The ethics behind insider trading

Edited byTanacheva, Otinova, Belenova, Leont’evEdited by

Greed is good:The ethics behind insider trading

ContentsContents

Intro ……………………………………………………………………………………..……3 Defining the term …………………………………………………….……..….….4 Why is it unethical? ……………………………………….……….……..…..….5 Insiders ……………………………………………………………………………..………6 Prosecution and punishment …………………………………………….…7 Russian realities ……………………………………………………………………11 On the level of academia ……………….……………………………….…..12 Wall Street scandals ………….……………………………………………..….13 On the screens …………………………………………………………………..…..22 Conclusion ……………………………………………………………………….…….25

IntroIntro

Distinguish between legal and illegal insider trading !

Market abuses: *insider trading *practices of manipulative, improper or deceptive trading *making false or misleading statements, promises, and forecasts

Defining the term

Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company

Defining the term

Why is it unethical?

*information asymmetry *cheating *dishonesty *unfair profit *discrimination *inequality of opportunity *violation of transparency

Why is it unethical?

Insiders

Any person who becomes aware of non-public information and trades on that basis may be guilty !

*chief executives, upper management *employees, brokers, associates *family, friends

Insiders

Securities and Exchange Commission [SEC] and several stock exchanges actively monitor trading, looking for suspicious activity !

Once the Department of Justice is involved, they conduct a very thorough investigation. If the DOJ finds criminal wrongdoing, they file criminal charges, and suspects may end up in jail

Prosecution and punishment

The penalties for insider trading depend on a few different factors: *the significance of the trading *evidence *SEC violations

Prosecution and punishment

Criminal prosecution: *up to 20 years in prison and/or a fine of up to $5 million for each violation *only fines apply if the defendant can demonstrate «no knowledge» of the rule violated *corporations face penalties of up to $25 million *mail and wire fraud (up to 20 years in prison), securities fraud (up to 25 years), racketeering, tax evasion, obstruction of justice *civil penalties !

Prosecution and punishment

The median jail sentence (months)

Prosecution and punishment

3018*2009-2011*2000s

10*1993-1999

Russian realities

The law sets out fines of $10,000-$300,000 or a prison term of 2-6 years for the improper use or insider information

Russian realities

#94Russia’s rank among all countries with legal regulations of insider action (2010)

On the level of academia

Ethical norms of CFO insider trading !

Opportunistic insider trading !

Insider trading restrictions and top executive compensation !

Insider trading and the voluntary disclosure of information by firms

On the level of academia

Wall Street ScandalsWall Street Scandals

Martha Stewart2001

Money Made $228,000 in dumped stock

The Scam She sold ImClone biotech stock the day after Sam Waskal, founder of ImClone,

informed friends and family to sell their shares based on insider information

Pay Up In 2004, she was found guilty of

conspiracy, obstruction of proceeding and making false statements Spent 5 months in prison

1

2

Arthur Samberg2001 Money Made $2.1 million The Scam Samberg, a former Pequot Capital CEO, emailed blatant requests to David Zilkha of Microsoft for insider information Pay Up He paid the SEC $28 million Pequot was forced to close by mid-2009

Joseph Nacchio2005

Money Made Over $50 million in dumped stock

The Scam As a former Qwest Communications chief,

Nacchio gave shareholders positive financial projections while

selling millions in stock Pay Up

In 2007, he was convicted of 19 out of 42 counts of insider trading

The Qwest’s stock price collapse led to thousands of jobs and millions of dollars in

retirement savings lost3

Yoshiaki Murakami2006 Money Made $25.5 million The Scam Murakami learned non-public information that Livedoor, a financial services company, was aiming for a 5% stake in Nippon Broadcasting His fund purchased nearly 2 million shares and then sold them to Livedoor Pay Up Murakami was suspended for 3 years, paid a $30,000 fine, and $11.2 million in penalties Livedoor leader, Takafumi Horie, was convicted for securities fraud and sentenced to 2.5 years in prison

4

Randi and Christopher Collotta2007

Money Made $15 million

The Scam Randi, a compliance officer for Morgan Stanley, leaked non-public information about planned mergers to her husband

Christopher, a trader Pay Up

They plead guilty of conspiracy and were sentenced to 6 months of house arrest and

community service

5

Raj Rajaratnam2009 Money Made $60 million The Scam As a billionaire hedge fund manager and founder of the Galleon Group, he swapped insider tips with a number of other traders, hedge fund managers, and key employees at IBM, Intel Corp, and McKinsey&Co Pay Up Rajaratnam was found guilty of 14 counts of conspiracy and fraud Also fined $92.8 million Sentenced to 11 years in federal prison (the longest-ever sentence for insider trading)

6

Charles and Sam Wyly2010

Money Made $31.7 million

+ $550 million over 13 years The Scam

They traded stock in public companies, where brothers sat on corporate boards,

through hidden entities located abroad to conceal their ownership (exploiting non-

disclosure of offshore issuer securities) Pay Up

Charles died in August 2011 during the investigation

Sam, age 79, stated that the government and SEC would «get nothing»7

Steve Cohen2012 Money Made $276 million The Scam Cohen’s firm, SAC Capital Advisors, worked closely with Mathew Martoma, a professor who worked on a clinical trial for an Alzheimer’s drug The hedge funds bought shares from the drug companies involved in the trial and bet the shares would fall Pay Up SAC agreed to pay a record $616 million in penalties to the SEC

8

Boiler Room

On the ScreensWall Street

Margin Call

Money Never Sleeps

On the ScreensWall Street:

Too Big to Fail

On the ScreensSkins

Conclusion

Negative impacts: *reduced trust in the system, loss of faith in the markets *increased confusion and volatility *loss of confidence in the company *exploitation of advantage *further alienation of average investor

Conclusion

Questions and comments are

welcome

Sources

https://www.wikileaks.org/wiki/Whistleblower_exposes_insider_trading_program_at_JP_Morgan http://www.businessinsider.com/worst-insider-trading-scandals-2011-11?op=1 http://thenewdaily.com.au/money/2014/05/12/top-10-insider-trading-scandals/ http://money.cnn.com/gallery/investing/2014/06/02/insider-trading-famous-cases/ http://www.investopedia.com/articles/03/100803.asp http://www.investopedia.com/articles/02/061202.asp?rp=i http://www.investopedia.com/financial-edge/0312/u.s.-government-cracks-down-on-insider-trading.aspx http://www.investopedia.com/financial-edge/0511/the-truth-about-insider-trading.aspx http://www.investopedia.com/financial-edge/0210/should-insider-trading-be-legal.aspx Infographics: The Biggest Wall Street Insider Trading Scandals The Insider’s Guide to Insider Trading