Insider Trading - Johnny Jones - Essay Example

Johnny’s secretary Rita relates to the Justice Department agent about Johnny’s lunch dates with Joan and Jake, as a result of which ”they are going to become wealthy by buying company stock.”
Issue: The legal question
The issue to be settled is whether or not Joan, Jake, and Johnny are guilty of violating the Securities law prohibiting insider trading – Johnny in his capacity as an officer of the firm, and Joan and Jake who acted on tips from Johnny.
Rule: The law of the case

Sec 16 (b) of the Securities Exchange Act of 1934 directly addresses insider trading, while Sec 10(b) indirectly does so. Insiders refer to the officers, corporate directors, or beneficial owners of more than 10% of a firm’s shares.
The case law is SEC v Texas Gulf Sulphur Co. (1966) which ruled that anyone in possession of inside information must either disclose the information or refrain from trading. Dirks v SEC (1984) ruled that tippees (receivers of second-hand, non-public material information) are liable if the tipper was in breach of fiduciary duty, and he/she and the tippee personally benefitted from the disclosure.

Analysis: The ratio decidendi
Illegal insider trading “involves the theft of valuable information about corporate plans that properly belongs to the corporation and its investors.” Its vigorous prohibition is necessary to protect the intellectual property rights that rightfully belong to the corporation and its shareholders. Illegal trading is done when the purchase or sale of securities is conducted in breach of the fiduciary relationship based on non-public, material information, in such a way that the price of the security is affected. It is also illegal for the person enjoying such a relationship of trust and confidence to tip such material, non-public information for them to trade on such a basis.

Aside from appropriating the information in violation of property rights, insider trading also reduces the incentives of legitimate market participants to make discoveries of information, by unjustly appropriating trading profits on undisclosed information. It robs investors of many benefits of investing

In this case, Johnny Jones is a VP, a high-ranking official in the company who enjoys a relationship based on trust and confidence; therefore, he is precluded from trading on the information he knows, and from tipping it to his acquaintances who would act on it in stock trades. There is no need to prove that Johnny traded on the insider information they knew; it is sufficient that they possessed it that insider trading is necessarily presumed. For the case of Joan and Jake, the testimony of Rita would implicate them as insider traders.

Conclusion: The decision
Johnny is guilty of insider trading as an officer of the corporation, while Joan and Jake are guilty of insider trading as tippees of Johnny. Read More