harmonic Inc. including insider trading and imposed penalties on the stock exchange members and other market stakeholders. broker misconduct and non-compliance of the listing regulations.000. Macdonald updated her husband. and fined $30. The deal went forward under a merger agreement entered into on December 22. Macdonald¶s wife.Financial Institutions Report ² insider trading Once the CEO of investment bank Keefe. (The drug was later approved.and blank-selling. SECP detects 22 cases of insider trading. Mr. Mrs. short. to resolve the case. it said. said the statement.

a former president and chief operating officer of chip maker Advanced Micro Devices Inc. Caremark Rx Inc. According to the SEC. Naseem was simply calling his banker-buddy in Pakistan. Mr. Insider trading case involving investment bankers: Back in March 2010. He is charged with one count of conspiracy and 25 counts of securities fraud. It appears that Naseem was more or less a full-time insider trading professional.. John H.. He worked as investment banker for the Global Energy Group at Credit Suisse bank... to resolve this action Mr. Atiq Raza Pays $3m Fine. When the OrthoClear settlement was publicly announced several days later. Thus. pay prejudgment interest and a penalty equal to those profits. 26 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . and Alexander Vorobiev.. a federal prosecutor is 37 years old. who is an UBS director. 58 years old.450. (Feb. Veritas DGC Inc. This is a classic case of investment banker insider trading. stemmed from trades he made in 2006 while serving as a director of San Francisco orthodontic device maker OrthoClear Holdings Inc. 3. In addition to TXU. Aleksey Koval.Financial Institutions Report ² insider trading and announced the next day. Naseem is accused of passing along tips involving Hydril Co. Settles Insider Trading Charges (Jan 2008): The charges against Saiyed Atiq Raza. There illegal insider transactions began at least in 2005 and ended in February 2009. Harland Co... Trammell Crow Co. using his position²as well as his office phone²at Credit Suisse to obtain information about deals and leak them to his foreign contact from the very start. He is accused of tipping off a banker in Pakistan with information about nine corporate acquisitions.. and Northwestern Corp.900. The only twist is that they used code words such as ³frequent flier miles´ or ³potatoes´ as if rich investment bankers care about potatoes! There were several different companies and defendants made close to $1 million. Energy Partners Ltd.it was a serial insider trading ring. Raza within two days of learning about the settlement (company had agreed to cease competing with rival Align Technology Inc. 2010).before the litigation settlement agreement became public. the price of Align stock shot up 48% and Mr. Credit Suisse Banker Charged With Insider Trading : Naseem. Calif) by OrthoClear's chief executive Zia Chishti. Raza netted a profit of $1. misappropriated material nonpublic information about pending acquisitions and supplied it to Koval. Igor Poteroba. mr Ejaz Rahim with the information.which would increase in value if the company's share price rose -. this case was filed against Igor Poteroba. So. including the TXU buyout. Few days ago he charged with insider trading. Where as US Securities and Exchange Commission (SEC) charged as Mr Rahim received µnonpublic¶ information about the proposed buyout of TXU Corp from Mr Naseem and then bought TXU call option contracts and stock. and a Pakistani national. He also agreed to disgorge his trading profits. he agreed to pay $3m in fine to settle SEC charges of insider trading. Levinberg consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions of the Exchange Act. of Santa Clara. Jacuzzi Brands Inc. began making large purchases of Align call options -. who in turn fed the information to Vorobiev.

Furthermore. Cuban involves his sale of a block of shares in Mamma. 3. found to have has achieved its wealth by market manipulation and delusion of the Pakistani masses that invested in the stock market. which collectively form the second largest shareholder of ANL. JS Group mutual funds being managed by JS investments. are of paramount importance to the S. Live Securities and Aziz Fidahussein brokerage house and his family members. and Angelo R. or where the buyer and seller is the same client. the former chief executive of Countrywide Financial. a Canadian internet search company now called Copernic. a transaction that drove down the price of its shares.g. The market increased thus netting them a handy profit. the S. Jahangir Siddiqui¶s son. It was uncovered that the top buyers and sellers were all clients of JS Global.Cross trading: Large volumes of shares traded within the group. in order to mislead the general public. as it tries to reestablish its credibility as the chief protector of the integrity of the securities markets. the billionaire owner of the Dallas Mavericks basketball team. and his vested interests directly resulted in numerous illegal related party transactions. Cuban avoided a loss of $750. Whereas In the enforcement action against Mr.Financial Institutions Report ² insider trading 2 Insider Trading Cases Take Center Stage (white collar watch) The civil enforcement actions against Mark Cuban. manipulative trading of shares by the clients of JS Global Capital Limited was carried out. By acquiring unusually large positions in ANL.Pumping and dumping: Large quantities of shares bought and sold by the group to artificially inflate the price. 5.Order matching: Where orders were buying and selling orders placed with a fractional difference of time. 2. Mr. or private investment in a public entity.com. In the end.000 while Mr. JS Group companies. The case against Mr. just before it announced a stock offering known as a PIPE.But this was just the beginning and the price kept increasing and so as their buy out. e. and the price of the shares was artificially hiked up.C. Mozilo. Mozilo made a profit of approximately $140 million on his stock sales. Mozilo.E. less than one minute and with the same quantity and rate for buying and selling the shares.Wash trades: Where free deliveries of shares among family members were made without any underlying transaction. The artificial increases in price were executed with a view to induce the public to buy Azgard Nine shares. SECP is clear on who carried out the manipulation and also on exactly how it was done. Jahangir Siddiqui and his collaborators bought 40% of the total market trade of ANL and then sold 33% of the total market trade to unsuspecting investors.E.Price ramping: General public induced to purchase shares at increasingly higher prices by giving them an impression of increased trading activity/liquidity. sponsors/directors of Azgard Nine Limited. 27 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . Ali Jahangir Siddiqui is a common director in both Jahangir Siddiqui and Company Limited and Azgard Nine Limited. which they have found consisted of: 1. plans to put the role of Countrywide Financial in the collapse of the mortgage securities market front and center as part of its claim that executives at the company misled investors about its risks. 4. JS GROUP IN CRIME: Various JS Group companies and funds.C.

The firm fell apart after Rajaratnam was arrested in 2009 for conspiring to trade using insider information.M. The scheme could have brought in profits of some $20 million.Financial Institutions Report ² insider trading Jahangir Siddiqui is well known to be one of Pakistan¶s most corrupt businessmen. Martha Stewart's friend Sam Waksal. Advanced Micro Devices. Stewart avoided losses of $45. She was found guilty on multiple counts. acquisitions. However. nonpublic information pertaining to upcoming earnings forecasts. Under the terms of the settlement.081 and did not have to admit or deny any wrongdoing. CEO of a biotech company called ImClone. Faneuil spoke with Stewart telling her that he thought ImClone's share price was going to drop because Waksal was trying to cash out. Raj Rajaratnam. Bacanovic's assistant. an executive of Intel.Stewart agreed to pay $195. a senior executive at New Castle Funds. and told him to sell Waksal's stock in ImClone. On December 27. Hilton Hotels and others. Thus this came to an end with serious charges on the manipulators. was charged with numerous counts of securities and wire fraud. 2001. an executive at the consulting firm McKinsey & Company. Waksal attempted to call his stock broker. Peter Bacanovic at Merrill Lynch. Chiesi were part of an elaborate network of insiders who shared tips on companies like Google. who also served as Stewart's broker. including perjury. Government. charitable trusts and investments made in the stock market by average Pakistanis. but Bacanovic was on vacation. for the charges of insider trading. They repeatedly traded on material. accused of passing company secrets to Ms. founder of the Galleon Group. Rajaratnam. and Anil Kumar. Rajaratnam and Ms. Mr. mergers. and the former Bear Stearns hedge fund manager of operating at the center of a vast insider trading ring.928 shares of ImClone.B. he has accumulated most of his wealth by insider trading. Bacanovic. corporate raiding and embezzlement of huge sums of money from Pakistani pension funds. include Robert Moffat. 28 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . and reaped more than $20 million in illicit profits by trading. Waksal did speak with Doug Faneuil.928 of her shares in ImClone. Galleon Chief and Associate Indicted in Insider Case Rajaratnam was the founder of the once mighty hedge fund firm Galleon Group. Stewart sold almost 4. learned that the FDA was going to reject ImClone's application for approval of its cancer drug. Stewart was saved from the plummeting share prices immediately afterward. Erbitux. Upon learning this. Martha Stewart. told Faneuil to call Stewart and give her the story. Chiesi. In December 2001. or other business combinations. Four others who were arrested along with Mr. according to the U. Starting as a stock broker. Rajiv Goel. a senior official at I. the American celebrity who just finished her own prison sentence for insider trading and other charges.673 by selling her 3. Danielle Chiesi. Mark Kurland. Stewart decided to sell all 3. a former division of Bear.000 shares in the bio-pharmaceutical company ImClone Systems only days before the Food and Drug Administration rejected one of its products. The sale occurred one day prior to the announcement concerning Erbitax's rejection.S.

Datta. conducted enquiries. all Executive Directors. Sharma. the Company Secretary and the then Chairman of HLL. R. K. suspecting insider trading. . and M. who were on the core team which discussed the merger. not a magic bullet. Gopalakrishnan. CONCLUSION: It makes sense that insiders know more about the company than anyone. Lahiri. 29 | P a g e INSTITUTE OF BUSINESS MANAGEMENT . so watching what they do is another tool you can use. use it along with you other evaluation tools So you need to ³THINK TWICE´ before engaging in such activities.4 crore in compensation. SEBI directed HLL to pay UTI Rs 3.M. and also initiated criminal proceedings against the five common directors of HLL and BBLIL: S. Dadiseth. The controversy involved HLL's purchase of 8 lakh shares of BBLIL two weeks prior to the public announcement of the merger of the two companies (HLL and BBLIL). in August 1997. A. SEBI.K.V.Financial Institutions Report ² insider trading The Case of insider trading (HLL-BBLIL Merger) The case study analyses the issues related to the insider trading charges against HLL with regard to its merger with Brooke Bond Lipton India Ltd. Later in March 1998 SEBI passed an order charging HLL with insider trading. The case focuses on the legal controversy surrounding these charges. and after about 15 months. SEBI issued a show cause notice to the Chairman. Here are some points to remember: y y y People sell for a number of reasons ± don¶t jump to conclusions Don¶t put too much importance on the actions of individuals ± look for trends Insider trading is only one tool.

BAC.com/article/2010/02/10/us-galleon-wiretaps-secidUSTRE6184WE20100210?pageNumber=2  http://www.onepakistan.com/?p=1922 http://www.pk (The Securities and Exchange Commission of Pakistan) www.FAZ.com/terms/i/insidertrading.about.sbp.org/wiki/Insider_trading http://pakistaniat.about.jang.kse.html?tickers=C.nytimes.reuters.investopedia.com/topics/reference/timestopics/subjects/i/insider_trading/index.htm http://invest-faq.gov.yahoo.htm http://en.html?_r=1&page wanted=2 http://topics.businessdictionary.com/articles/trade-insider.org.MS  http://thenews.cnbc.statebank.com.com/cs/businessethics/a/InsiderTrade702.com/2007/05/05/pakistani-banker-charged-for-insider-trading-scheme/ http://www.pk (The State Bank of Pakistan) www.sec.Financial Institutions Report ² insider trading REFERENCES:  http://www.com/blog/2010/08/29/latest-insider-trading-case-involvinginvestment-bankers/  http://www.nytimes.accessmylibrary.lk/2011/01/02/massive-fraud-and-insider-tradinguncovered-in-pakistan/ http://nation.com/od/advancedtrading/a/Insidertra12300.secp.secactions.about.asp http://www.com                     www.JPM.pk/updates.com/cs/finance/a/insider_trading.dailytimes.pk (The Karachi stock Exchange)  http://www.pk/pakistan-news-newspaper-daily-english-online/Business/30-May2008/Pair-indicted-for-insider-trading/1 http://www.com/news/world/us/78451-us-authorities-nab-five-in-insidertrading-probe.html http://www.com.html http://management.com/docs/insidertrading033104.com/definition/insider-trading.com/id/40319986/Famous_Insider_Trading_Cases?slide=2 30 | P a g e INSTITUTE OF BUSINESS MANAGEMENT .com www.com.com.insidermonkey.htm  Economic survey Pakistan (economic review)  www.com/tech-ticker/massive-insider-trading-investigation-could-nailwall-street%27s-biggest-names-535640.GS.scirbd.XLF.htm http://stocks.ht ml?8qa&scp=1-spot&sq=&st=nyt http://www.asp?page=2007\05\20\story_20-5-2007_pg7_33 http://www.wikipedia.asp?id=22732  http://www.htm http://finance.pk/default.html http://economics.seclaw.org  www.gov/answers/insider.com/2007/06/20/business/worldbusiness/20insider.thesundayleader.

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