Question

Scenario 1: You are the Chief Investment Manager of Nexus Corporation one of the leading Investment Banks of the country. You are working on the merger and acquisition transaction of Ahman Co and Verizon Soft where Ahman is acquiring Verizon Soft a software technology company. It is expected that as a result of the transaction the share prices of the Verizon would increase. Seeing opportunity of profit, you purchase the shares of Verizon using this information. Discuss the legal implication of this transaction. (BREIF AND PRECISE)

Answer 1

Insider trading is illegal and against trading rules. When any information which is not readily available in the market is known to someone and such persons uses this information to gain undue advantage, this results in insider trading.

Insider trading is not allowed and people who are found guilty of insider trading have to bear heavy fines and penalties.

We all know, market discounts everything. This means market price reflects all the news for that share. But news such as merger and acquisition which is not known to public, the market price of share is not correct and not reflecting the effect of this news.

When, Chief Investment Manager of Nexus Corporation uses this information of Merger and Acquisition, he is using information for personal gain. This information is not known to public. Hence, he is involved in insider trading.

The Chief Investment Manager if caught will not only have to forfeit the shares but also pay heavy fines and penalties which can be in millions or based in percentage of transaction value.

If not caught, then also ethically the transaction is not correct as this information is not available in market.

When share prices if Verizon increase, the Chief Investment Manager will dump the shares and book profit and this may lead to sharp fall in prices as demand and supply will get affected. Hence, insider trading is banned and illegal.

Personal or any information which is not available to public should not be used by employees, relatives or anyone who has access to it. Only when such information had been dispersed and made known to public, then transactions can be done.

Trading had lots of rules and regulations. And non compliance had heavy penalties with heaviest fines imposed on insider trading. Hence, should be avoided.

Thus, the Chief Investment Manager should not indulge in the above transaction on buying shares of Verizon before merger and acquisition in order to make personal gains.