Our era aptly has been styled, and well may be remembered as, the “age of information. “Francis Bacon recognized nearly 400 years ago that “knowledge is power,” (Nickels &,McHugh 2011) “Insider trading is an unethical activity in which insiders use private company information to further their own fortunes or those of their families or friends”.
Insider trading is a term that includes both legal and illegal conduct. The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies.
Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.
(Agnello & Donnelley 1975) Stated if every member of a community has unlimited access to the resources of the community, then the community’s resources soon will be used up unless they happen to be available in infinite supply. The system of private ownership of assets, by contrast, effectively can use the price system to ration the assets in such a way as to preserve them properly and to benefit all members of the community.
The Insider Trading Debate
Arthur Levitt stated in 1998 that more Americans were investing in the stock market than ever before and Americans had almost twice as much money invested in the stock market as in commercial banks. The illegal version of insider trading most of us think of; is the type of insider trading that achieved wide-spread in the 1980’s with the SEC’s civil cases and the United States Department of Justice’s criminal cases against Michael Milken and Ivan Boesky which inspired even Hollywood’s imagination with the movie “Wall Street”. It is the trading that takes place when those privileged with confidential information about important events use the special advantage of that knowledge to reap profits or avoid losses on the stock market, to the detriment of the source of the information and to the typical investors who buy or sell their stock without the advantage of “inside” information.
According to ( Manne 1966) “Some argue that insider trading is a legitimate form of compensation for corporate employees, permitting lower salaries that, in turn, benefit shareholders. It provides an incentive to innovation, some argue, by promising huge rewards for developing a plan or product that will lead to a precipitous rise in the stock”. (Easterbrook 1985). Found that “Members of the legal community denounce the practice of insider trading. They view insider trading as an unethical abuse of power by corporate officers and directors. people who have invested resources to develop their human capital to better assimilate information, or corporate officers and directors are always going to have superior access to information”.
The case of USA vs Raj Rajaratnam
An excellent example referring to insider trading would be the Raj Rajaratnam incident. (Belczyk & U.S. Attorney’s Office 2011). A federal jury in the US District Court for the Southern District of New York found that Galleon Group hedge fund founder Raj Rajaratnam orchestrated the largest hedge fund insider trading case in US history and convicted Rajaratnam on all 14 counts of insider trading including; five counts of conspiracy to commit securities fraud and nine counts of committing securities fraud from 2003 to March 2009. In just over 18th months, this office has charged 47 individuals with insider trading crimes; Rajaratnam is the 35 person to be convicted. On Oct. 2011 Rajaratnam was sentenced to 11 years in prison In addition to his prison term, Rajaratnam was sentenced to two years of supervised release and ordered to pay forfeiture in the amount of $53,816,434 and a $10 million fine. RAJARATNAM will surrender to authorities on November 28, 2011. (Richey 2011) On January 20, 2011 Danielle Chiesi was arrested in 2009 along with Galleon Group hedge fund founder Raj Rajaratnam.
After pleading guilty in connection with the case and was accused of communicating non-public information about IBM Corporation, Advanced Microdevices (AMD) and Sun Microsystems (now Sun-Oracle) in 2008 and 2009 to her superiors at New Castle Funds LLC, a Manhattan-based investment advisory company formerly part of Bear Stearns. Danielle was accused of using the information to reap more than $4 million in illegal profits for New Castle. Danielle Chiesi admitted to exploiting her access to valuable non-public information to reap $1.7 million in illegal gains. By sharing and conspiring to trade on inside information, Chiesi compromised the companies she sold out and distorted the market for their stocks. (Richey 2011)
Former IBM senior vice president Robert Moffat was sentenced to six months in prison in September and ordered him to pay a $50,000 fine for his role in the scheme after pleading guilty in March 2010. Former Intel Capital executive Rajiv Goel pleaded guilty to insider trading charges in February 2010. Rajaratnam, Chiesi, Goel and Moffat were arrested in October 19, 2009 and charged along with two other individuals and two business entities with insider trading. The complaint alleged that the individuals provided Galleon Group and another hedge fund with material nonpublic information about several corporations upon which the funds traded, generating $25 million in illicit gain.
Agnello & Donnelley, Property Rights and EJjiciency in the Oyster Industry, 18 J.L. & ECON. (1975) pg. 521
Easterbrook, Insider Trading as an Agency Problem, in PRINCIPALS AND AGENTS: THE STRUCTURE OF BUSINESS (Pratt & Zeckhauser eds. 1985). Pg. 330 Henry B. Manne, Insider Trading and the Stock Market (1966) (insider trading increases market efficiency because it produces desirable incentives on corporate managers). Retrieved from: http://www.sec.gov/news/speech/speecharchive/1966speech.shtml Jaclyn Belczyk & U.S. ATTORNEY’S OFFICE(2011) May 11, 2011. Retrieved from: http://jurist.org/paperchase/2011/05/us-hedge-fund-founder-convicted-of-insider-trading.php Jurist Legal News & Research (2011): Jaclyn Belczyk, Daniel Richey Retrieved from: http://jurist.org Testimony of Arthur Levitt Concerning Appropriation for Fiscal Year 1999; March 19, 1998 Before the Subcommittee on Commerce, Justice, State and Judiciary of the Senate Committee Appropriations. Retrieved from: http://www.sec.gov/news/speech/speecharchive/1998/spch221.htm Understanding Business Nickels, McHugh, McHugh pg. 101
United States Attorney Southern District of New York (2011), U.S. ATTORNEY’S OFFICE ELLEN DAVIS, CARLY SULLIVAN,JERIKA RICHARDSON,EDELI RIVERAPUBLIC INFORMATION OFFICE: Retrieved from: http://www.justice.gov/usao/nys/pressreleases/May11/rajaratnamrajverdictpr.pd