This document discusses insider trading, defining it as trading stocks by people with access to non-public company information. It explores why insider trading is considered unethical, such as information asymmetry and unfair profits. Several high-profile cases of insider trading are summarized, including Martha Stewart, Raj Rajaratnam, and Steve Cohen. The document concludes that insider trading reduces trust in markets, increases volatility, and further alienates average investors.
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Insider Trading Ethics Guide
1. Edited by
Tanacheva, Otinova, Belenova, Leont’ev
Greed is good:
The ethics behind
insider trading
2. Conttentts
Intro ……………………………………………………………………………………..……3
Defining the term …………………………………………………….……..….….4
Why is it unethical? ……………………………………….……….……..…..….5
Insiders ……………………………………………………………………………..………6
Prosecution and punishment …………………………………………….…7
Russian realities ……………………………………………………………………11
On the level of academia ……………….……………………………….…..12
Wall Street scandals ………….……………………………………………..….13
On the screens …………………………………………………………………..…..22
Conclusion ……………………………………………………………………….…….25
3. IInttrro
Distinguish between legal and illegal insider trading
!
Market abuses:
*insider trading
*practices of manipulative, improper or deceptive trading
*making false or misleading statements, promises, and
forecasts
4. Defining the term
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 non-public information
about the company
5. Why is it unethical?
*information asymmetry
*cheating
*dishonesty
*unfair profit
*discrimination
*inequality of opportunity
*violation of transparency
6. Insiders
Any person who becomes aware of non-public
information and trades on that basis may be guilty
!
*chief executives, upper management
*employees, brokers, associates
*family, friends
7. Prosecution and punishment
Securities and Exchange Commission [SEC] and several
stock exchanges actively monitor trading, looking for
suspicious activity
!
Once the Department of Justice is involved, they
conduct a very thorough investigation. If the DOJ finds
criminal wrongdoing, they file criminal charges, and
suspects may end up in jail
8. Prosecution and punishment
The penalties for insider trading depend on a few
different factors:
*the significance of the trading
*evidence
*SEC violations
9. Prosecution and punishment
Criminal prosecution:
*up to 20 years in prison and/or a fine of up to $5 million
for each violation
*only fines apply if the defendant can demonstrate «no
knowledge» of the rule violated
*corporations face penalties of up to $25 million
*mail and wire fraud (up to 20 years in prison), securities
fraud (up to 25 years), racketeering, tax evasion,
obstruction of justice
*civil penalties
!
11. The law sets out fines of
$10,000-$300,000 or a
prison term of 2-6 years
for the improper use or
insider information
Russian realities
#94 Russia’s rank among all
countries with legal
regulations of insider
action (2010)
12. On the level of academia
Ethical norms of CFO insider trading
!
Opportunistic insider trading
!
Insider trading restrictions and top executive
compensation
!
Insider trading and the voluntary disclosure of
information by firms
14. Martha Stewart
2001
Money Made
$228,000 in dumped stock
The Scam
She sold ImClone biotech stock the day
after Sam Waskal, founder of ImClone,
informed friends and family to sell their
shares based on insider information
Pay Up
In 2004, she was found guilty of
conspiracy, obstruction of proceeding and
making false statements
Spent 5 months in prison
1
15. 2
Arthur Samberg
2001
Money Made
$2.1 million
The Scam
Samberg, a former Pequot Capital CEO,
emailed blatant requests to David Zilkha
of Microsoft for insider information
Pay Up
He paid the SEC $28 million
Pequot was forced to close by mid-2009
16. Joseph Nacchio
2005
Money Made
Over $50 million in dumped stock
The Scam
As a former Qwest Communications chief,
Nacchio gave shareholders positive
financial projections while
selling millions in stock
retirement savings lost 3
Pay Up
In 2007, he was convicted of 19 out of 42
counts of insider trading
The Qwest’s stock price collapse led to
thousands of jobs and millions of dollars in
17. Yoshiaki Murakami
2006
Money Made
$25.5 million
The Scam
Murakami learned non-public information
that Livedoor, a financial services
company, was aiming for a 5% stake in
Nippon Broadcasting
His fund purchased nearly 2 million shares
and then sold them to Livedoor
Pay Up
Murakami was suspended for 3 years, paid
a $30,000 fine, and $11.2 million in
penalties
Livedoor leader, Takafumi Horie, was
convicted for securities fraud and
sentenced to 2.5 years in prison
4
18. Randi and Christopher Collotta
2007
Money Made
$15 million
The Scam
Randi, a compliance officer for Morgan
Stanley, leaked non-public information
about planned mergers to her husband
Christopher, a trader
Pay Up
They plead guilty of conspiracy and were
sentenced to 6 months of house arrest and
community service
5
19. Raj Rajaratnam
2009
Money Made
$60 million
The Scam
As a billionaire hedge fund manager and
founder of the Galleon Group, he swapped
insider tips with a number of other traders,
hedge fund managers, and key employees
at IBM, Intel Corp, and McKinsey&Co
Pay Up
Rajaratnam was found guilty of 14 counts
of conspiracy and fraud
Also fined $92.8 million
Sentenced to 11 years in federal prison (the
longest-ever sentence for insider trading)
6
20. Charles and Sam Wyly
2010
Money Made
$31.7 million
+ $550 million over 13 years
The Scam
They traded stock in public companies,
where brothers sat on corporate boards,
through hidden entities located abroad to
conceal their ownership (exploiting non-disclosure
of offshore issuer securities)
Pay Up
7 Charles died in August 2011 during the
investigation
Sam, age 79, stated that the government
and SEC would «get nothing»
21. Steve Cohen
2012
Money Made
$276 million
The Scam
Cohen’s firm, SAC Capital Advisors,
worked closely with Mathew Martoma, a
professor who worked on a clinical trial for
an Alzheimer’s drug
The hedge funds bought shares from the
drug companies involved in the trial and
bet the shares would fall
Pay Up
SAC agreed to pay a record $616 million in
penalties to the SEC
8
25. Conclusion
Negative impacts:
*reduced trust in the system, loss of faith in the markets
*increased confusion and volatility
*loss of confidence in the company
*exploitation of advantage
*further alienation of average investor