Question

Question 5

A. Discuss the crime of insider trading, when does it occur and what effect does this crime have on the business community? In looking at the crime, are there any preventative measures that can be put into place to stop this crime in the future, or will this continue to be an issue on a going forward basis? Explain.

B. Does the class believe that the industry of stockbrokers needs more government oversight and regulation to reduce this crime? Explain

Answer 1

A. Insider trading occurs when someone in possession of an unpublished price sensitive information tends to share it with a few people he/she favors. Since the information is price sensitive that means it has a potential of materially affecting the price of the securities. It is considered to be an unfair practice because a few people having the information tend to have an advantage at the expense of others. For e.g.: An employee knows that the share price of his company would go down as the news of the manipulation of the books of the company for several years comes to light but before the information goes public he tells his friend who is an investor in the company about the same who then sells shares of the company held by him. This is an act of insider trading.

When instances of such an act come to the fore it tends to shake the confidence of the investors in the market and can cause a market to collapse if it is related to an institution which is of grave importance to the public. The fiduciary relationship between the company and investors goes into jeopardy. This can prevent current and new investors from investing in the market if they consider the market to be unfair.

Yes, there can be certain preventive measures that can be adopted to stop this crime in the future:

1) Many countries still do not consider it a crime with no law pertaining to it so it is important that it comes under the purview of the law and certain penalties and punishments are decided for the perpetrators.

2) It is advisable to have regular checks and monitoring of the market to ensure such instances do not occur or kept to the minimum.

3) Officials of the company should be prevented from buying and selling the security of the company around the time when price sensitive information is to be published and this can be done by keeping a close watch on them.

4) Educating the employees of the company about the demerits of insider trading is also important to prevent such instances.

5) A company can also have a special committee in place that regularly checks the investment of the employees in the company.

6) A mechanism whereby any transaction related to company's security by the employees should require the permission of the committee shall be put in place to prevent such instances from happening. Also, stockbrokers should be kept out of this system and employees should buy or sell securities of their own company by themselves.

B. Yes because still insider trading is not considered illegal in some countries which makes it almost impossible for the gullible investors to get a fair return on their investments. It is essential that proper penalties are in place to ensure that stockbrokers do not take the market for a ride and are cautious in their practice. This can be done when regular monitoring is done and regulatory authorities take it to be a punishable crime under the law. As they say, the fear of law must instill in people to prevent them from wrongdoings.