Abstract: Insider trading is one of the most controversial aspects of securities regulation. Many favors deregulation of insider trading, allowing corporations to set their own insider trading policies by contract. Others contends that the property right to inside information should be assigned to the corporation and not subject to contractual reassignment.
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Insider trading has been a part of the U.S. market since William Duer used his post as assistant secretary of the Treasury to guide his bond purchases in the late 1700s. (Brudney, 1979) Definition
The buying or selling of a company’s securities, such as stocks or options, by corporate insiders or their associates based on information about the security originating within the firm that would, once publicly disclosed, affect the prices of such securities (Brudney, 1979). 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 (Dolgopolov, 2008). It is legal once the sensible information has been made public when the insider has no direct advantage over other investors. The Securities and Exchange Commission (SEC), however, still requires all insiders to report all their transactions (Dolgopolov, 2008). The above definition of insider trading excludes transactions in a company’s securities made on nonpublic/ outside information, such as the knowledge of forthcoming market-wide or industry developments or of competitors’ strategies and products (Brudney, 1979). Although insider trading typically yields significant profits, these transactions are still risky. Considerable trading by insiders, though, is due to their need for cash or to balance their portfolios (Dolgopolov, 2008). Nevertheless, many people still find insider trading in corporate securities objectionable. One objection is that it disrupts the confidentiality that corporate employees owe to their shareholders (Wilgus 1910). Another opposition is that, because managers have access to inside information, they can transfer wealth from outsiders to themselves in an arbitrary and secret way (Brudney, 1979). The economic support of prohibiting insider trading is that such trading can adversely affect securities markets or decrease the firm’s value (Coffee, 2007) Corporate insiders
Corporate insiders are individuals whose employment with the firm (as executives, directors, etc.) or those whose access to the firm’s internal affairs (as consultants, accountants, lawyers, etc.) gives them valuable information (Brudney, 1979). Insider Trading Cases
Here are several scenarios that illustrate what is or not insider trading (Scu.edu, 2010): I. You accidentally overhear two business people at the next table discussing the fact that a company in which you hold stock is going to miss quarterly earnings. You then sell your stock (Scu.edu, 2010). This activity is actually not illegal. It is not illegal if you just happen to overhear someone say something (Scu.edu, 2010). II. You overhear someone reveal insider information, you get on a computer and hack into a company's financial database and find they won't make their quarterly earnings. And you sell. (Scu.edu, 2010) Hacking into a computer becomes illegal insider trading because you're engaging in deceptive practices (Scu.edu, 2010). III. You have a meeting with a banker, and the banker invites you to take part in a private investment in a public entity-the company is trying to raise capital. The banker hands you an NDA [non-disclosure agreement] and you sign it. The banker then tells you about this offering and after the meeting ends you call your broker and liquidate your stock in the company (Scu.edu, 2010). This fact is called the misappropriation. One issue with respect to...
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