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Group Project 0011D - Bus5111

- Illegal insider trading involves the use of material non-public information to gain an unfair advantage in securities trading. - It misaligns company and investor interests, reduces market efficiency, and harms businesses, shareholders, and society. - The SEC enforces strict regulations and penalties against insiders, tippers, and tippees engaged in illegal insider trading.

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Franklyn Doh-Nani
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92 views4 pages

Group Project 0011D - Bus5111

- Illegal insider trading involves the use of material non-public information to gain an unfair advantage in securities trading. - It misaligns company and investor interests, reduces market efficiency, and harms businesses, shareholders, and society. - The SEC enforces strict regulations and penalties against insiders, tippers, and tippees engaged in illegal insider trading.

Uploaded by

Franklyn Doh-Nani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Insider Trading -Overview

Keywords and Overview


• Insider information – non-public, material information about a company’s plans or finances
giving investors an unfair advantage.
• Insider - anyone with access to material non-public information.
• Tipping – sharing insider information.
• Insider trading – using insider information to trade stock.
• The SEC enforces insider trading.
The Scenario
• An associate knows of a forthcoming business merger.
• Merger will change the market dynamics.
• Both companies’ stock owners will profit after public announcement of a merger.
If acted upon, this is insider trading.
Legal Implications
Legal insider trading
• Trades must comply with SEC policies.
• SEC forms must be filed.
• Directors and large shareholders must publicly disclose transactions.
Illegal insider trading
• Using insider information for personal gains/ avoid losses from trading securities is illegal.
• Securities Exchange Act of 1934, Rule 10b-5
• Disclose or abstain rule – defines legal insider trading and illegal securities fraud.
• Misappropriation theory –makes using insider information, including “tippers” and “tipees”,
illegal.
• Rule 14e-3 – makes purchasing and selling nonpublic information for hostile takeovers illegal.
Legal Implications
• Jail - 20 Years maximum.
• Fines - Entities $25 million; Individuals $5 million maximum.
• Forfeiture - civil sanction on violators to give up 3 times maximum of profits or losses avoided.
• Banishment – from trading or serving as director of a public traded company.
• Investors can sue the violator.
• Company’s civil sanction up to $1 million or 3 times the profits or losses avoided.
Ethical Implications
Ethical Concerns
• Unfair - perpetrators aim to take advantage and profit from uneven competition.
• Exploits – fiduciary duty to business relationships and the information resources entrusted with
them.
• Deceptive - intentionally causes false beliefs and compromises others’ decision quality.
• Compromises - the market’s well-being, going against its most valued virtues.
• Harmful - it harms investors and destroys social goods.
Summary
• Illegal insider trading misaligns companies’ and investors’ interests, makes investors hesitant.
• Businesses, shareholders, and society suffer from illegal insider trading

Summary
• Illegal Insider trading is the use of insider information for financial gains in stock trades.
• SEC can impose harsh penalties on insiders, tippers, tippees, and sellers of information
• Illegal insider trading misaligns companies’ and investors’ interests, makes investors hesitant.
• Businesses, shareholders, and society suffer from illegal insider trading.
Conclusion
• The associate’s fiduciary duty was broken by disclosing non-public material information.
• Actions taken by the associate or yourself to use insider information for financial gain is illegal
insider trading
Socio-economic Implications

Economic Impact

.According to Manove & Michael (1989), Insider traders and other speculators with private

information are able to appropriate part of company's investment income at the expense of the

interests of other shareholders.

• Market efficiency – Markets are efficient when all participants have equal access to

information. Insider trading badly affects the securities market and reduces company’s value.

.Insider trading often hinders business investment and reduces the effectiveness of business

practices.

• Market participation – variations in Stock price increases investor uncertainty and companies

economically suffer from lower capital investment.

.Insider trading is unfair and frustrating and preventing people from participating in the market

and makes it difficult for companies to raise funds.

.The use of insider trading is illegal because it gives inside information an unfair advantage in

the market and makes the benefits of inside information greater and allow insiders to artificially

influence the value of company stock.

Social Impact

• Insider trading damages company's reputation thereby causing negative publicity and

sometimes regarded as social irresponsibility.


• Insider trading challenges corporate culture and takes away public trust and confidence in the

company’s integrity.

Insider trading view insider trades as inequitable and immoral and assert that restricting insider

trades curbs resource misallocation and benefits the whole society ("impact of insider trading on

analyst coverage and forecasts," 2020).

Proponents contend that insider trading accelerates the price discovery process, increases market

efficiency (Leland, 1992; Bernhardt et al., 1995; Choi et al., 2016) and may even play a role in

rewarding and motivating executives (Roulstone, 2003; Denis and Xu, 2013).

That insider trading increases the amount of information valuable to analyst research activities

and helps enhance analyst services.

Reference:

He, G., & Marginson, D. (2020). The impact of insider trading on analyst coverage and forecasts.

Accounting research journal.

Manove., & Michael. (1989). The harm from insider trading and informed speculation. The

Quarterly Journal of Economics, 104(4), 823-845. https://doi.org/10.2307/2937869

The impact of insider trading on analyst coverage and forecasts. (2020, June 8). Discover
Journals, Books & Case Studies | Emerald Insight.

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