Transactions Considered as Insider Trading - Research Paper Example

 Foundations of Business Table of Contents Introduction 2 Question One: Types of Transactions Considered As Insider Trading 2 Question Two: Specific Conditions Under Which Insider Trading Is Considered Illegal Under United States’ Federal Securities Laws. 3 Question Three: Widespread Investigation into Insider Trading 5 Conclusion 6 References 7 Introduction The infringement of the company’s policies and the federal laws for the employees to trade in the securities of the company while the employees are aware of the material and the private information about the company can be referred as insider trading. It is illegal to provide the material or the non-public information to others based upon which they may trade in the company securities. Question One: Types of Transactions Considered As Insider Trading There are various transactions that have been prohibited as stated by the company’s rules and regulation: I) Transaction in the securities of the company – When the employee is well aware of the material and the nonpublic information with regards to the company, he or she may not trade in the securities of the company, but counsel others to hold, buy or sell the securities of the companies. They may even disclose the information of the company to others who might then trade. They may even assist others to engage in any of these activities. II) Transaction in the securities of other companies – Since the employees are well aware of the material and the nonpublic information of other companies because of their experience, therefore in this regards, the employees are forbidden to transact in the securities of other companies. III) Short sales – It may be the case that the employees of the company may borrow the securities in order to sell with a hope of price dropping. They may intent to buy back the securities at the lower price in order to replace the borrowed securities. The employees of the company are then strictly prohibited to engage themselves in such kinds of short selling of the company’s securities (Heckmann Corporation, n.d.). Question Two: Specific Conditions Under Which Insider Trading Is Considered Illegal Under United States’ Federal Securities Laws. In the Securities Exchange Act, there are provisions designed to prohibit the insiders in the corporation to take any advantage of the insiders’ information in trading the corporation’s securities. There are two federal statutes having the provisions forbidding the insider trading. They are the Securities Exchange Act of 1934 and the Insider Trading Sanctions Act of 1984. Prohibition of the insider trading can be warranted on the fairness and equity grounds. Under the federal securities law the basic prohibition of the insider trading can be derived from the rule 10b-5, disseminated pursuant to Section 10(b) of the Exchange Act. There is special condition where the insider trading is considered as illegal. It would be completely illegal for any person or the individual to utilize the means and the instruments or the mail of national security exchange to make use of (a) any schemes, devices or artifice to defraud. (b) the untrue statement that is of the material fact or to fail to state the material fact that would have been essential to make the statements. (c) To engage in the activities of fraud or deceitfulness upon any person in relation to the purchase and sell of the securities. Since the major aim of the insider trading is to promote the fairness in the securities therefore the proscription only applies to the extent that the material information is not available to the public. To the extent to which the insiders are in the possession of the material non-public information, the federal law bans on the trading in the securities of the subject company (Sapp, 2000). The insiders are also prohibited to provide “tips” to other outside persons such as friends or families. This can be termed as tipping. The insider or the ‘tipper’ is restricted from disclosing the other persons who is called the ‘tippee’ about any kind of non-public but material information with regards to the public company or to make any kind of recommendations to buy and sell the securities of the public company. In this note, it can be said that according to the Act, if the commission thinks that the person has sold or bought the securities while in possession of the material nonpublic information, then the Commission might implement certain severe action in the United States district court to seek a civil penalty. The short-swing profit that is generally made by the corporate insiders in their corporation stocks is also forbidden (Seitzinger & Et. Al., 2002) Question Three: Widespread Investigation into Insider Trading It was reported by the Wall Street Journal on November 20 that a far-ranging insider trading investigation for the use of the outside expert consultant has the ability to entangle the consultants, the mutual fund traders, the hedge-funds and the investment bankers as well as the analyst living in the nation. The journal reported that the criminal and the civil investigation are being conducted by the U.S Attorneys office in Mahattam and the SEC. The investigation will be focused on whether the material or the non-public information was offered by the expert consultants to hedge funds and mutual funds as well (Ropes & Gray LLP, 2010). The other case related to the insider trading has been reported at “The New York Observer Wall Street”. It reported that with regards to the charges of the securities and the wire fraud that is in connection to the Federal Bureau of Investigation insider trading investigation, four arrests have been made. While the fifth person begged guilty to charges that was related to the investigation (Taylor, 2010). It was reported by the Wall Street Journal that the FBI has raided various offices such as Connecticut offices of Diamondback Capital management and level global investors. The other name is the Loch Capital Management in Boston. The action taken was part of the broad insider-trading investigation where still more raids were expected (Yahoo Finance, 2010). Conclusion In order to prevent insider trading from occurring, the companies need to be committed to preserve the privacy. It must also try to prevent the misuse of any un-published and price sensitive information. It needs to adhere to all the rules and regulations that have been set by the regulatory authorities with regard to the prevention of insider trading. The companies can appoint the Company Secretary as the Compliance Officers who would be reporting the managing directors regarding the prevention of insider trading that has been specified in the policies. If the companies are able to take immediate steps then they can prevent the occurring of such kind of cases. References Heckmann Corporation, (No Date). Heckmann Corporation. Prohibition against Insider Trading. Retrieved Online on February 28, 2011 from http://heckmanncorp.com/governance/insider.pdf Ropes & Gray LLP, (2010). Alert. “Expert Networks” Under Investigation: Insider Trading Probe Into The Use of Consultants May “Ensnare” Hedge Funds, Mutual Funds, and Investment Bankers Across the Country. Retrieved Online on February 28, 2011 from http://www.ropesgray.com/files/Publication/4378eec0-dd0d-4605-bb88-0018e470c15d/Presentation/PublicationAttachment/ab778762-50e8-4186-a8d9-019bfecafc36/20101121WSJExpertNetwork.pdf Seitzinger, M. V. & Et. Al., (2002). CRS Report for Congress. Federal Securities Law: Insider Trading. Retrieved Online on February 28, 2011 from http://fpc.state.gov/documents/organization/8043.pdf Sapp, S. L., (2000). Insider Trading Under the Federal Securities Laws. News. Retrieved Online on February 28, 2011 from http://www.lockelord.com/files/News/ca528475-f18a-4f12-8222-8948c3681be5/Presentation/NewsAttachment/aa783fbf-8ae8-486a-a958-8d3f2154ec4c/Insider%20Trading%20Under%20The%20Federal%20Securities%20Laws.pdf Taylor, M., (2010). The New York Observer Wall Street. FBI Makes Five Insider Trading Arrests. Retrieved Online on February 28, 2011 from http://www.observer.com/2010/wall-street/four-insider-trading-arrests Yahoo Finance, (2010). Cramer: Insider-Trading Probe Good for Retail Investors. CNBC. Retrieved Online on February 28, 2011 from http://finance.yahoo.com/news/Cramer-InsiderTrading-Probe-cnbc-1959666326.html?x=0 Read More