An ‘insider’ in business terms is someone who has access to valuable information about a company that is not yet made known to the public. For example, high-level executives might be planning a merger. If this information were to become public, it would alter stock prices considerably.
‘Insiders’ are also individuals who own stock that is worth over 10% of a company. This entitles them to certain clandestine information that the public would not be privy to hearing.
Insider trading is an infamous practice on Wall Street where corruption runs deeper than the average person can fathom. Any advantage is pounced upon when profit is the aim of the corporation. There are big bonuses to be made from a reliable tip-off.
When this ‘insider’ information is shared, and a select few profit from it, this is illegal insider trading.
For instance, a CEO is getting a haircut in a barber and he absentmindedly let’s slip his companies quarterly earnings. If the barber trades on this information, he could face a hefty prison sentence.
The SEC is the regulatory body in charge of monitoring cases of illegal trading. This group analyzes stock market decision making and investigates irregularities. When stocks rise dramatically without any public information being released, the SEC will look into the buyers.
Insider trading can be tricky to prosecute. It is sometimes impossible to prove that an illegal conversation took place. In this respect, modern technology has been a godsend for the SEC. Nowadays, they rely on phone and online records to prove unlawful connections.
One bizarre example of an Insider trading case that went to court is the curious trial of R.Foster Winans. This corrupt columnist wrote a weekly article for the Wall Street Journal entitled ‘heard on the street’.
These were essentially tips on stocks and they had a considerable effect on the market each week.Whichever company Finan recommended would experience a massive surge. However, Finan ran into trouble when he divulged the contents of his weekly tip to a few well-known stockbrokers before it was made public.
Using this information, the stockbrokers made a healthy profit and allegedly shared these winnings with Finan. The column had not yet been published so the public was deemed to have a significant disadvantage.
Finan was convicted of the crime but avoided prison by arguing that the column was, in fact, the property of the Wall Street Journal. By that thinking, a corporate entity cannot be tried for insider trading. Finan’s lawyers earned their paycheck on this one.
Another unusually high-profile case involved renowned TV home-maker, Martha Stewart. The cooking guru owned stocks in ImClone, a pharmaceutical company.
This company had just had a brand new cancer medication rejected by the FDA. This drug previously made up a large chunk of ImClone profits.
Stock prices plummeted when the public heard of the FDA’s decision. This meant that many employees and their families were bankrupted. Mysteriously, the companies CEO and close friends had all sold their stocks before the crash.
Stewart had sold 4000 shares, making a profit of $250,000 before the collapse. The SEC found evidence of insider trading and Stewart was convicted to 5 months of prison along with a $30,000 fine.
People commit illegal insider trading as there is massive profit to be made and it’s difficult to get caught. However, convictions carry heavy prison sentences and enormous fines.
The SEC is skilled in analytics. They usually sniff out foul play by watching out for highly improbable predictions. Although, they have falsely accused some of insider trading when the suspects were indeed benefitting from astoundingly good luck.
Treachery on Wall Street can and does have global consequences. This is clearly a lesson that must be learned from the 2007 economic crash. Insider trading is an insidious rot inside our financial institutions, denying a fair deal to the public.