Investigation, Research, Analysis and Real-World On Insider Trading - Case Study Example

?Investigation, Research, Analysis and Real World Case Study ies) On the Topic of Insider Trading INTRODUCTION AND BACKGROUND The term ‘insider trading’ explains the different unethical practices in the field of stock exchange. It is a process in which an associate may get involved in the illegal practices of insider trading for his/her own interest (The Indian Express Ltd, “The Evil of Insider Trading”). These types of practices are followed by way of having unauthorized access to the confidential information of a particular company. In this investigative research study, the main factors considering certain cases pertaining to the concept of insider trading will be analyzed and discussed. In this regard, the level up to which the aspects of insider trading along with other related activities are on the rise will be determined upon. In recent times, it is observed that amid the most talked about cases of insider trading the names of Raj Rajaratnam, Chief Executive Officer (CEO) of Galleon Group and Rajat Gupta, the ex MD of McKinsey and ex director of Goldman Sachs come into contention. In relation this particular aspect, proper literature backed up with problem identification and discussion will be presented throughout the overall process of the research. It has been determined that the issue of insider trading has emerged as a bane of modern day business world. It has certainly affected the level of trust upon higher level of authorities of globally leading companies (HT Media, “Rajat Gupta Asked to Pay $13.9 mn in SEC Insider-trading Case”). THESIS STATEMENT This investigative study aims to highlight a number of critical factors that are associated with the following cases i.e. Raj Rajaratnam, CEO of Galleon Group, and Rajat Kumar Gupta, ex MD of McKinsey and ex director of Goldman Sachs who were successfully prosecuted for practicing insider trading in their respective companies. PROBLEM STATEMENT With regard to the case of Raj Rajaratnam, the concerning problem mainly represented his involvement in the illegal practices pertaining to insider trading. This factor can be considered to give rise to the problems associated with even greater implications of criminal offences that reflected from the part of Rajaratnam. Another problem concerning the similar issue can be highlighted whereby Rajat Gupta who was the former director of Goldman Sachs and the ex-managing director of McKinsey was also prosecuted in relation to insider trading. These two cases were considered to be amongst of the most high profile cases which were examined in an in-depth manner. These cases were also evaluated to be as the most challenging cases because they involved numerous obligations that came from the part of the convicted entities. In relation to these cases, it also gave rise to numerous obligations and interventions that came out from the parts of the concerned parties involved in the cases of practicing inside trading. Thus, these problems seem to propagate a number of issues which will precisely be highlighted in the discussion sections. Correspondingly, the study will be able to present a broad idea concerning the severity along with the consequences of performing such illegal practices. It will also lead to the determination of the variable ways and measures that could be adopted in order to curb all the major issues associated with insider trading (HT Media, “Rajat Gupta Asked to Pay $13.9 mn in SEC Insider-Trading Case”). REVIEW OF LITERATURE In relation to the facets related to insider trading, it has determined that this particular practice is one the rise. Based on the current scenario, it has been determined that the two individuals namely Raj Rajaratnam and Rajat Gupta were the primary persons who were solely responsible for carrying out insider trading activities. Consequently, they were prosecuted for their crime by way of imposition of large amount of fines and imprisonment. In this similar context, it can be ascertained that there are various other factors associated with the concept of insider trading. According to David O. Friedrichs, it has been explained that with the commencement of 20th century, there has been a rise in all sorts of instances associated with insider trading. He also declared that such instances do not go well in the long run and eventually come to an end. All sorts of the crimes associated with insider trading get prosecuted (Friedrichs 1-100). In this similar context, Hongming Cheng considered insider trading to be attributable to different evidentiary problems that arise in such cases. It is determined to be as a white collar crime which can create a considerable extent of negative impacts in an overall economy and most importantly to a company where it is practiced. Thus, it is of primary importance to tackle this situation so that that it can be prevented at a large scale (Cheng 1-120). In relation to the concept of insider trading, it has also been affirmed by Hasan Nejat Seyhun that it is an illegal practice which can very well put the interests of a company at stake. The author had also provided weightage to the fact that these forms of illegal practices are carried out by the insiders who exist in a company. Based on the graveness of this aspect, he has suggested that even stringent regulations are needed to be formed for the purpose of creation of additional restrictions upon this particular practice (Seyhun 1-105). In a different context, Salinger explained that the identification of activities relating to insider trading is considered to be a very difficult task. It requires very high expertise to identify such instances of criminal activities. Moreover, the identification process can prove to be very lengthy. During the period of 1970s, the term of imprisonment was for five years for all those entities involved in insider trading. However, after the end of this particular period, it marked the era of a new beginning. The term of imprisonment got doubled and was increased to 10 years which began from the start of 1930s. Thus, taking these aspects into consideration, it can be determined that the law was able to revise itself with the particular approach of creating a stringer form of commandment and also for nullifying the aspect of insider trading (Salinger 1-100). Thus based on the entire studies, it can be stated that the aspect of insider trading represents a negative implication. The evaluated authors have suggested their viewpoints regarding this particular aspect and their comprehensions have depicted a clear idea regarding the negativities associated with insider trading. Correspondingly, this section of the study has provided a fair amount of knowledge about this particular concept and it also has helped in determining the problems associated with the increasing practice of insider trading (Bainbridge 1-70; Fink 1-50). CASE STUDIES In relation to the concerned cases, the two main individuals i.e. Raj Rajaratnam and Rajat Gupta had their primary involvements which were mainly associated with insider trading. In relation to the involvement of Rajat Gupta and the detection of his crime in the case of insider trading, he was found to pass confidential information to Rajaratnam. However, immediate action was taken in relation to the circulation of information. He was thereby charged with a lawsuit by the United States regulatory. He was charged with US$13.9 million for sharing confidential information. In addition, he was also barred from his current duties whereby he acted as an officer in a particular company. He was also debarred from acting as an investment advisor with any of the brokers or associates (HT Media, “Rajat Gupta Asked to Pay $13.9 Mn In SEC Insider-Trading Case”). Rajat Gupta had been considered guilty on 15th of June 2012 for divulging private information to Galleon Group LLC’s co-founder regarding Berkshire Hathaway Inc.’s $5 billion deal in Goldman Sachs. Moreover, he was also found guilty for his involvement in delivering nonpublic information relating to the bank’s fiscal results for the period of second along with the fourth quarters of the year 2008. With regard to his illegal actions, he was punished with a prison term of two years in October 2008. Besides, Rajat Gupta was also ordered to pay a criminal fine which amounted to US$5 million (HT Media, “Rajat Gupta Asked to Pay $13.9 Mn In SEC Insider-Trading Case”). Conversely, Rajat Gupta was found to a have a very strong corporate profile. He was previously one of the managing partners at McKinsey & Co. Inc. and was also a board associate of Procter and Gamble Co. along with American Airlines Inc. However, all his professional expertise backed with strong corporate figure did not do any good to him in relation to the series of crimes committed by him. He was unable to flee away from the clutches of law. However, an in-depth analysis was followed to determine a clear-cut picture regarding his involvement in the series of illegal activities. The investigations primarily embattled upon the broad aspects of confidential information sharing which primarily reflected from the part of Rajat Gupta. Nevertheless, besides all the allegations and charges that were put against him, he was considered to have the highest business profile in the entire probe (HT Media, “Rajat Gupta Asked to Pay $13.9 Mn In SEC Insider-Trading Case”). The prime entity who was in association with Rajat Gupta in this particular case was Raj Rajaratnam. Nonetheless, he also faced similar fate like that of Rajat Gupta as he lost an appeal of lodged in 2011 in relation to his conviction for securities fraud and conspiracy. He was thus ordered to disburse a sum of US$92.8 million penalty for this particular matter and was also ordered to surrender more than US$53.8 million and disburse a sum of US$10 million fine for his involvement in the criminal case. Currently, Raj Rajaratnam is serving an 11-year prison term at the Federal Medical Center Devens located in Ayer, Massachusetts. The main body that was responsible for the prosecution of both Raj Rajaratnam and Rajat Gupta was the United States regulatory. The Securities and Exchange Commission (SEC) also played a variable role in punishing the offenders for their crimes. A proper analysis of the case was able to cite a renewed focus by the United States regulatory to prevent insider trading i.e. high profile prosecutions that were effectively completed with high amount of penalties and a proper settlement (HT Media, “Rajat Gupta Asked to Pay $13.9 Mn In SEC Insider-Trading Case”). DISCUSSIONS Insider trading which is a form of an unethical practice is exercised by those entities who wish to attain unauthorized profits by way of following certain illegal functions in an organization. These types of activities are largely carried out by the higher authorities who perform the high end operational functions in a company. These types of activities are also carried out by those with sheered amount of critical expertise who could very well misutilize protected information of a company without anyone’s knowledge. Prosecution of such offenders also requires a varied amount of measures that are needed to be skillfully deployed to punish them. As a measure of prosecution, it has been analyzed that offenders are punished by way of large amount of fines and long terms of imprisonment among other broad terms of punishment. In addition, with the inclusion of strong enforceability such cases can also be sorted out and can be brought to an end. Moreover, there are numerous reports suggesting the prosecutions of many high profile cases relating to insider trading. This practice is however considered to be very lucrative and it drives various entities towards it. It is measured to be lucrative because of the fact that it provides numerous opportunities to such entities to earn high sources of revenues but as already discussed this process involves the procurement of revenue in an illegal manner. In relation to the aspect of possible motivations for which persons commit insider trading it can be regarded that the aspect of lucrative benefits drives people towards involving themselves in such kind of practices. People nowadays feel tempted by the easiest sources of incomes that can effectively play a very important role in making their lives better. Most of the people wish to lead an affluent lifestyle and in order to fulfill such aspect activities pertaining to insider trading may very well come into play. In case of Raj Rajaratnam and Rajat Gupta their involvement in the activities of insider trading played the major role. Their involvement in these activities will be specifically highlighted and the consequences which each of them had to face will also be cited upon. In relation to the proper analysis of the case, it has been determined that there has been a rapid increase of activities pertaining to insider trading. And, most of the people who are involved in such activities have a strong professional background. Especially in the context of Canada, there have numerous noticeable instances which are related to insider trading. Such instances generally take place in the operational functions of a company (Huang 1-100). CRITICAL REVIEW OF THE CASE A proper analysis of the case has enabled to present a fair amount of idea pertaining to the intricacies of the case. The case has been analyzed in an in-depth manner and based on the severity of the punishment that was delivered to the prosecutors helped in determining that the criminals exactly got what they deserve. Raj Rajaratnam was responsible for passing confidential information of the company to unauthorized entities. And most importantly, he followed this particular activity for his own benefit. Being in a company, his primary objective should have been to act in keeping with the interests of the company. However, he did not seem to act accordingly; in fact, he followed a different route and acted upon in a completely illegal manner. With regard to his prosecution, the law acted upon in a formative manner and it very clearly discharged its duties. Based on the graveness of the series of crimes that reflected from his part, Raj Rajaratnam was imposed with large amount of fines and was also sentenced to imprisonment. In case of Rajat Gupta, he was also prosecuted in the similar way as he was the considered to be closest ally of Raj Rajaratnam in this particular case. Thus, the law was able to serve justice in a distinctive manner. All the interventions that were created by both the offenders did not do any good to them and eventually they ended up paying large amount of fines and landed in jails. Compared to the measures that were adopted to punish the offenders, it has been realized that the law has become much stringent in matters pertaining to insider trading. In relation to the execution of insider trading in the particular case, it can be determined that with sheer expertise and knowledge base regarding the internal affairs of the company, the involvements in insider trading came into play. However, based on a comprehensive evaluation, it is apparent that the prosecutions were successfully completed. These cases were considered to be so high profile because all the entities involved in the case had a very strong professional background (HT Media, “Rajat Gupta asked to pay $13.9 mn in SEC insider-trading case”). On a broader term, the ‘terms of punishment’ that were provided in the past were not much severe. However, with the passage of time, the law has been able to revise itself and punish the offenders based on the graveness of the crimes associated with them. It also helped the regulators of law to deploy a lucid picture of the severity that one has to face if he/she is involved with any act pertaining to insider trading (HT Media, “Rajat Gupta Asked To Pay $13.9 Mn In SEC Insider-Trading Case”; Gasparino 1-150). CONCLUSION In relation to the concerned case of insider trading, it has been realized that this particular process is on the rise with the beginning of 20th century. This form unethical activity is largely taking place in the organizations that are dealing with large amount of finances along with stock broking agencies. In relation to the recent cases of insider trading, it has been realized that there were two key people i.e. Raj Rajaratnam and Rajat Gupta who had their key involvement passing valuable information of their organization. As per the analysis of the case, it has been found that Raj Rajaratnam was the primary player who was solely responsible for passing secret information to other companies backed up with a chain of other similar activities. Rajat Gupta also did not stand far behind as he was considered to be the closest associate of Raj Rajaratnam. Both of them were equally responsible for practicing insider trading. However, they were not able to hide their offences from being revealed. They eventually got prosecuted. Thus, this study proved to be very beneficial for creating a proper awareness regarding the concept of insider trading. It has also proved to provide great aid in determining the level up to which such instances can come into play in the near future. The paper also provided fruitful knowledge of certain authors regarding this particular concept which helped in the determination of even a fairer amount of idea pertaining to insider trading. Works Cited Bainbridge, Stephen M. Research Handbook on Insider Trading. United States: Edward Elgar Publishing, 2013. Print. Cheng, Hongming. Commercial Crime and Commercial Regulation. United Kingdom: Bright Publishing Company, n.d. Print. Fink, Matthew P. The Rise of Mutual Funds: An Insider's View. United States: Oxford University Press, 2011. Print. Friedrichs, David O. White Collar Crime in Contemporary Society: White Collar Crime in Contemporary Society. United States: Cengage Learning, 2009. Print. Gasparino, Charles. Circle of Friends: The Massive Federal Crackdown on Insider Trading--and Why the Markets Always Work Against the Little Guy. United States: HarperCollins, 2013. Print. Huang, Hui. International Securities Markets: Insider Trading Law in China. Netherlands: Kluwer Law International, 2006. Print. “Rajat Gupta Asked To Pay $13.9 Mn In SEC Insider-Trading Case.” HT Media. 2012. Web. 02 Nov. 2008. Seyhun, Hasan Nejat. Investment Intelligence from Insider Trading. United States: MIT Press, 2000. Print. Salinger, Lawrence M. Encyclopedia of White-Collar & Corporate Crime, Volume 1. United States: SAGE, 2005. Print. “The Evil of Insider Trading.” The Indian Express Ltd. 2013. Web. 02 Nov. 2008. Read More