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Insider Trading - Essay Example

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Legal prohibition of insider trading is economically regarded as one way of fair allocation of property rights via information generated from a given firm that has gone or in the process of going public. According to the early common law in the United States, it was permissible…
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Insider Trading
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Insider Trading: Case Analysis Details: al Affiliation: Insider Trading: CaseAnalysis
Introduction
Legal prohibition of insider trading is economically regarded as one way of fair allocation of property rights via information generated from a given firm that has gone or in the process of going public. According to the early common law in the United States, it was permissible for insiders to trade in firms’ stocks with a cap of non-disclosure of inside information (O’Brien, 1995). However, the last three decades have witnessed enactment of several complex federal laws effectively prohibiting insider trading with regulations being at the epicenter of the modern trading activities of US securities.
US Insider Trading Law Overview
Insider trading simply refers to trading in securities with possessive influence of material nonpublic information (Shin, 1996). Prohibition of insider trading derives the force of law under the federal securities law Rule number 10b-5, promulgated by courts pursuant to Section 10(b) of the Securities Exchange Act enacted in 1934. Additionally, the Insider Trading Sanctions Act ("ITSA") enacted by the congress in 1984 and the Insider Trading and Securities Fraud Enforcement Act ("ITSFEA") of 1988 basically expanded the definition of persons in “control" of information capable of giving undue selective advantage to certain investors (O’Brien, 1995). In particular, “insiders’ not only refer to managerial officers, directors and controlling shareholders, but also covers corporate outsiders in possession of inside information disseminated to them by either true or constructive insiders. Under the foregoing legislative initiatives, insider trading is a violation of the ethical coded conducts laid down and monitored by the federal government and the Securities Exchange Commission, which is an extension of the government.
Case Analysis
Ordinarily, company employees as well as clients will most likely have access to material non-public information regarding possible advisory courses supposedly taken by clients or public companies (Harris, 2003). As an employee of Medivac, Manny was an insider with full knowledge of a proposed merger between her employer and Medtronic. Though the position held in the company is not mentioned in the case beforehand, Manny is seemingly knowledgeable enough of the treasure in waiting, perhaps with a basic understanding of insider trading regulatory principles to evade the consequential effects of violation scenarios. As stated above, the violation of insider trading law traditionally involves the purchase and/or sale of securities aided by "insider" material information that is/are non-public. While it is not illegal to make trades on securities, the prohibition only becomes valid to the extent that information forming the underlying basis of trade is internally generated towards an exclusive beneficial end of a single entity with disruptive operative mechanics of the free market forces (Grechenig, 2006). Apparently, this was the case with Manny’s informational spillover. Her action of divulging insider material nonpublic information tampered with accurate pricing of Medivac shares and fair allocation of capital investment to risk-averse investors with eventual effect of increasing to a greater extent the likelihood of Mitchell’s windfall gains spanning into multiple folds.
The case places prosecutory liability over Manny’s action as a participant tipper revealing confidential information entrusted to her to a tippee who happens to be a close relative; brother. As an employee of the Medivac, Manny was not only in breach of confidentiality as insider, but also violated supreme fiduciary duty. Notably, the ‘correct’ price of a firm’s shares is that which is set by the market forces of demand and supply with all information concerning the security already publicized/disclosed/availed to other investors (O’Brien, 1995). Precisely, Manny violated the Security Exchange Act, Rule 10b-5 and she should be held to account.
References
Harris, L. (2003). Trading & Exchanges. Oxford: Oxford Press.
Grechenig, K. (2006). The Marginal Incentive of Insider Trading: an Economics
Reinterpretation of the Case Law. The University of Memphis Law Review, 37, 75-148.
O’Brien, J. (1995). Illegal Insider Trading, Mergers, and Market Efficiency,
Unpublished Ph.D. dissertation, University of North Carolina.
Shin, J. (1996). ‘The Optimal Regulation of Insider Trading.’ Journal of Financial
Intermediation, 5, 49-73. Read More
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