What Is Insider Trading And Why Is It Illegal?Insider trading is one aspect of the financial and stock market world in which confidence can really be shaken. It goes without saying that the very nature of insider dealing means that it must remain secret if it is to succeed and thus rarely do such stories come to light. When such stories do make it into the daily news, trust in free and fair markets can be damaged. As a crime, it could be argued that it is 'victimless' and that therefore, punishments are out of proportion to the offence. However, it can also be argued that by making profits in the market by using secret information, all investors in the specific company have lost out. It should also be noted that in exceptional circumstances, a company may be adversely impacted by share price volatility which could cause job losses for staff. In financial companies, confidence is vitally important, and a swinging share price could - in theory - cause the end of a profitable company. Therefore, it seems entirely reasonable that governments should frown upon insider dealing and try to prosecute offenders where possible.
Though mergers and acquisitions are obviously sensitive times in the course of a business, the extra numbers of analysts, lawyers and advisory staff offer unusual opportunities. The staff will be forced to sign NDAs - non disclosure agreements - but still, the exceptional profits are tempting. If, for example, a company is undervalued and possibly vulnerable, other companies in the same sector will be looking at the possibility of a strategic purchase. The analysts and lawyers that begin to work on the deal - long before it exists - know that just the mention of a 'potential interest' in the market will likely send the price of the target company to rocket. Should a takeover not materialise, the insider that has arranged to purchase an interest will make very high percentage returns in a matter of just a few weeks. It is very easy money. The insider is likely to have friends or family members that are a party to the transaction. Their job will be to purchase company stock. This additional person, or group of people - who may or may not know each other - make investigation much harder since the link between information and purchase has been blurred or broken. There is always the potential for an insider to not purchase but instead to 'sell' a tip to other fund managers or market participants for other funds and privileged clients. Alternatively, the purchase of their interest can be carried out through an offshore fund or account. This masks the nature of the deal further, making successful investigation of a number of types of stock fraud even harder. To be able to investigate these matters, known as 'suspicious transactions', financial regulators need to be able trace and prove connections. This means that telephone, mobile communications and computer records need to be accessed. In addition, both personal and professional records are required. Needless to say, insider trading is not always easy to prove. In the United States, immunity from prosecution can be granted to individuals in return for prosecution evidence. This is clearly a very valuable tool in breaking apart insider trading rings in the same way as used against criminal gangs such as The Mafia and anti-competitive companies. The Securities And Exchange Commission in the Unites States has incredible power! This is clearly a very valuable tool in breaking apart insider trading rings in the same way as used against criminal gangs such as The Mafia and anti-competitive companies.
The scale of deals means that individuals can make incredible profits whilst not really influencing the overall scheme of events. For example, in 2007, the City of London Police investigated nearly 300 cases which totalled around £54 million. It must go without saying that there must have been many other transactions which were not deemed suspicious and to be investigated - despite their actual nature. It is also possible for individuals to abuse a position of authority in the stock market by using, abusing and not declaring their full position. For example, journalists could promote a company when they actually own shares themselves which were bought specifically for the purpose! An example of this was prosecuted in the United Kingdom in 2005. The "City Slickers" column in the Daily Mirror was used to promote small companies and more details can be read in this
BBC story
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