Insider Trading

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Paper Topic: Insider Trading THE UNWARRANTED INSIDER TRADING Consider the following scenario Jack and Diane happily married Electro-Source Co executives Jack -director within the marketing division Diane – vice president in charge of all North American sales One Friday , Jack advises Diane that the company lost a large government contract for new electronic components The contract was worth over US 1 billion in sales and the loss could signal large layoffs Government Officials Did not publicized decision advised privately and confidentially ‘ several non-winning bidders , including executives at Electro-Source tippees COMMITED CRIME : INSIDER TRADING br What is insider trading breach of a fiduciary duty buying or selling of a security possession of material , nonpublic information about the security selling /tipping securities information ( through misappropriation THE SCENARIO INSIDER TRADING : ILLEGAL Regulated by the US Securities and Exchange Commissions (1909 Securities and Exchange Act 1933 -fraud prohibition regarding security sales Securities and Exchange Act 1934 (amendment Securities and Exchange Act 1934 Sect

10b5 -provides for implementation of 10b Sect 10b-5 It shall be unlawful for any person , directly or indirectly (a ) to employ any device , scheme , or artifice to defraud (b ) to make any untrue statement of a material fact or omit to state a material fact necessary in to make the statements made , in light of the circumstances under which they were made , not misleading or (c ) to engage in any act , practice , or course of business which operates or would operate as a fraud or deceit upon any person , in connection with the purchase or sale of a security Penalty and Punishment Insider Trading Sanctions Act of 1984 Insider Trading and Securities Fraud Enforcement Act of 1988 penalties as high as 3x the profit gained or the loss Latest Instances of Illegal Trading Martha Stewart and Broker Peter Bacanovic vs

SEC Litigation Release 18169 Stewart sold stock in ImClone Systems , Inc biopharmaceutical Co on 12 / 27 /01 tip ‘ from Bacanovic (broker of Merrill Lynch , Pierce , Fenner Smith Inc sold 3 ,928 shares of her ImClone stock upon knowing that Waksal attempted to sell (from the tipper creation of alibi for Stewart ‘s ImClone market report Conceal /withheld facts during trade investigation Stewart ‘s penal her thwarted financial losses civil monetary penalties Restriction from being a director Limited power /activity in any public company Kenneth L

2 billion equity reduction Misleading the employees regarding company growth Lay ‘s Penal payback of all ill-gotten gains civil money penalties Restriction from being a director in any public company an injunction against future violations How

SEC Litigation Release 18776 prevarication of Enron ‘s publicly accounted financial results , business performance , financial condition Sell stocks that is not reflective of its market value ‘Conceal massive losses in the company Misinformed public regarding Skilling ‘s resignation (announcing it as personal Overvaluing of books at over 7B Omission of 1

16b -prohibits short-swing profits ( acquisition at less than 6 mo ) made by corporate insiders holding more than 10 of the stocks Sect

10b -prevention of fraud related to SEC directives Sect


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