Traders Over Heinz Insider - Term Paper Example

?Running Head: Business Ethics – Insider Trading Business Ethics – Insider Trading [Institute’s Business Ethics – Insider Trading Introduction Maglich (2013) highlights a recent high profile case of insider trading which took place right before the news of Buffet’s Berkshire Hathaway and 3G Capital acquiring Heniz. Insiders, who have only been identified as a “GS account”, had information about the acquisition of Heinz by Warren Buffet suddenly bought several shares of the company and the increased demand of the shares caused an upward surge of more than 7.5 percent in the shares of the company which had been consistently trading at the same price level for the past several months. Once the announcement took place, trading for the shares skyrocketed and price increased by more than 20 percent, thus, benefiting the people who had previously bought those shares for a premium. The case also reveals that the SEC and other regulators are willing to punish such actions as they are deemed to undermine market efficiency and investor confidence. In fact, they have even gone so far as to freeze Swiss bank accounts. Insider trading has been prevalent since the very inception of stock markets (Ferrell et al., 2012, pp. 83). In the recent past, several prominent names which include but are not limited to Rajat Gupta (Goldman Sachs), Raj Rajaratnam and Jason Goldfarb (Galleon Group), Donald Johnson (NASDAQ), Joseph Skowron and Yves Benhamou Matthew Kluger and Brett Bauer have been disgraced, fined, imprisoned due to insider trading. Although insider trading is one of the most widely discussed and debated issues within the field of business ethics, there is a serious disagreement amongst experts regarding whether or not insider trading should be made ethical or unethical. This paper makes a brief attempt at exploring and analysing various dynamics of insider trading in light of the above mentioned article. More specifically, the paper would make an attempt at understanding the issue of insider trading in light of business ethics theories, its impact on the stakeholders and possible recommendations to resolve this issue. Discussion Introduction to Insider Trading It is apparent that employees of a particular company are likely to possess information about the company that no individual on the outside knows such as a possible merger, acquisition (as in the case of Heinz), financial results, lawsuits, getting access to new distribution or communication channels, strategic alliances and others. The law does not restrict employees of any company and for that matter of fact even the top management, directors and large shareholders of the company from trading the shares of the company but it does not make it explicitly clear that they should not take any advantage of non-public information (Ferrell et al., 2012, p. 83). In fact, even if an insider reveals a piece of crucial inside information, the law restricts the ability of any outsider to use or act upon that information (Henn, 2011, p. 85). Important here to note is that the timing is crucial in the cases of insider trading. Insiders aware of non-public information can act on that information once that become public. Some companies restrict insiders to act on that information only after 24 hours had passed on that information becoming public in order to avoid any complications (George, 2006, p. 75). Ethical Issue The ethical issue which is under discussion here is that of insider trading. The insiders, clearly, used the information that did not belong to them and used it for their personal gain (Sharma & Bhal, 2004, p. 412). When an asset of any organization is used, without the permission of the owner, for personal gain, the gain belongs to the owner and in this case it belonged to Heinz who has been now been acquired by Buffet’s company. Insider trading is also an ethical issue because while other traders in the market had access to a certain level of information, these insiders used information that had yet not been made available to the general public to amplify their gains. Therefore, the information advantage gained by the insiders is inherently unfair. Regardless of the fact that how diligent and thorough they would have been in their research, they would have never been able to uncover this information thus disrupting the basic rule of providing everyone with a level playing field (Henn, 2011, p. 85). Therefore, the same has the potential to discourage investors from participating in the market with significant insider trading. Quite understandably, fewer people participating within a market translates into lesser liquidity, lesser efficiency and more variability all of which have a negative impact over financial development, which in turn has empirically verifiable relationship with economic growth (Shaw, 2010, p. 320; Hoffe, 1994, p. 123). Impact on Stakeholders In this case, the most relevant and crucial stakeholders’ insider involved within trading, Heinz, its shareholders and investors, SEC and regulators and investors involved in the broader stock market. Quite clearly, the insiders who benefited from this information enjoyed a positive impact of insider trading; at least until before their Swiss bank accounts were frozen. If the investigation of SEC reveals that they were indeed involve in the crime, they might also end up serving jail time as the same has happened in other high profile cases. The gains for shareholders and investors of Heinz could have much more had the insiders did not take the liberty to engage in insider trading. More importantly, their ability to generate financial gains from trading activity are likely to be hampered in the recent future because with this scandal, the investors would now see Heinz as one of those organizations which has failed at effectively combating with the problem of insider trading. It is likely that people would always remain sceptical of the volatility within the share price of the company’s share (Petrick & Quinn, 1997, p. 85). Even worse, the brand image of the company might also get hurt if it becomes public that some high profile officers or directors of the organization were involved in the case. Furthermore, insider trading also has negative impacts for the broader investor community and securities market. Insider trading has the potential to create significant gains for the insiders but it is a zero-sum game as it restricts the ability of outsiders to make gains from the trading process (Shaw, 2010, p. 320). Insider trading manipulates the market and the outsiders, as mentioned earlier as well, feel left out and playing a game where they have a clear disadvantage. One of the greatest achievements of the United States in the early 19th century was paving way for financial development, which in turn ensured economic development. Stock market is a crucial element of the financial market as it links savers with lenders in a transparent market. They assume that all of the people have an equal opportunity at excelling and making gains if they invest time and energy and understanding the dynamics. However, as what happened in the case of Heinz, all the knowledge, modelling, calculations and assumptions of the savers and investors were deified when the insider took advantage of their non public information. In short, these events discourage savers to invest within the market which is not welcome news in the era of recessionary pressures and credit crisis. Recommendations/Resolution There are no doubts about the fact that Heinz and American stock market has suffered a serious blow due to the recent insider trading allegations. The outsiders that are now trading other shares but do not have contacts in the stock market with the insider or are not insider themselves fess less motivated to partake in the trading process because they believe that been subjected the unfair conditions. Quite understandably, the same has the potential to decrease the liquidity within the markets and raise serious questions over the ability of the markets to create stimulate financial development. When outsiders, who formulate a significant majority in all cases, withdraw from the market, financial markets would cease to serve the purpose of creating a link between the lenders and borrowers within the market and stimulating economic activity. The point here is that is imperative to find solutions for this problem. Although, Heinz and the SEC cannot go back in time and undo this event, they follow some simple steps to decrease the likelihood of such events happening in the near future. The SEC and Heinz should take an active approach at increasing the secrecy within organizations. When there are more people who know about a certain corporate decision, it is more likely that the information would leak to the general public. However, when only a handful of people are aware of a certain piece of information, it is easy and straightforward to point out the culprits because there are a limited number of people who emerge as suspects. This solution is more plausible and practicable because companies like Apple, Boeing, Lockheed Martin, Sukhoi Company, IKEA, Trader Joe’s, Glencore and others have been able to stay away from the insider trading headline primarily because of the strong controls that they have imposed over the outflows of information from the organization. The fact is that revolution in the field of information technology has made it much easier for individuals to share and transfer information and that also without even revealing their identity and meticulously covering their tracks. More than 63 percent of the brokers have admitted to benefiting from inside information but there are only a handful of cases that have appeared in the media over the past few decades. Again, the point here is that insider trading is inevitable and the best approach is to put efficient and effective controls regarding the flow of information within the organization (George, 2006, p. 75). Another solution to avoid the problem of insider trading in the future is to ensure that Heinz and other companies take active steps at improving their overall communication with the general public. It becomes more rewarding and tempting for the insiders to use inside information when they know that information will not be made public for quite some time. However, when the organization itself decides to make all information public as soon as possible, it would decrease the likelihood of the insider possessing any crucial material non public information to use for their trading. The following two recommendations are directed at both Heinz and the SEC to impose. However, the following recommendation is directed towards the SEC, regulators and policymakers of the country. Many Austrian free market and libertarian economists and experts argue that the solution to the problem of insider trading is to legalize insider trading. They argue the same with the idea that at its very core, markets are supposed to get the prices right and these prices should correctly reflect the situation of the company and market expectations about the same. Buffet acquiring Heinz was positive news which had the potential to increase the stock price of the company, however, that increase in the stock price only appeared on the surface after the announcement had been public. However, when insiders began to buy the shares of Heinz at premium, the same ensured that it begin to reflect in the market prices much sooner. Quite understandably, insiders are the ones who possess the most authentic and relevant information about the organizations that they are employed in, therefore, if they are allowed to trade then the markets would be in a better position to avoid a crash and burn scenario similar to the situation of Enron and WorldCom in the past. Important here to understand is in this age of connectivity and information technology, it almost impossible to maintain surveillance and keep track of information flow from and to employees of any organization without violating their civil liberties (Shaw, 2010, p. 320). Furthermore, some experts believe that the opportunity for insider trading gives managers an opportunity to engage in a never ending process of innovation, improvement, and generating value. Furthermore, it also forces managers to take calculated risks with the available resources rather than being content with the current position of the organization. For example, had insider trading been made legal, the managers and directors Heinz would have strived more harder to secure this deal with Buffet’s company because they knew that such an opportunity would ensure an inflation of the stock price. Quite understandably, the gains that Heinz’s managers and insiders would make from trading would serve as the reward for their hard work and determination. The proponents of insider trading also argue that compensation to employees in form of the profits from insider trading is cheap for the long term shareholders of the organization as it does not come from the corporate profits of the organization (Henn, 2011, p. 85). Conclusion Heinz has joined the ranks of several companies that have been in the centre of allegations relating to insider trading. The SEC has taken swift actions and has guaranteed strong punishment for the culprits in this case. The impact of insider trading on the stakeholders is highly likely to be negative both in the short term and long term. This explains why an overwhelming number of countries have made it illegal for traders to use inside classified and non public information. Interestingly enough, one solution to solve the problem would be legalize insider trading across the broad hoping that it would lead to a new era where share prices would be able to more accurately represent the situation of the company. Another suggestion would be follow the approach of companies such as Apple, Boeing, Lockheed Martin, Sukhoi Company, IKEA, Trader Joe’s, Glencore and others to create a secretive environment and make haste in making all information public which inevitably has to become public in the future (Sharma & Bhal, 2004, p. 412). References Ferrell, O. C., Fraedrich, J., and Ferrell, L. 2012. Business Ethics: ethical decision-making and cases. New York: Cengage Learning. George, R, T., De. 2006. Business ethics. Pearson/Prentice Hall. Henn, S. K. 2011. Business Ethics: A Case Study Approach. John Wiley and Sons. Hoffe, O. 1994. Immanuel Kant. State University of New York Press. Maglich, J. 2013. SEC Sues Traders Over Heinz Insider-Trading Allegations, Freezes Swiss Bank Account. Forbes. Retrieved from April 30, 2013: http://www.forbes.com/sites/jordanmaglich/2013/02/15/breaking-sec-sues-traders-over-heinz-insider-trading-allegations-freezes-swiss-bank-account/ Petrick, J. A., & Quinn, J. F. 1997. Management ethics: integrity at work. California, Sage Publications. Sharma, P., & Bhal, K. T. 2004. Managerial ethics: dilemmas and decision making. California, Sage Publications. Shaw, W. H. 2010. Business Ethics: A Textbook with Cases. Cengage Learning. Read More