Jump to content

Welcome to Tezi Mandee - Community Of Pakistani Investors & Traders
Register now to gain access to all of our features. Once registered and logged in, you will be able to create topics, post replies to existing threads, give reputation to your fellow members, get your own private messenger, post status updates, manage your profile and so much more. If you already have an account, login here - otherwise create an account for free today!

Welcome to Tezi Mandee - Community Of Pakistani Investors & Traders

Welcome to Tezi Mandee - Community Of Pakistani Investors & Traders, like most online communities you must register to view or post in our community, but don't worry this is a simple free process that requires minimal information for you to sign up. Be a part of Tezi Mandee - Community Of Pakistani Investors & Traders by signing in or creating an account.
  • Start new topics and reply to others
  • Get latest news on Karachi Stock Market
  • Subscribe to topics and forums to get automatic updates
  • Registered member get added in mailing list for mailing updates
  • Get your own profile and make new friends
  • Customize your experience here
  • Be the first to know the KSE latest announcements shared by our members
  • Registered members get access to Protected Forums and topics
  • Registration is free Create Account
  • If you are already a member just Sign in
To Create Account ( Click Here )
To Sign In ( Click Here )
 

Insider Trading Riddle: Why Do the Rich Risk It?

- - - - -

1 reply to this topic

#1
Ayub

    SECOND LIEUTENANT

  • Senior
  • 2,123 posts
  • Joined 29-June 10
  • Skin: Main Blue
  • Offline
    • Gender:Male
    • Country: Country Flag

    Current mood: Question
    Reputation: 846
    Insider Trading Riddle: Why Do the Rich Risk It?

    BY PETER J. HENNING

    http://dealbook.nyti...h-risk-it/?_r=0

    The question seems to arise time and again: why would the rich jeopardize their wealth by committing an illegal act like insider trading?

    Some of the most prominent cases of illegal insider dealings have involved very wealthy people who made very little in profit from such trades when compared with their overall net worth.

    For instance, Raj Rajaratnam, a founder of the hedge fund Galleon Group, was a billionaire before last year’s conviction and sentence of 11 years in prison for insider trading. The government estimated that his illegal activities generated profits of over $60 million, but his hedge fund managed $7 billion at its peak, and relatively few of its trades were based on inside information.

    Other cases have involved even less money, and only a single trade. Martha Stewart was convicted in 2004 of lying to investigators after she sold shares of a biotech company that was about to come out with negative news about one of its drugs.

    The stock sale allowed her to avoid a loss of about $45,000. But she lost millions on paper in her stake in Martha Stewart Living Omnimedia, whose market value plunged after charges were filed and with the intense media attention on the prosecution.

    She later settled a civil suit filed by the Securities and Exchange Commission by paying about $195,000 in disgorgement and penalties.

    In a more recent case, the S.E.C. has accused Mark Cuban, the billionaire owner of the Dallas Mavericks, whose net worth is estimated at $2.3 billion by Forbes, of insider trading. The S.E.C. says he avoided over $750,000 in losses by selling his shares in a technology company before negative news was announced. Mr. Cuban is fighting the lawsuit, and the case will not go to trial until 2013 at the earliest.

    While all these cases have their own peculiarities, there are common threads.

    The information obtained may not have struck the defendants as being important enough to violate insider trading rules.

    The law requires that information be “material” to constitute illegal insider trading. That means a reasonable investor would consider it important, which is often determined with hindsight.

    Ms. Stewart was accused of insider trading based on information provided by her broker in a telephone call while she was traveling to Mexico, and her decision to sell the shares was made quickly. That information might not have seemed particularly special at the time, but her trading led to an S.E.C. investigation, during which she made a false statement about the reasons for the trade.

    In Mr. Rajaratnam’s case, he offered a defense that he used the so-called mosaic theory of investing, in which his firm gathered numerous bits of information and put them together to form a picture of a company’s prospects. He argued that no single piece of information was sufficiently important to drive the thousands of trading decisions the firm made each year.

    In his mind, he may not have viewed the information he received as having real significance, although a jury concluded he traded on material, nonpublic information.

    People who are used to making decisions quickly may not reflect on whether the information they receive takes them close to the line between permissible trading and securities fraud. Moreover, insider trading has not always been viewed as inherently wrong. While the United States has strict laws against it, other countries have only recently taken the position that it is illegal.

    Furthermore, unlike theft or even accounting fraud, which can harm a company’s bottom line and stock price, insider trading is a violation in which there is no easily identifiable victim. Stock trading takes place on anonymous exchanges, so the trader on the other side of the transaction is unlikely to have any idea that someone with inside information was involved. The real victim is the market, a faceless mass of billions of dollars’ worth of transactions daily.

    These are not valid excuses for those who trade on confidential information, but they can help explain why even sophisticated, wealthy investors can fall into the trap of insider trading.

    The mind-set that one could not have violated the law may also help explain why wealthy defendants fight charges so vigorously even though their cases often involve comparatively small amounts and paying a civil penalty would be much cheaper. It becomes a matter of principle, and personal resources are mobilized to fight the charges.

    Mr. Cuban was accused of learning about impending financial developments at a company in which he owned a sizable stake that the S.E.C. claims he agreed not to sell. It is likely that he could have settled the case for a relatively modest sum, but instead he has chosen to fight the civil charges at a cost that far exceeds his potential liability.

    For those facing criminal charges, the thought of pleading guilty may be abhorrent, especially in the current environment, in which substantial prison terms are being meted out for insider trading.

    Mr. Rajaratnam is estimated to have spent over $40 million on his defense, including a pending appeal. If the convictions are upheld, it would not be a surprise for him to pursue the case to the Supreme Court, adding further to his costs.

    Ms. Stewart settled her civil case for a modest payment after spending about five months in prison for her criminal conviction. One can ask whether it was worth even speaking to the F.B.I. and the S.E.C. when the amount involved was, for her, so trivial.

    There are insider trading cases that involve significant planning and extensive measures to hide the source of the information and the beneficiaries of the transactions. But that is usually not the case when the very wealthy are accused of this type of violation.

    Violating the law is never trivial, even if the stakes are small compared with a person’s wealth.

    Peter J. Henning, a professor at Wayne State University Law School, is the author of “The Prosecution and Defense of Public Corruption: The Law & Legal Strategies.” Twitter: @peterjhenning

    Definition of 'Insider Trading'

    The buying or selling of a security by someone who has access to material, nonpublic information about the security.

    http://www.investope...idertrading.asp

    Insider trading can be illegal or legal depending on when the insider makes the trade: it is illegal when the material information is still nonpublic--trading while having special knowledge is unfair to other investors who don't have access to such knowledge. Illegal insider trading therefore includes tipping others when you have any sort of nonpublic information. Directors are not the only ones who have the potential to be convicted of insider trading. People such as brokers and even family members can be guilty.

    Insider trading is legal once the material information has been made public, at which time the insider has no direct advantage over other investors. The SEC, however, still requires all insiders to report all their transactions. So, as insiders have an insight into the workings of their company, it may be wise for an investor to look at these reports to see how insiders are legally trading their stock.
    Quran 2:32. "Glory be to ALLAH, we have no knowledge except what You have taught us. Verily, it is You, the All-Knower, the All-Wise."


    #2
    Ayub

      SECOND LIEUTENANT

    • Senior
    • 2,123 posts
    • Joined 29-June 10
  • Skin: Main Blue
  • Offline
    • Gender:Male
    • Country: Country Flag

    Current mood: Question
    Reputation: 846
    Conclusion:

    Insider tracking is not easy, and it is hardly a guarantee of big returns. A pattern of trades might offer a cue for upcoming market shifts, and it is certainly reassuring to buy or sell a stock knowing that an insider is doing the same thing.

    Following the lead of insiders, however, will never replace diligent research.
    Quran 2:32. "Glory be to ALLAH, we have no knowledge except what You have taught us. Verily, it is You, the All-Knower, the All-Wise."






    Karachi Stock Exchange (KSE) Daily Reports


    Top Pakistani Sites        Haroof Top Sites    Promoted at Global Promote

    Indemnity, Disclaimer & Disclosure Notice:
    • By visiting TeziMandee.com you indicate your acceptance of our Forum Rules Disclaimer & Disclosure and indemnify TeziMandee.com, its associates and related parties of all claims howsoever resulting from the usage of the forum.
    Disclaimer: Trading or investing in stocks & commodities is a high risk activity. Any action you choose to take in the markets is totally your own responsibility. TeziMandee.com will not be liable for any, direct or indirect, consequential or incidental damages or loss arising out of the use of this information.
    Disclosure: The information in this forum is neither an offer to sell nor solicitation to buy any of the securities mentioned herein. The writers may or may not be trading in the securities mentioned.
    • All names or products mentioned are trademarks or registered trademarks of their respective owners.

    Copyright © 2006 - 2012, TeziMandee.com All Rights Reserved.
    eXTReMe Tracker