Insider Trading

Seven Examples of Insider Trading That an Investor Should Know About and Learn From

By: jackdowson

When companies place their stocks in the share market, it means that anyone can buy those stocks at any time. When people with access to nonpublic information on those stocks make transactions on these shares, it is referred to as insider trading. Insider trading talks specifically about buying and selling of shares based on prior information which is not in the public domain, and is available only to the employees of the company or someone else who has access to that information before it is released to the public.

Insider Trading

A person might know that his company is about to sign a multibillion-dollar contract the next week. This news would most likely drive up the share price, but at present, the public or other investors do not know about it. The person buys shares based on this information, and when the shares start going up from the following week, he sells his stocks to book a neat profit. It works for bad news as well. A person employed in the legal department of a company might be aware that they are likely to lose a legal case involving one of their brands, and will most likely have to pay a considerable fine. Since he forecasts correctly that the share prices will fall once this news comes out, he sells off his stock before the ruling of the case and avoids heavy losses. This mutilation of the level playing field for all investors is what is happens when insider information is misused.

Let us look at a few intriguing insider trading stories


1. Martha Stewart-ImClone

The famous chat show hostess and magazine author got embroiled in a very widely discussed insider trading case. The company in question is ImClone Systems, and Martha was said to be aware of impending bad news about the company whose shares she held. As soon as she got the news, Martha sold off the three thousand odd shares she had, which helped her avoid potential losses of more than $45000. The news which prompted her to sell off the shares was that ImClone was likely to receive an unfavorable FDA ruling against one of their cancer drugs, and it came to her through her stockbroker. Both her broker and she were indicted for insider trading, and she spent five months in jail.


2. Michael Milken-Junk Bonds

There was a time when Milken was referred to reverentially as the King of Junk Bonds. He had turned the process of buying and selling poor quality corporate debt paper into art. All was going well until the authorities got a whiff of the information Milken was privy to regarding the extent of debt in specific takeovers of one company by another. He pleaded guilty and had to pay a fine of $600 million and was also banned from trading. His downfall almost coincided with the bankruptcy of his former employer Drexel Burnham Lambert.


3. Jeff Skilling-Enron

This case has been written and talked about for more than a decade now, and is used as a case study for corporate governance. The CEO of Enron Energy, Jeff Skilling, was accused of misleading the public and shareholders regarding the real situation of the company and also indulging in fraud related to Enron stock.


4. Steven Cohen – SAC

It was a giant hedge fund, and has since been renamed as Point72. Cohen was accused of not doing enough to prevent insider trading activity by employees like Mathew Martoma and Michael Steinberg. Cohen was finally charged with only civil charges, but he had to pay almost $2 billion in the settlement.


5. Foster Winans – Various

A very popular column ‘Heard On The Street’ used to be penned by Winans long back. As part of his journalism, he used to get a lot of insider information which he would quietly pass on to his stockbroker to make purchases or sales on his behalf. When this came to light, Winans was convicted. It is a classic case of journalism ethics being twisted to misuse the access to information that several columnists have.


6. William Jackson – Business Week

It is another conviction related to the world of journalism. Jackson was an employee of a magazine called Business Week. He was privy to financial information accessed by the magazine, and he plotted with a stockbroker named Brian Callahan to make profits of almost $20000 with an equal amount for Callahan. The judgment fined both of them and asked them to repay their illegal gains as well.


7. Raj Rajaratnam – Galleon

This was one of the biggest fallouts of the 2008 financial crisis. Raj founded the hedge fund company Galleon and used insider information to make close to $20 million. There were as many as 14 separate charges, and it took almost two years before judgment could be pronounced in 2011. This case was closely linked to the indictment of Rajat Gupta following the collapse of Goldman Sachs.

What these seven stories tell us is that it is easy for insiders to misuse the information they have access to, but it is equally easy for authorities to get a whiff of it, because of the regulatory requirements of declarations that is mandatory. All these stories of high profile indictments can mislead an investor into thinking that any insider information is illegal, but that is not correct. There are conditions and windows during which an insider is allowed to carry out insider trading. There is a wealth of information available on insider information and an investor who wants to find out more can look it up. It is best that for such an investor to find out whether he or she fits the definition of an insider. It is also advisable to check with his or her employer or broker.



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