Question

Ethical Behaviour Question Books R is a software development company operating in New York City. The company specialize in developing applications for the healthcare industry relating to controlling the distribution of drugs to patients. Several years ago, the company went public and has been trading on the NY Stock Exchange, but the stock has languished. Recently, senior management has been in discussions with a private equity firm about the possibility of taking the company private and investing heavily in new applications to enhance its market position. Ken McGrath is the chief technology officer of the company and has been in meetings with the private equity people and the executive committee where discussions of the proposed transaction are taking place. The private equity people are considering offering a price for all of the outstanding shares that is 40 percent higher than the current trading price. At his Monday morning technology update meeting with his development team, someone asks Ken McGrath how the discussions are going. Ken McGrath responds that the deal has moved from the possible stage to the probable stage and the price will likely be a minimum of a 40 percent premium. He encourages all of his developers to quietly acquire as many of the shares as they can before the announcement of the deal takes place..

Required: Comment on Ken McGrath’s actions in telling his staff the details of the transaction. Should the developers take advantage of this knowledge and buy shares immediately?

Answer 1

Answer:

Ken Mc Grath's action in telling his staff the details of the transaction is unethical. The company has entrusted him with an important responsibility and he should have maintained untmost confidentiality while performing his duties. He, instead, divulged the details of the deals to his developers and encouraged them to indulge in insider trading.

The developers should not buy the shares as it is an offence to use a company's private information to benefit oneself.

Insider trading is not a good practice.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 nonpublic information about the company. In various countries, some kinds of trading based on insider information is illegal.so the developers should not take the advantage of this knowledge and buy shares.Penalities have been imposed strictly for those who encourage insider trading under various laws.