Insider Trading

Recently, there has been a scandal of insider trading involving primarily, Galleon Group. And also involves the companies Google and IBM.

What is “insider trading?”

Insider trading is where executives of a company know that it is going to fail or have a bad year etc, and proceed to sell their own stock in the company.

The reason this is wrong is because, other investors in the company who don’t know what’s going on (and couldn’t know) end up loosing their money. There are laws against insider trading.

The Recent Scandal

Hedge-fund giant Galleon Group, facing heavy investor withdrawal requests after Friday’s arrest of co-founder Raj Rajaratnam, moved to unload some of its technology stocks and other holdings to raise cash.

Investors have sought to withdraw about $1.3 billion of the $3.7 billion in assets Galleon manages, traders say. Moreover, two of the brokerage firms Galleon normally deals with, Bank of America Merrill Lynch and Barclays PLC, have told Galleon they will no longer trade securities positions with the fund firm, according to a person close to the situation. The Wall Street Journal October 21st, 2009

Raj Rajaratnam

The same article said that he (Raj Rajaratnam) told 130 employees that he did nothing wrong.

One of the reason we have laws against insider trading, is because it’s not good for the economy. With insider trading one -or only a few- get this information about the company. And so they sell stock, and they end up with all the money, without warning to anyone else. If everyone knew this information, then it would be fair. But we don’t want to leave people in the red, for information they didn’t have.

Also, it’s bad for the economy because there might have been some sort of solution to the problem. Instead the executives just sell and bail. And then, this can become typical. And private investors would never invest in the stock market. And the economy fails.

Here’s some suspects to be involved:

Key figures charged Friday in the Galleon insider-trading case. All four say they are innocent.

Bloomberg NewsRobert Moffat, senior vice president at IBM

Associated PressMark Kurland, a partner at hedge-fund group New Castle Partners

Associated PressAnil Kumar, a director at consulting firm McKinsey & Co.

Associated PressDanielle Chiesi, a portfolio manager at New Castle.

(Provided by the Wall Street Journal)

History of Insider Trading

Rules and Trials Over the Years

Library of Congress
1912-1913

Pujo Committee in Congress investigates Wall Street’s alleged “money trust.” Among its conclusions: “the scandalous practices of officers and directors in speculating upon inside and advance information as to the action of their corporations may be curtailed if not stopped.” Congress, though, ignored the committee’s recommendation to legislate against insider trading.

Popperfoto/Getty Images
1933 and 1934

Part of reform efforts in the wake of the stock market crash of 1929, the Securities Act (1933) and the Securities Exchange Act (1934) penalized certain inside trades, but did not prohibit insider trading generally.

Associated Press

2003

Martha Stewart, home merchandising and media executive, indicted on charges of insider trading. She was convicted in 2004 on four counts of obstruction of justice.

1961

Columbia University law professor, William Cary, becomes Securties and Exchange Commission chairman. Cary pioneered the use of Section 10(b) of the Securities Exchange Act—a broad rule against securities fraud—to target insider trading. Within the next few years, especially with the prosecution of insiders at Cady, Roberts & Co. and at Texas Gulf Sulphur, the SEC expanded the interpretation of the 1934 Act to prohibit insider trading generally.

Bettmann/Corbis
1986

Ivan Boesky agrees to plead guilty in an insider-trading case. The arbitrageur ultimately paid a $100 million fine for trading on information from a Drexel Burnham Lambert banker and served 22 months in prison.

1997

In United States v. James Herman O’Hagan, the Supreme Court clarifies which types of insider activities are prohibited by U.S. securities legislation, endorsing the SEC’s broad interpretation of Section 10(b) as a tool to be used against insider trading.

2009

Raj Rajaratnam, founder of New York fund firm Galleon Group, arrested on charges of insider trading. Federal authorities describe the operation as the biggest insider trading ring in a generation.

(Once again from the Wall Street Journal)

-Ben

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