Insider Dealing Criminal Law is Draconian and Unnecessary - Essay Example

INSIDER DEALING CRIMINAL LAW IS DRACONIAN AND UNNECESSARY Insider Dealing Criminal Law is Draconian and Unnecessary Insider Dealing Criminal Law is Draconian and Unnecessary Insider trading has been considered illegal in various nations, including the UK. Most people perceive the trading as outright stealing; hence the UK laws have become stricter over the years, including swift punishment to those who are caught garnering inside information as well as those who trade, regardless of their lack of/ or association with the company. As a result, there have been several laws such as the Financial Services and Markets Act 2000 as well as the Criminal Justice Act of 1993, which are meant to protect workers as well as firms from the activities of the investors. The proposed criminal laws purport that the act is unfair since an investor who has inside information is highly likely to make more profits as compared to a typical investor. Other scholars claim that unauthorised insider trading tends to increase the cost of capital on the issuers of securities; hence, reducing economic growth (Alexander 2007, pp. 229-230). However, it is undoubtedly that though the set criminal laws are meant to help the investors and ensure economic success, they are unnecessary, draconian, and obviously counter-intuitive. Wagner (2011, pp. 974-975) asserts that the criminal laws are extreme and there is a need to legalise insider dealings to benefit the markets, ensure more transparency, reduce accounting fraud, and act on timely and factual information. Various scholars posit that criminal laws regarding insider trading in the UK are unnecessary and are a burden to some market participants. This is because though such trading has been illegal since the year 1980, it has always been difficult to effectively prosecute persons who have been accused of such dealings. In most cases, the suspects are able to escape arrest or prosecution; thus, the regulators often rely on fines to punish those who are found abusing the market. It is unfortunate though that the fines have always been perceived as inefficient since the perpetrators are able to walk scot-free since they have the necessary resources to cover their fines. In that case, this only increases the rate of misconduct; making the set laws redundant (Ferran 2004, pp. 44-45). The number of insider dealing cases by the Financial Conduct Authority in the UK has heightened in the past years. Since the year 2009 to 2013, there have been roughly 23 convictions. For instance, in 2009, Christian Littlewood who was a corporate financier and an insider trader was sentenced to three years and four months in jail. It was believed that the gross profit accumulated from his insider trading was roughly £1million (Goodley 2011). Although insider trading may seem to be somewhat portentous, such a move only raises more suspicions, making investors uncomfortable and uneasy when trading. Therefore, there should be lesser penalties on such persons since they are not necessarily committing fraud. The criminal laws with regard to insider trading are overly severe and harsh. For instance, in 2014, Carl Linderum, a 36 year old business man who ran a hedge fund was arrested on suspicions that he was dealing in insider trading. After ten months, the Financial Conduct Authority (FCA) dropped the case on grounds that there was no enough evidence to indeed prove that the suspicious transactions were unlawful. However, the arrest led to the collapse of the hedge fund, which was worth $100 million and around seven employees lost their jobs (Enrich & Agnew 2014). This definitely shows that the laws against insider trading are draconian and are only meant to punish the investors. They are unfair, unclear, and do not serve their intended purpose. The laws only lead to high profile arrests and raids, yet, most of them do not yield any benefit or convictions. The modern need and effort to stop trading on specified undisclosed financial data is insignificant since it is not easy to spot the real insiders; hence, making it possible to target top directors, large shareholders, as well as executives, which is unfair (Manne 2014). Consequently, since they are aware that they are being targeted, they end up disappearing from their ranks though the valuable inside data remains with them. This means that the case to outlaw inside trading is obviously weak and only intended to inflict more damage than good to careers as well as families. It is important to understand that insider dealings though might be somewhat unfair since it favours some investors, it has immense significant economic as well as social benefits, including guaranteeing that there is a more precise pricing of the market as well as the stocks. Numerous errors have been made in the name of prosecuting the wrongdoers. What the criminal laws are doing is helping the federal prosecutors to make a name for themselves by convicting the low-rank functionaries. The law is out to damage the reputation of otherwise competent personnel such as the medical researchers and specialists among others. It is then sound to argue that it is time that the UK government stopped such ridiculous pomposity and focus on coming up with ways in which the insider dealing can be made to benefit all persons without discrimination. It is evident that the criminal laws against insider trading are counter-intuitive; hence, unwarranted. The government has been so focused on criminalising the trade, forgetting that it has its benefits. Most of the traders as well as hedge fund related consultants such as James Sanders and Julian Rifat have been prosecuted for violating the law. For example, Rifat pleaded guilty to roughly eight counts, claiming that he passed inside information during his course of employment. He had passed information on various firms, including Volkswagen, Barclays, and Metro to Graeme Shelley who was an associate at Novum securities. They both received a two year sentence and profits from all the accounts amounted to£250,000 (Moore 2014). In a similar case, a husband and wife received a four year prison term after they pleaded guilty for insider trading. James Sanders and his wife Miranda were imprisoned for netting over£1.5 million from their insider dealing (Neville 2012). It is unfortunate that such a move only led to the government reducing economic efficiency and not necessarily enhancing transparency in the market. The government has a tough job, since most of the people who trade on personal stocks are involved in inside dealings. However, with the limited resources been put in place, the federal authorities tend to focus on high profile people and big money. This means that there is no transparency, making the specified laws evidently gratuitous (Du & Wei 2003, pp. 4-5). The regulation of insider trading under the UK law had an objective of protecting the shareholders against misusing confidential or privileged information by corporate insiders. The criminal law was the main platform in which the legal authorities sought to control such trade as well as market manipulation (McLaughlin 2013, pp. 19-20). They agreed that insider trading is a grave threat to the good governance as well as integrity of the financial markets; hence, came up with several laws which are not only unnecessary but also draconian in nature. For instance, Part 5 of the Criminal Justice Act of 1993 prohibited dealings that affected the price of the securities based on inside data, disclosing of a company’s information knowingly, and encouraging others to deal in particular securities based on information garnered (Alexander 2013, pp. 412-413). However, such a law is uncalled for since it prevents people from utilising the resources and markets, from changing their concepts, and using timely as well as accurate information. The rules set aside only focus on the ‘non-public’ data, which is a legal and not necessarily an economic concept. Consequently, organisations and individuals are forced to make modern decisions, regarding trade based on outdated information (Mathews 2013). It is sound to argue that keeping the nation ignorant of what is happening is definitely an economic idiocy, since it is highly likely to make more folly choices and markets may take a long time to adjust. On the same note, Ska (2011, p.76) asserts that the financial crisis was aggravated by the fact that there was insufficient information and poor assumptions. If the people had realised the real value of having mortgage based securities and acted in the right manner, there would have been lower losses and it is possible that the meltdown would have quickly ended. In that case, making insider trading illegal is not only bad for the investors but also for the economy in general. Although insider dealing sounds somewhat ominous, the proposed criminal laws are unquestionably extreme. This is because such trading does not involve any form of fraud as security markets are impersonal and large. Most of the objectives of an investor are to identify the necessary undiscounted aspects of an industry or an economy as this is where true prospects lie for them. For example, in case an investor learns that there is an impending merger in a certain firm, they do not go out of their way to look for millions of shareholders, convincing them to sell and telling them there is no any deal. In reality, they buy the million shares from those who are intending to sell anonymously on a stock exchange. Furthermore, the insider trading related laws tend to imbalance the markets since they regulate only half of the trade (Aktas, Bodt & Oppens 2008). Competent investors make good business by being in the know on when they are not or are supposed to sell or buy. Most of the insider information tips only alert the owners to hold on to their shares or to ensure that they have not bought new ones. For that reason, it is improper for the government to treat such traders like drug dealers. The criminal laws disregard most of the people who utilise the non-public data to make investment decisions. Subsequently, such enforcement bias against selling or buying unbalances the economic market (Bandow 2011). The government should understand that the public is entitled to have timely as well as the best information to make business decisions and coming up with strict laws impedes decision making on private investment and does not enhance more resourceful market. The Financial Services and Markets Act (FSMA) of 2000 increased criminal penalties to persons accused of insider trading. Section 118 of the FSMA, created three categories of offences related to market abuse with regard to misusing information garnered, creating misleading or false impressions, and distorting the market (Bainbridge 2013, p. 407). The offences were designed in an effort to boost confidence and protect people from abusing information that was legally protected. However, the investors do not benefit from the prosecutions and most of them lose based on what they know since in most cases, the ‘inside’ information is often meant to become public. It is also untoward that the government’s fervent arrests end up discouraging even those who innocently gather information. It is unclear on the type of information that can be considered secure; since people are always on the look out and uneasy as the federal government might be listening. Accordingly, most people end up losing their hard earned money due to government’s ignorance on the need for timely information and ultimately lose confidence (Brazier 2012; Levmore 2008, p.117). Moreover, although some people might perceive insider dealing as unfair, to most people, it is indispensable. This is because when people act based on factual information, they are able to set the right prices. This means that the laws are unnecessary and harsh since interfering with the modification process by prosecuting economic goons on the assumption they are being involved in insider trading makes it hard and longer for the market to adjust (Maloney 2014, p. 702). Although firms and individuals have a right to keep their information and punish the people who infringe their trust, the offence should be regarded civil and not necessarily criminal. The punishment given should also be able to fairly fit the charges and the government is not justified in any means to use any form of intrusive enforcement strategy to combat vicious crimes (Schindler 2007, pp. 40-41) The UK government alleges that the laws against insider dealing promote fairness, which is somewhat far-fetched. This is because it is unheard of for anyone to believe that any form of investment can occur in a level or fair playing field. For instance, experts on Wall Street are able to make good money because of the asymmetric data or information they get to ensure a competitive advantage over their rivals. Serious traders as well as investors go to astonishing lengths to get hints on imminent deals. Looking closely at some agents such as Hedge Funds, research shows that they have company jets, whose direction might disclose top executives heading off for major merger meetings. At this point is important to argue that though the beneficiary of the inside data may not deserve being so fortunate, it is not unfair that the buyer or the seller ended up losing as there are no victims when it comes to insider dealings. This is because the person on the receiving end acted based on their personal decision after getting the information and they were not compelled to make any choices. This means that the party would still have acted in the same manner even if the insider did not offer the information (Ali & Gregoriou 2008, pp. 38-40). French , Mayson and Ryan (2014, pp. 343-344) argue that laws that control market abuse are affected by penalising the insider dealing, requires firms to publish all information that affects their trade, and forces the insiders to declare their form of trading. This is manifestly pointless since regulation leads to a tremendous loss of people’s resources such as time. The private sector spends approximately 10 billion hours to meet the government’s demand on paperwork. As such, regulation discourages innovation, creation of new products, services, and jobs (Levine 2014). Scholars go on to argue that the goal of insider criminal laws, which is to enhance fair stock market, is overly misguided. This is due o the fact that most of the market participants trade their securities based on partial information. In almost all transactions, one group is likely to have more information than the other. It can only be possible to enforce trading laws in case a trader decides to sell or buy a security. However, the choice not to trade can also be essential (Caprio 2012, p. 191). For that reason, scholars such as Bames (2010, pp. 116-117) affirms that related laws prevent markets from reflecting the necessary and complete information regarding securities; thus, it is impossible to set up a fair price. Criminal laws against insider trading assume that people live in a world where everybody can trade on fair and ideal information. However, such a world is inexistent and the government should take a bold step and stop punishing traders and investors who are acting on timely and precise information since that is what financial markets should be all about. There should be an attempt to reassess the applicability of criminal laws with regard to dealing with insider trading and the UK government should come up with other solutions to regulate it such as the application of civil as well as administrative laws. There should also be more educational campaigns to increase knowledge on stock exchange market as well as its main characteristics (Ska 2011, pp. 17-18). Reference List Aktas, N., Bodt, E & Oppens, H, 2008, Legal Insider Trading and Market Efficiency, Journal of Banking & Finance, vol. 32, no.7, pp.1379-1392. Alexander, R.C.H, 2007, Insider Dealing and Money Laundering in the EU: Law and Regulation, London, UK: Ashgate Publishing. Alexander, K, 2013, UK Insider Dealing and Market Abuse Law: Strengthening Regulatory Law to Combat Market Misconduct, [Online] Available at < http://www.google.com/url?q=http://www.rwi.uzh.ch/lehreforschung/alphabetisch/alexander/person/publikationen/2013Insider.pdf&sa=U&ei=P7b3VPetBs6XaqqVgtAJ&ved=0CDEQFjAF&sig2=0X0g-29L1ON3ml1Z-w4fzw&usg=AFQjCNHdauE4rpunknSf7Mj-qKyGCpN8uw> [viewed March 05 2015] Ali, P & Gregoriou, G, 2008, Insider Trading: Global Developments and Analysis, Boca Raton, Florida, CRC Press. Bainbridge, S, 2013, Research Handbook on Insider Trading, London, UK: Edward Elgar Publishing. Bames, P, 2010, Stock Market Efficiency, Insider Dealing and Market Abuse, London, UK: Gower Publishing. Bandow, D, 2011, It’s time to Legalise Insider Trading, [Online] Available at < http://www.forbes.com/2011/01/20/legalize-insider-trading-economics-opinions-contributors-doug-bandow.html>[viewed March 05 2015] Brazier, G, 2012, Insider Dealing, New York, NY: Rutledge. Caprio, G, 2012, the Evidence and Impact of Financial Globalisation, New York, NY: Academic Press. Du, J & Wei, S, 2003, Does Insider Trading Raise Market Volatility? New York, NY: International Monetary Fund. Enrich, D & Agnew, H, 2014, U.K Agency Struggles in fight against Insider Trading, the Wall Street Journal, [Online] Available at< http://www.wsj.com/articles/SB10001424052702303640604579296520563211360 >[viewed March 05 2015] Ferran, E, 2004, Building an EU Securities Market, London, UK: Cambridge University Press. French, D, Mayson, S & Ryan, C, 2014, Mayson, French and Ryan on Company Law, Oxford: Oxford University Press. Goodley, S, 2011, Unremarkable Couple who amassed a Fortune from Insider Trading, the Guardian, [Online] Available at [viewed March 05 2015] Levine, Matt, 2014, what’s next for Insider Trading Law? Wall Street Journal, [Online] Available at < http://www.bloombergview.com/articles/2014-12-11/whats-next-for-insider-trading-law>[viewed March 05 2015] Levmore, S, 2008, Securities and Secrets: Insider Trading and the Law of Contracts, Virginia Law Review, vol. 68, no.1, pp. 117-160. Maloney, N, 2014, EU Securities and Financial Markets Regulation, Oxford: Oxford University Press. Manne, H, 2014, Busting Insider Trading: as Pointless as Prohibition, The Wall Street Journal, [Online] Available at < http://www.wsj.com/articles/SB10001424052702304279904579516170211639290> [viewed March 05 2015] Mathews, C, 2013, why is Insider trading even illegal? Free Republic News, [Online] Available at < http://www.freerepublic.com/focus/news/3048343/posts>[viewed March 05 2015] McLaughlin, S, 2013, Unlocking Company Law 2nd Edition, New York, NY: Rutledge. Moore, J, 2014, Powerful Banker pleads Guilty in biggest ever Insider Trading Case, the Independent, [Online] Available at [viewed March 05 2015] Neville, S, 2012, Husband and Wife Jailed for Insider Dealing, the Guardian [Online] Available at [viewed March 05 2015] Schindler, M, 2007, Rumours in Financial Markets: Insights into Behavioural Finance, London, UK: John Wiley & Sons. Ska, I, 2011, Insider Dealing and Criminal Law: Dangerous Liaisons, New York, NY: Springer Science & Business Media. Wagner, R, 2011, Gordon Gekko to the Rescue? Insider Trading as a tool to Combat Accounting Fraud, University of Cincinnati Law Review, vol.79, no.3, pp. 973-1015. Read More