INSIDER TRADING AN ETHICAL ANALYIS

SYED UARIM ALI SHAH (31790)

BUSINESS ETHICS (SSC401)

INSTRUCTOR: MEHBOOB
BHUKARI
Overview:

 What is Insider trading

 Laws For Insider Trading
 Case Summary
 Ethical Analysis
What is Insider Trading?

 The SEC defines illegal insider trading as "buying or selling a

security, in breach of a fiduciary duty or other relationship
of trust and confidence, while in possession of material,
nonpublic information about the security.“
 Trading in a public listed company’s stock by someone who
has non public ,material information about the company
 It is a crime if made to get wrongful gain and avoid losses
Laws For Insider Trading In
Pakistan
SECURITIES AND EXCHANGE ORDINANCE, 1969
 CHAPTER III-A INSIDER TRADING 15A. Prohibition on stock exchange deals by insiders
 15-A. Prohibition on stock exchange deals by insiders.- No person who is, or has been, at any time
during the preceding six months, associated with a company shall, directly or indirectly, deal on a stock
exchange in any listed securities of that or any other company or cause any other person to deal in
securities of such company, if he has information which a) is not generally available; b) would, if it were
so available, be likely to materially affect the price of those securities; or c) relates to any transaction
(actual or contemplated) involving such company.
 Explanation.- For the purpose of this section, the expression “associated with” shall. mean a person
associated with a company, if he- (i) is an officer or employee of that company or an associated
company; or (ii) occupies a position which gives him access thereto by reason of any professional or
business relationship between him or his employer or a company or associated company of which he is a
director
 a person contravening the provisions of section 15A shall be punishable with imprisonment for a term
which may extend to three years, or with fine which may extend to three times the amount of gain
accrued or loss avoided by such contravention, or with both.
SECURITIES AND EXCHANGE ORDINANCE, 1969
CHAPTER IV PROHIBITIONS AND RESTRICTIONS
Section 17. Prohibition of fraudulent acts, etc.
 No person shall, for the purpose of inducing, dissuading, effecting, preventing or in any
manner influencing or turning to his advantage, the sale or purchase of any security,
directly or indirectly
 Section 17(e)(vi) of the Securities Ordinance prohibits an insider from buying or selling
its own securities when such insider is in possession of material facts and omits
CASE SUMMARY
 Pakistani banker charged in insider trading case
 He's accused of raking in more than $7.5 million
 May 11, 2007, the sec charged Ajaz Rahim,44,a Pakistani banker who was employed by Faysal Bank in Karachi, Pakistan with insider
trading based on material, non-public information he received from Hafiz Naseem, an employee of Credit Suisse (USA) in New York.
Hafiz Naseem, in U.S. District Court in Manhattan, the Credit Suisse banker accused of giving Rahim tips, was charged in early May.
The SEC said Naseem and Rahim had both worked at American Express Bank in Karachi in the late 1990’s
 Mr.Rahim assets, which regulators say exceeded $7 million, were being frozen and that American legal authorities suspected he had
traded on inside information.
 Credit Suisse served as an investment banker or financial advisor in all of the involved deals, and the phone calls to Rahim were made
close in advance of — and frequently the day of or the day before announcements of the proposed deals. according to the Third
Amended Complaint, Naseem, in order to insure he would obtain a personal, financial benefit from his misappropriations, in May
2006 opened up a brokerage account in Pakistan and granted trading authority over that account to Rahim, his "tippee
 The Commission alleged that, on February 5, 6, 7, 8 and 23, 2007, Naseem, in breach of his duty to Credit Suisse and its client,
telephoned Rahim and conveyed to him non-public, material information concerning the proposed but unannounced leveraged buyout
of $45 billion of TXU Corp by an investor group led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group and other
information.
 Rahim, on February 23, 2007, purchased 6,700 TXU call option contracts with March 2007 expiration, and 15,000 shares of TXU
stock through Bank Julius Baer Co. Ltd. According to the Commission, these purchases allowed him to reaptrading profits of
approximately $5.1 million.
 Rahim engaged in insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
Naseem was convicted of 28 counts of insider trading and one count of conspiracy to commit securities fraud
 On June 4, 2008, a judgment in the criminal case was entered against Naseem. He was sentenced to a prison term of ten years and, on
June 6, 2008, was ordered to forfeit $9 million in illegal trading profits. Naseem be, and hereby is, barred from association with any
broker, dealer, or investment adviser. An arrest warrant is pending against Rahim, who is fighting extradition from Pakistan and is not
on trial.
 ETHICAL ANALYSIS
1) ETHICAL ANALYSIS (AGENT PRESPECTIVE) Would a virtuous person have leaked the
information to Ajaz rahim? Zubair naseem showed a failure of character:
 Lack of Integrity
 Absense Self-Control
 Greed
 Breach of a Fiduciary Duty

2) ETHICAL ANALYSIS FROM DISTRIBUTIVE JUSTICE PRESPECTIVE

when considering financial markets, the concept of distributive justice is an important factor. Distributive
justice contains a variety of theories. These are competing views of distributive justice and can determine
whether or not insider trading is ethically permissible
 Egalitarian
 Socialism
 Capitalism
 Libertarianism
2a) JUSTICE AS FAIRNESS (JOHN RAWLS)
o Fairness