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Training Presentation on Shareholder crimes
- 1. In this PPT you will get the answer of the following assignments: You are the new training manager for a large corporation that offers employees the opportunity to purchase company stock directly through their paychecks. Using the following scenario and other recent real-life examples, develop a training session for the employees of the company. The goal of the training session is to accomplish the following: Shareholder crimes
- 2. Identify the crime. Explain what federal agency would prosecute the crime. What punishment(s) could be enforced? Provide other real-life examples of people who have committed this crime.
- 3. SCENARIO Jack and Diane are married and both executives at Electro-Source, a large multinational electronics company. The couple holds substantial Electro- Source company stock and the majority of their retirement funds depend on company stock performance. Jack is a director within the marketing division and Diane is a vice president in charge of all North American sales. One Friday, Jack advises Diane that the company lost a large government contract for new electronic components.
- 4. The contract was worth over US $1 billion in sales and the loss could signal large layoffs. Government officials have not publicly announced their contract decision; however, they have advised (privately and confidentially) several non-winning bidders, including executives at Electro-Source. Jack and Diane decide to immediately sell the majority of their company stock to protect their retirement savings.
- 5. . The market on that Friday was favorable toward Electro-Source stock as earlier reports indicated that Electro-Sources was a finalist for the contract; however, as stated, a final decision was not yet public. Jack and Diane sell their stock to unsuspecting investors through their personal broker
- 6. Running Head: INSIDER TRADING Training on Insider Trading Insider Trading 1
- 7. Introduction Case Overview Crime: Insider Trading Federal Agency: Security and Exchange Commission Insider Trading 1
- 8. Insider Trading What is Insider Trading Impact of insider trading Insider Trading 1
- 9. Identify the Crime Involvement of Internal Person of Organization Internal Information Information use for self- interest Insider Trading 3
- 10. (U.S. Securities and Exchange Commission, 2010)
- 11. US Regulation of Insider Trading Section 16 of the 1934 Securities Exchange Act Section Rule 10b-5 Section Rule 14-e3
- 12. Section 16 of the Securities Exchange Act 1934 Section 16 (a) : Disclosure Provision Section 16 (b) : Recovery of Short Swing Profits
- 13. Section Rule 10b-5 Aspect of the Rule Elements of the offense Protective aspect from insider trading
- 14. Section Rule 14e-3 Prohibits the insider trading during the tender offers Establishes a “ disclose or abstain from trading” Is not premised on breach of a fiduciary duty Section Rule 14e-3(a) Section Rule 14e-3(d)
- 15. Punishment for the Insider Trading The punishment for the insider trading are: Penalties Imprisonment
- 16. Example of The Insider Trading Martha Stewart’s Insider Trading Case (Haffmen & Drew, 2007) Perot Systems Insider Trading Case (U.S. Securities and Exchange Commission, 2010). Two French Citizens Insider Trading Case (U.S. Securities and Exchange Commission, 2010).
- 17. References Kennon, J. (2010). Understanding Insider Trading. Retrieved March 2, 2010. From http://beginnersinvest.about.com/cs/newinvestors/a/ 102702a.htm Bartos, J.M, (2006).United States securities law: a practical guide (3rd ed.). Kluwer Law International. Jhonson, P.M. & Hazen, T.H. (2004). Derivatives regulation. Aspen Publishers Online. Steinberg, M.I, (1984). Securities regulation: liabilities and remedies. Law Journal Press.
- 18. References Haffmen & Drew. (2007). Martha Stewart's Insider Trading Case: A Practical Application of Rule 2.1. Retrieved March 2, 2010. From http://www.allbusiness.com/legal/banking-law- banking-finance-regulation/8908385-1.html U.S. Securities and Exchange Commission, (2010). Retrieved March 2, 2010. From http://www.sec.gov/news/press/2009/2009-275.htm
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Editor's Notes
- Jack and Diane are married and both executives at Electro-Source, a large multinational electronics company. They hold substantial Electro-Source Company stock. One Friday, Jack advises Diane that the company lost a large government contract for new electronic components. So Jack and Diane decide to immediately sell the majority of their company stock to protect their retirement savings. On Friday, Jack and Diane sell their stock to unsuspecting investors through their personal broker. The crime that has been identified in the given case is Insider Trading and Federal Agency that prosecute this crime is Security and Exchange Commission (SEC). The SEC regularly brings insider trading enforcement actions ( U.S. Securities and Exchange Commission, 2010)
- When a person uses the internal information of an organization for making the investment decision and the information doesn’t available for the general public. In some cases the information allows to profit, in others, avoid a loss. This act is called the insider trading (Kennon, 2010). Impact of the Insider trading Unfair practices to public investors. Decrease the efficiency of market.
- In this case the Jack and Diane both is the executive at Electro-Source Company. Jack is a director within the marketing division and Diane is a vice president in charge of all North American sales. On Friday the company lost a large government contract for new electronic components. The contract was worth over US $1 billion in sales and the loss could signal large layoffs. This information has not publically announced by the government. However the all executive of the company knows about this information. It means this is the insider information and the general public doesn’t aware about it. Jack and Diane are married and both executive at company. They have the substantial Electro-source stock. After the knowing this information they decide to sell their stock to protect from the fund loss. Jack and Diane sell their stock to unsuspecting investors through their personal broker. They have used the insider information for their own interest. They have done the insider trading, which is a crime.
- There were 42, 50, 46, 47 and 61 insider trading enforcement actions from 2004 to 2008 respectively as per the data provided by Security and Exchange Commission.
- Section 16 of the Securities Exchange Act of 1934 prohibits short-swing profits (from any purchases and sales within any six month period) made by corporate directors, officers, or stockholders owning more than 10% of a firm’s shares (Bartos, 2006). Section Rule 10b-5, prohibits fraud related securities trading. Section Rule 14e-3, Transactions in Securities on the Basis of Material, Nonpublic Information in the Context of Tender Offers (Bartos, 2006).
- Section 16 (a), such persons must file forms 3, 4 and 5 describing the ownership and subsequent purchase or sale of the securities. The insiders file initial reports of their holdings of equities and if there any change occurs they must file the report within ten days to the exchange. Section 16(b), profits made from the purchases and sales of the securities taking place within six month of each other must be repaid to the company (Bartos, 2006).
- Rule 10b-5 promulgates rules prohibiting the use of “manipulative or deceptive device or contrivance” in connection with the purchase or sale of any security or any securities based swap agreement (Johnson & Hazen, 2004). The elements of offence are manipulation or Deception, Materiality, reliance, loss causation, damages, scienter and “in connection with purchase and sale of securities”. SEC Rule 10b-5 prohibits fraud related to securities trading.
- Rule 14e-3 applies disclose or abstain provision to the possession of material information relating to a tender offer where the person know or has reason to know that the information in non-public and was received directly or indirectly from the offeror, the subject corporation, any of their affiliated persons, or any person acting on behalf of either company (steinberg, 1984.) Rule 14e-3(a) prohibits anyone, except the bidder, who possesses material, nonpublic information of a tender offer, from trading the target’s securities. Rule 14e-3(d) preventing provision complementing.
- According to the section 10(b) and 14(e) of securities exchange act of 1934, accused of the insider trading have to give back the their trading profit and may also pay the penalty of up to three times of the profits the accused realized from their insider trading. In addition to the financial penalties, there are criminal penalties. If the fraud is big then the penalty, the US government gives the imprisonment up to 10 years to accused (Kennon, 2010).
- In December 2001, Martha Stewart’s, CEO of a biotech company called ImClone, learned that the FDA was going to reject ImClone's application for approval of its cancer drug. After getting this insider information the Stewart sold their shares for protect the loss. Stewart avoided losses of $45,673 by selling her 3,928 shares of ImClone.9. She used the information for their self interest. By this act she performed the insider trading crime (Haffmen & Drew, 2007). Perot system family employee was doing the insider trading crime. He used the information of the merger dell and perot systems for their self interest. He illegally trades in perot system call option after knowing the merger before announcement. This is the offence of insider trading crime which has done by the company employee (U.S. Securities and Exchange Commission, 2010). The two French person tried to illegally profit from the Paris based manufacturer acquisition of another health care products company located in Chattanooga, Tenn. The French person illegally trades the call options of the company after getting this un-publicly information. That means they have done the insider trading. So they are accused of the insider trading (U.S. Securities and Exchange Commission, 2010). .