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Talking Finance: Greed fuels insider trade

Talking Finance: Greed fuels insider trade

Talking Finance
Oscar Wilde, the famous Irish writer quoted that “private information is practically the source of every large fortune”. Information indeed is extremely valuable, especially if such information is not publically available and can be used to make a profit.

If a person is contemplating buying land in Cambodia and secretly learns from another party that a bridge will shortly be built and the prospective land will greatly increase in value as a result, the person has benefitted from inside information. The confidential information provided in this case will likely result in a material gain for the purchasing party. While morally questionable this would probably not be considered a criminal act.  

However, the trading of securities based on information that is not publically available is considered a white collar crime in most countries, and the Securities and Exchange Commission of Cambodia has indeed instituted penalties for insider trading.  

Insider trading is the trading of a company’s stock or securities by individuals with access to non-public material information about the company.

If the information about the company is not publically disclosed, trading on such knowledge is unfair to other investors and is illegal in most jurisdictions. Insiders are generally considered company officers, directors, key employees, and shareholders with a material stake in the company.  

Trades made by these types of insiders, or related parties, in the company’s stock based on material non-public information are a violation of fiduciary duty owed the shareholders or a breach of trust and confidence.  

Fines and potential jail time are severe consquences

Insider trading is not limited to employees or shareholders, it can cover any person who misappropriates confidential information for securities trading purposes in a breach of duty owed to the source of information.  
Insiders can legally trade the company’s stock once the material information has been made public, at which time the insider has no direct advantage over other investors.  In most jurisdictions such trades are generally required to be reported to regulatory authorities.  

There have been plenty of notorious cases of insider trading.  

In 2003, Martha Stewart, the American business magnate and media personality, and her broker Peter Bacanovic were indicted for insider trading.

Stewart sold shares of ImClone  Systems after Bacanovic advised her that the CEO of the company, Sam Waksal, had sold his stock. The following day the stock dropped 16 percent as the company was denied a licence for its new cancer drug. Stewart avoided a loss of US$45,673 but had to serve five months in prison.  

The secretary of Oracle CEO Larry Ellison was privy to confidential information, including potential acquisitions and mergers. Based on this information, her husband purchased the stock of a company Oracle was planning to purchase and made an $82,000 profit. He eventually settled out of court and paid a fine of $198,000.    

The temptation to trade on confidential information or an illegal stock tip may be quite alluring as a quick and easy profit can be made.  

However, if caught, the fines and potential jail time are severe consequences of this crime of greed.

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