In
this post, we bring to you the concept of Insider Trading. Yes! The same thing
which got Rajat Gupta, MD of McKinsey at that time and a co-founder of one of
the leading international business schools in India, a 2 year jail in the U.S.
federal prison.
The Birth..
Insider
trading is something that has been around ever since the first stock markets
opened up in the Netherlands in the 1600’s but its effects on investors and
economies were not fully understood till the 20th century
What Insider Trading means…
Insider
trading refers to the trading of a company’s stock or other public securities
by an individual who has access to non-public information (i.e. classified or
privileged information) about the company or an upcoming event that could
impact the markets
Punsishable? Yes indeed!
Insider
trading is considered wrong and illegal as it gives the people who posses
privileged information and unfair advantage over the average investor and they
could make much larger profits than an average investor, which makes it very
unfair to the general investing community.
Notable Cases of Insider Trading
1.
Albert H.
Wiggins
The Roaring 20’s : 1920’s America was gave birth to one of the most bullish markets ever seen by man, it was a market with almost no regulation which enabled a select few to put easily put up smokescreens and market operations to reap profits. One of the most famous of these was the Wiggins case in which the head of the Chase National Bank at the time, Alfred Wiggins shorted over 40,000 shares of his own company and made millions in the markets. The funny part was that there was no law against this at the time and it prompted the creation of a Securities Law termed as the “Wiggins Acts”.
The Roaring 20’s : 1920’s America was gave birth to one of the most bullish markets ever seen by man, it was a market with almost no regulation which enabled a select few to put easily put up smokescreens and market operations to reap profits. One of the most famous of these was the Wiggins case in which the head of the Chase National Bank at the time, Alfred Wiggins shorted over 40,000 shares of his own company and made millions in the markets. The funny part was that there was no law against this at the time and it prompted the creation of a Securities Law termed as the “Wiggins Acts”.
2.
The Great Bilzerian
We are all aware of the flamboyant Instagram playboy Dan Bilzerian but few of us know how his father Paul Bilzerian made the millions of dollars he would later bestow upon his sons. In the late 80’s Pauls Bilzerian was involved in several cases of stock parking and greenmailing in which he used takeover information he has to get companies to buyback their own shares from him at higher prices. He was sentenced to 4 years in prison and a fine of 1.5 million dollars, but he still had enough money to leave his sons 100 million dollar trust funds.
We are all aware of the flamboyant Instagram playboy Dan Bilzerian but few of us know how his father Paul Bilzerian made the millions of dollars he would later bestow upon his sons. In the late 80’s Pauls Bilzerian was involved in several cases of stock parking and greenmailing in which he used takeover information he has to get companies to buyback their own shares from him at higher prices. He was sentenced to 4 years in prison and a fine of 1.5 million dollars, but he still had enough money to leave his sons 100 million dollar trust funds.
3.
The
Greedy Journalist
The Foster Winans case is unique not because of the volume of damages caused but rather due to the curious way in which it was carried out. Forster Winnans was a coloumist for the wall street journal who wrote a weekly stock profile column. Winnans had such an impact on the market that the stocks he wrote about often went up or down according to the contents of his article. Eventually Winnans began to leak information about his upcoming articles to traders who began using this information to make insider trades from which they gave Winnans a cut of the earnings.
The Foster Winans case is unique not because of the volume of damages caused but rather due to the curious way in which it was carried out. Forster Winnans was a coloumist for the wall street journal who wrote a weekly stock profile column. Winnans had such an impact on the market that the stocks he wrote about often went up or down according to the contents of his article. Eventually Winnans began to leak information about his upcoming articles to traders who began using this information to make insider trades from which they gave Winnans a cut of the earnings.
4.
The
Christmas Debacle
In Dec 2011 two HSBC traders were involved in a currency front running scam (stocking up currency in anticipation of a future transaction) in a deal handled by HSBC on behalf of Cairn Energy which involved a merger-acquisition in which the Pound Sterling for the transaction was to be sourced by HSBC. The traders took advantage of this situation and bought the currency in advance, resulting in extra and illegal profits for themselves and the bank. They were recently apprehended by the department of justice and a sensational audio clip was recovered with one of the accused describing the deal as,” ohhh, f*****g Christmas”.
In Dec 2011 two HSBC traders were involved in a currency front running scam (stocking up currency in anticipation of a future transaction) in a deal handled by HSBC on behalf of Cairn Energy which involved a merger-acquisition in which the Pound Sterling for the transaction was to be sourced by HSBC. The traders took advantage of this situation and bought the currency in advance, resulting in extra and illegal profits for themselves and the bank. They were recently apprehended by the department of justice and a sensational audio clip was recovered with one of the accused describing the deal as,” ohhh, f*****g Christmas”.
Who is the Police?
1 United
States : Insider trading is dealt with very differently in different
countries. States like the US have very stringent regulations about insider
trading as they have a long history with it and we all can learn from them. In
the US most of the regulation and legislation is handled by the SEC and the
enforcement and prosecution is carried out by the department of justice.
2 European
Union : In 2014 the European standardized the legislation for insider
trading in its member nations through the Criminal Sanction for Market Abuse
Act in which all EU member states agreed to introduced prison sentences of 2-4
years for Insider trading.
3 India
: In India most of the regulatory and legislative duties are performed by SEBI,
which was empowered in the wake of the Harshad Mehta Scam in 1992. In India
securities market legislation and enforcement is carried out by SEBI which acts
as a watchdog for most sectors of the financial sectors and protection of
Investor Interests.
And…… What is the IMPACT of Insider
Trading?
In a
broader perspective the entire market is considered a victim of insider trading
as directly or indirectly the entire market is affected by the price
fluctuations and misappropriations caused by the misuse of information by
privileged parties. However even though the traditional opinion is that loss of
confidence in the markets caused by insider trading harm the average investor
and in extension the economy might be misplaced.
Several
prominent economists including the Great Milton Friedman have argued that
insider trading is one of the closest things to a victimless crime that exists
in modern society. The basic theory is, insider trading a way to correct
information asymmetry. The fact that information can be distributed to the
entire market by the actions of a few privileged information holders should be
treated as boon and the buying or selling pressure for a stock will
automatically become a source of information for an investor.
The
argument to legalize insider trading makes several arguments from the
perspectives of free speech, and the fact that insider trading on negative
information might actually save a lot of investors a lot of money. In reality
however we are far away from ever legalizing insider trading as the act of
giving and unfair advantage to certain investors over others seems to be enough
of a deterrent to stop and talk of the legalization of insider trading. Only
time will tell if this level of liberalization will ever be accepted in the
financial markets of the world.
Here is the turning point but..
Insider Trading is legal!! Wait wait before having any thoughts…please read the
Terms & Conditions ahead……
The
legal version is when corporate insiders—officers, directors, and employees—buy
and sell stock in their own companies. When corporate insiders trade in their
own securities, they must report their trades to the Regulatory Body of the
Securities Market.
- Arko Biswas
Student and Core Committee Member of Finance Club, MISB Bocconi
