Question

Thomas Abramson is a quality control manager for Capitol-IZE Pharmaceutical Company, Inc. The company is headquartered and has its principal production facility in Indianapolis, Indiana. For several years, Capitol-IZE Pharmaceutical has been engaged in the research and development of a new cancer drug, Izerion. As part of the federal regulatory procedure for mass-marketing a new drug, Capitol-IZE Pharmaceutical applied to the Food and Drug Administration (FDA) for final approval of Izerion.

Yesterday, Abramson's supervisor informed him in somber fashion that the FDA had rejected the company's application for final approval of Izerion. Apparently, the FDA was concerned about serious side effects that manifested during the drug's clinical trials. Abramson's supervisor further advised him that next Monday Capitol-IZE Pharmaceutical is scheduled to go public with a press release concerning the FDA's rejection of Izerion.

Abramson is frantic. He owns approximately 6,000 shares of Capitol-IZE Pharmaceutical stock, and he knows that news of the FDA's rejection of Izerion will be disastrous to the company, its employees, and its shareholders. Capitol-IZE Pharmaceutical stock is currently valued at $47.50 per share, and news of the FDA's disapproval of Izerion will likely drive the stock down to one-half of its current value.

Abramson quickly runs the numbers on his calculator. A reduction of 50 percent of the stock's value would represent a personal loss of $142,500. Abramson's Capitol-IZE Pharmaceutical stock is his only retirement plan, aside from a modest pension he will receive from the company (assuming the company survives the announcement).

Abramson has a plan. Today, he will instruct his financial planner to immediately sell all 6,000 shares of his Capitol-IZE Pharmaceutical Company, Inc., stock. Abramson rationalizes his decision by assuring himself that anyone else in his position would do the same thing.

Is Thomas Abramson plan legal? Is it ethical?

Answer 1

                In order to determine the legality and ethicality of the case, let us first understand what security is. Security is a form of investment in an enterprise through which the individual expects a reasonable amount of profit earned mainly from the efforts of others. Securities and Exchange Commission (SEC) was prominently created to regulate the trade of securities to avoid any malpractices or fraudulent transactions, enforce the applicable securities laws and regulate the activities of other personnel such as securities brokers and dealers/consultants.

Insider trading is an aspect of SEC wherein an individual (executive or employee) trades for profit based on the internal information that is confidential. Misappropriation theory is when an individual who inappropriately acquires and uses the internal information for his/her profit . Thus, insider trading makes a person liable for his/her act. From this perspective, Thomas Abramson’s plan is absolutely illegal as he uses information about FDA rejection to make profit on his stock value.

Ethically speaking, Thomas Abramson is unethical in his act. According to Utilitarian ethical theory, an act is considered moral if it does greater good for a greater number of people. In this case, Abramson’s action was highly self-centered and his action does not do good to the people nor his employees nor the investors. His action to sell the stock before announcing FDA’s rejection is absolutely unethical and unfair professional code of conduct.

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