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vde Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of nonpublic information. However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company.[1] In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders (in the U.S., defined as beneficial owners of ten percent or more of the firm's equity securities) must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. Many investors follow the summaries of these insider trades in the hope that mimicking these trades will be profitable. While "legal" insider trading cannot be based on material non-public information, some investors believe corporate insiders nonetheless may have better insights into the health of a corporation (broadly speaking) and that their trades otherwise convey important information (e.g., about the pending retirement of an important officer selling shares, greater commitment to the corporation by officers purchasing shares, etc.) Illegal insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.[2] However, it is relatively easy for insiders to capture insider-trading like gains through the use of transactions known as "open market repurchases." Such transactions are legal and generally encouraged by regulators through safeharbours against insider trading liability. [3][4]
Contents
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1 Legal insider trading 2 Illegal insider trading o 2.1 Definition of "insider" o 2.2 Liability for insider trading o 2.3 Misappropriation theory o 2.4 Proof of responsibility o 2.5 Trading on information in general o 2.6 Tracking insider trades o 2.7 Insider trading vs. insider information 3 American insider trading law
3.1 Common law 3.2 SEC regulations 3.3 Court decisions 3.4 Insider trading by members of Congress 4 Security analysis and insider trading 5 Arguments for legalizing insider trading 6 Legal differences among jurisdictions 7 See also 8 Notes 9 References 10 External links
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a class of the company's equity securities. Trades made by these types of insiders in the company's own stock, based on material non-public information, are considered to be fraudulent since the insiders are violating the fiduciary duty that they owe to the shareholders. The corporate insider, simply by accepting employment, has undertaken a legal obligation to the shareholders to put the shareholders' interests before their own, in matters related to the corporation. When the insider buys or sells based upon company owned information, he is violating his obligation to the shareholders. For example, illegal insider trading would occur if the chief executive officer of Company A learned (prior to a public announcement) that Company A will be taken over, and bought shares in Company A knowing that the share price would likely rise. In the United States and many other jurisdictions, however, "insiders" are not just limited to corporate officials and major shareholders where illegal insider trading is concerned, but can include any individual who trades shares based on material non-public information in violation of some duty of trust. This duty may be imputed; for example, in many jurisdictions, in cases of where a corporate insider "tips" a friend about non-public information likely to have an effect on the company's share price, the duty the corporate insider owes the company is now imputed to the friend and the friend violates a duty to the company if he or she trades on the basis of this information.
Generally, insider traders act upon information that they believe to be true that is not available to the public giving them the upper hand in making profits. Insider informants pass along information in the form of gossip and do not personally buy or sell stock based on projections. Whether or not either party is acting illegally is solely in the hands of the SEC.
Insider trading, or similar practices, are also regulated by the SEC under its rules on takeovers and tender offers under the Williams Act.
In 1997 the U.S. Supreme Court adopted the misappropriation theory of insider trading in United States v. O'Hagan, 521 U.S. 642, 655 (1997). O'Hagan was a partner in a law firm representing Grand Metropolitan, while it was considering a tender offer for Pillsbury Co. O'Hagan used this inside information by buying call options on Pillsbury stock, resulting in profits of over $4 million. O'Hagan claimed that neither he nor his firm owed a fiduciary duty to Pillsbury, so that he did not commit fraud by purchasing Pillsbury options.[21] The Court rejected O'Hagan's arguments and upheld his conviction. The "misappropriation theory" holds that a person commits fraud "in connection with" a securities transaction, and thereby violates 10(b) and Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. Under this theory, a fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of the information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company's stock, the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those who entrusted him with access to confidential information. The Court specifically recognized that a corporations information is its property: "A company's confidential information...qualifies as property to which the company has a right of exclusive use. The undisclosed misappropriation of such information in violation of a fiduciary duty...constitutes fraud akin to embezzlement the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another." In 2000, the SEC enacted Rule 10b5-1, which defined trading "on the basis of" inside information as any time a person trades while aware of material nonpublic information so that it is no defense for one to say that she would have made the trade anyway. This rule also created an affirmative defense for pre-planned trades.
every effort to make all reports available to all the broker's clients on a timely basis. Analysts should never report material nonpublic information, except in an effort to make that information available to the general public. Nevertheless, analysts' reports may contain a variety of information that is "pieced together" without violating insider trading laws, under the mosaic theory.[24] This information may include non-material nonpublic information as well as material public information, which may increase in value when properly compiled and documented. In May 2007, a bill entitled the "Stop Trading on Congressional Knowledge Act, or STOCK Act" was introduced that would hold congressional and federal employees liable for stock trades they made using information they gained through their jobs and also regulate analysts or "Political Intelligence" firms that research government activities.[25] The bill has not passed.[26]
There are very limited laws against "insider trading" in the commodities markets, if, for no other reason, than that the concept of an "insider" is not immediately analogous to commodities themselves (e.g., corn, wheat, steel, etc.). However, analogous activities such as front running are illegal under U.S. commodity and futures trading laws. For example, a commodity broker can be charged with fraud if he or she receives a large purchase order from a client (one likely to affect the price of that commodity) and then purchases that commodity before executing the client's order in order to benefit from the anticipated price increase.
Larry Harris claims that differences in the effectiveness with which countries restrict insider trading help to explain the differences in executive compensation among those countries. The U.S., for example, has much higher CEO salaries than do Japan or Germany, where insider trading is less effectively restrained.[34]
Abuse of information Efficient market hypothesis ImClone stock trading case Private Securities Litigation Reform Act Raj Rajaratnam Rene Rivkin Securities fraud Securities Regulation in the United States
[edit] Notes
1. ^ Insider Trading U.S. Securities and Exchange Commission, accessed May 7, 2008 2. ^ "The World Price of Insider Trading" by Utpal Bhattacharya and Hazem Daouk in the Journal of Finance, Vol. LVII, No. 1 (Feb. 2002) 3. ^ Michael Simkovic, "The Effect of Enhanced Disclosure on Open Market Stock Repurchases", 6 Berkeley Bus. L.J. 96 (2009). 4. ^ Amedeo De Cesari, Susanne Espenlaub, Arif Khurshed and Michael Simkovic, "The Effects of Ownership and Stock Liquidity on the Timing of Repurchase Transactions", 2010 5. ^ a b Stuart Stein. (2001). New standards for "legal" insider trading. Community Banker. 6. ^ "Speech by SEC Staff: Insider Trading - A U.S. Perspective" by Thomas C. Newkirk, Associate Director, Division of Enforcement (September 1998) 7. ^ "Law and the Market: The Impact of Enforcement" by John C. Coffee, University of Pennsylvania Law Review (December 2007) 8. ^ Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" p. 589 9. ^ Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" p. 586-587 10. ^ "In Insider Trading Cases, Proof Of Tipping Should Require More Than Inference" by Thomas Gorman, Securities Regulation Law Journal (May 2007) 11. ^ 17 C.F.R. 240.14e-3 12. ^ Insider Trading A U.S. Perspective 13. ^ U.S.S.G. 2B1.4 14. ^ Congress: Trading stock on inside information?, CBS News, November 13, 2011 15. ^ Laws, at sec.gov 16. ^ Laws, at sec.gov 17. ^ Testimony, at sec.gov
18. ^ Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" p. 586 19. ^ a b Haddock, David D.. "Insider Trading". The Concise Encyclopedia of Economics. The Library of Economics and Liberty. Retrieved 2008-01-22. 20. ^ Christopher Cox, U.S. Securities and Exchange Commission Speech by SEC Chairman:Remarks at the Annual Meeting of the Society of American Business Editors and Writers 21. ^ Law.com 22. ^ House Ethics Manual (2008) 23. ^ Henry Blodget (November 14, 2011). "THE CONGRESS INSIDER TRADING SCANDAL IS OUTRAGEOUS: Rep. Spencer Bachus Should Resign In Disgrace". Business Insider. Retrieved Novemver 17, 2011. 24. ^ Investopedia.com Mosaic Theory 25. ^ Gross, Daniel (2007-05-21). "Insider Trading, Congressional-Style". Slate (The Washington Post Company). Retrieved 2007-05-29. 26. ^ H.R. 2341 GovTrack.us 27. ^ http://www.huffingtonpost.com/james-altucher/should-insider-tradingbe_b_324409.html 28. ^ Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" p. 591-597 29. ^ http://www.theatlantic.com/magazine/archive/2011/11/capitol-gains/8692/ 30. ^ www.walterblock.com-Privilege.pdf 31. ^ cato.org 32. ^ Japanlaw.info 33. ^ Objectives and Principles of Securities Regulation, IOSCO, May 2003 34. ^ Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" p. 593
[edit] References
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Stephen M. Bainbridge, Securities Law: Insider Trading (1999) ISBN 1-56662-737-0. Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" ISBN 0-19-514470-8. Grechenig, The Marginal Incentive of Insider Trading: an Economics Reinterpretation of the Case Law, 37 The University of Memphis Law Review 75-148 (2006). Grechenig, Positive and Negative Information - Insider Trading Rethought (http://ssrn.com/abstract=1019425). Review of Financial Studies; May2009, Vol. 22 Issue 5, p1845-1887, 43p
Insider Trading Informational page from the U.S. Security and Exchange Commission (SEC) Testimony Concerning Insider Trading, by Linda Thomsen, Director of the SEC's Division of Enforcement, before the U.S. Senate Judicial Committee (September 26, 2006) SEC Forms 3, 4 and 5 Insider Trading: Information on Bounties
Timothy Sullivan We're still against fraud, aren't we? United States v. O'Hagan: Trimming the Oak in the wrong season St. John's Law Review, Winter 1997. An opinion on Why Insider Trading Should be Legal Larry Elder Interviews Henry Manne Why forbid insider trading? by Ajay Shah, consultant to the Ministry of Finance, India Information, Privilege, Opportunity and Insider Trading by Robert W. Mcgee and Walter E. Block a scholarly work that opposes regulations against insider trading Free Samuel Waksal argues that businessman's insider trading should not be considered a crime Rule: Ownership Reports and Trading by Officers, Directors and Principal Security
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