An Economic Analysis of Insider Trading in Canada
In the past decade, white-collar crime such as illegal insider trading, banking fraud, ponzi schemes, corporate embezzlement and political money laundering has reached an all-time high. In North America alone, respected and highly influential individuals such as Martha Stewart, Bernie Madoff, and Conrad Black have been prosecuted for their crimes and companies such as Fannie Mae and AIG were brought before congressional committees. Unfortunately, while the above individuals were prosecuted and convicted, white-collar crime persists today and the resulting negative economic effects are numerous.
Individuals and corporations alike reduce investment after falling victim to white-collar crime and economies suffer as a result. Billions of dollars are lost annually and public trust in the economic system is seriously diminished. Moreover, white-collar crime contributes to an increase in the cost of doing business as firms put increasing amounts of money into prevention procedures. The increased costs impacts consumers through higher prices and a lower quality of service.
Enforcement is also a major issue. Unlike traditional forms of criminal behaviour, many white-collar crimes are especially difficult to prosecute. Perpetrators often use sophisticated means to conceal their activities through a series of complex transactions and tracing their maneuvers is extremely challenging. Furthermore, while corporate crimes often cost billions of dollars, because losses are frequently spread out over numerous unaware victims, many white-collar crimes are never reported. As a result, many crimes go unnoticed and an accurate valuation of white-collar crime is difficult to determine.
Similarly concerning is the fact that white-collar crime is not unique to North America. As a direct result of advances in technology, the international arena has experienced a dramatic growth in white-collar crime as well. Globalization has facilitated more efficient methods of travel and communication, and the result has been an increase in the movement of goods, services and capital. Consequently, white-collar criminals have access to a larger base of victims as they can now conduct their operations on an international scale.
In short, white collar-crime has significant and wide reaching consequences. Billions of dollars are lost annually, and economies are suffering as a result. Due to globalization and advances in technology, the problem is growing and enforcement is becoming increasingly difficult. Fortunately, the present situation offers a perfect occasion to analyze the motivations behind white-collar criminals and the problems facing securities regulators. Moreover, the current context of crisis also presents a key opportunity in which to evaluate alternative agendas for combating the problem.
In the pages that follow, the paper will provide an economic analysis of white-collar crime. Specifically, the paper will proceed in two parts. Part I will provide background information on white-collar crime and an economic analysis of the motivations behind why white-collar criminals engage in illegal activity. Part II will provide detailed analysis of insider trading in Canada. A discussion of the Canadian enforcement system and new approaches to deterrence will also be provided. The goal of the paper is to shed light on the economics behind insider trading and the increasing prevalence of illegal insider trades in the Canadian market.
PART I –White-Collar Crime
A Brief History of White Collar Crime
Edwin Sutherland of the American Sociological Society coined the phrase “white-collar crime” in 1939 during a presidential address to his peers. Sutherland defined the term as "crime committed by a person of respectability and high social status in the course of his occupation." Although this definition leaves room for debate as to what...