Illegality of Insider Trading

Knowing a bit more than my neighbor, having a sneak peek into the impending exam questions (owing to a better communication with the teacher) before anyone else, getting a slice of the delicious chocolate cake mummy made because I am her favorite family member………….yes!! We do tend to look for such guilty pleasures, which often result into our profit or at least save our neck from any loss. 

This is the basic concept of Insider Trading…..taking advantage of one’s position for personal benefit. Who is an “Insider”? An “Insider” is a person who is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access, by virtue of such connection, to unpublished price sensitive information in respect of securities of the company, or who has received or has had access to such unpublished price sensitive information.  Resultantly, “Insider Trading” refers to the use of confidential information gained by virtue of employment in a business, or in connection with an “insider”, or a stock brokerage, to buy and/or sell stocks and bonds based on the private knowledge that the value will go up or down. Legality of Insider trading

Like any other concept, Insider Trading also has a dual aspect. Rather “had”. Insider Trading is a regularly observed phenomenon when corporate insiders – officers, directors or employees immediate relatives as connected persons – buy or sell stock in their own companies within the confines of company policy and the regulations governing this trading.  This is very much legal and common.

Illegality of Insider Trading

What differentiates legal insider trading with illegal insider trading? Let us refer to a very curious (famous or notorious??…coin your choice of term) case of Martha Stewart Stock Trade Scandal of 2001.

Martha is an American Business woman and television talk show host. She was voted America’s 3^rd most powerful woman in 2001by Ladies Home Journal. She had invested a large sum of money in her father’s ImClone Company. ImClone’s stock price dropped sharply at the end of 2001 when its drug Erbium, an experimental monoclonal antibody, failed to get the expected Food and Drug Administration (FDA) approval. It was later revealed by the U.S. Securities and Exchange Commission that prior to the announcement (after the close of trading on December 28) of the FDA’s decision, numerous executives sold their stock. ImClone’s founder, Samuel D. Waksal, was arrested in 2002 on insider trading charges for instructing friends and family to sell their stock, and attempting to sell his own. Martha Stewart, the founder of Martha Stewart Living Omnimedia, also became embroiled in the scandal after it emerged that Bacanovic tipped her off that ImClone was about to drop. In response, Stewart sold about $230,000 in ImClone shares on December 27, 2001, a day before the announcement of the FDA decision. Stewart’s involvement would have never come to light had Doug Faneuil, Bacanovic’s assistant, not disclosed it to investigators.Although Stewart maintained her innocence, she was found guilty and sentenced on July 16, 2004 to five months in prison, five months of home confinement, and two years probation for lying about a stock sale, conspiracy, and obstruction of justice (source-Wikipedia).

This is what differentiates the legal and illegal aspects of Insider Trading. The use of such confidential, non-public information to weasel out of the way of impending loss or enjoy advantages while putting the general “aam admi’s” interests in detriment.

Measures to curb the menaces of Insider Trading in India

The market watch-dog SEBI looks over the entire ground of Insider Trading regulations. The Securities and Exchange Board of India (SEBI) has brought into force new proposals in December, 2013, broadening the scope of who can be held liable for insider trading violations. SEBI has long sought greater powers to investigate securities fraud, which many analysts say is undermining confidence in the stock market, particularly among retail investors.

In May Prime Minister Manmohan Singh urged SEBI to root out the “disease of insider trading” from stock markets.

Officials with access to sensitive information will also be required to submit planned trades in company shares ahead of time to resolve any potential conflict of interest.

The new proposals also mandate that every listed company and market intermediary formulate a code of conduct to regulate, monitor and report trading in securities by its employees or connected persons.

Trades by stakeholders, employees, directors and their immediate relatives would need to be disclosed internally to the company.

J.N. Gupta, a former SEBI executive director who now runs proxy advisory firm Stakeholders Empowerment Services, said the new proposals could be effective in curbing insider trading. (Sources- Reuters) History of murky insider trading is battered across Indian and world history, be it Hindustan Lever Limited v/s Brooke Bond Lipton India Limited case or Levine, Siegel, Boesky and Milken: The Precognition Rat Pack scandal. Hence, it gets really necessary for protection of investor rights, to regulate the insider trading game loft. However, there will be differences in point of views regarding the recommendations. Insider Trading is a shady arena and laws relating to it are bound to be shrewd, cunning and hawkish.

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