Insider Trading

illegal insider trading does not only happen when you are a member of the Board of Directors. Joe.

James, a part-time non-permanent word processor at two investment houses, learned all he needed to

know from the desks of co-workers, garbage cans, and from making copies of documents that

discussed impending mergers and acquisitions. Even though the documents referred to the companies

involved by code, James was able to learn their true identity by piecing together their industry,

historical stock prices, names of officers, and geographic location.

Once James knew who and when, he distributed the information to friends, family, and anyone who

would listen via an Internet chat room under the name "TheBin." What James did not know is that

among his many listeners were members of the Securities and Exchange Commission (SEC), the FBI,

and federal prosecutors. In fact, at any given time, 100 specially trained SEC employees are surfing

the Net, visiting chat rooms, and reading message boards looking for illegal inside traders. When they

identify a red flag, they forward the information to the Office of Internet Enforcement, a special

division of the SEC who helps build cases to pursue criminal charges and/or civil lawsuits.

The SEC is not the only surveillance group out in cyberspace. The exchanges monitor trading activity

as well. In fact, the American Stock Exchange was the organization who originally identified a problem

when they noticed unusual trading patterns prior to the public announcement of these mergers and

acquisitions. Once the SEC was notified, it was only a matter of time.

James directly told at least 10 people, but as with any valuable secret, the information spread like

wildfire. A friend of Jamess, a waiter at a New York restaurant, made over $285,000. He told a patron

who profited by at least $445,000, which was certainly more than he earned in his former career as a

school teacher.

While his friends made millions of dollars, James was more conservative and profited by only $70,000-

$110,000, plus various non-pecuniary benefits such as cases of wine. This seems to be a small gain

given the hefty fines and prison time that is certain to follow.

It seems the Internet is affecting the stock market in all sorts of ways, both good and bad. It remains

to be seen if the perceived anonymity of the Internet acts as a breeding ground for the conveying of

private corporate information. One thing is for certain, however, the SEC is readying themselves by

continual efforts and manpower devoted to policing cyberspace.

Questions

1. Explain what is meant by non-public, or private, information? 8 mrks

2. How & Who can come into contact with private, or inside, information? 10 mrks

3. When does private corporate information turn into illegal insider trading? 10 mrks

4. Why is the Internet such a high potential breeding ground for inside information? 12 mrks

5. What should you do if you learn of inside information? 10 mrks