final insider trading word

8/12/2019 Final Insider Trading Word

1/7

WHAT IS INSIDER TRADING

Insider tradingis the trading of apublic company'sstock or othersecurities (such asbonds or

stock options)by individuals with access to non-public information about the company. Invarious countries insider trading based oninside information is illegal. This is because it is seen

as being unfair to other investors who don't have access to the information.

For example, illegal insider trading would occur if thechief executive officer of Company A

learned (prior to a public announcement) that Company A will be taken over and then bought

shares in Company A while knowing that the share price would likely rise.

The Definition of Insider Trading

Insider trading occurs when someone makes an investment decision based on information that is

not available to the general public. In some cases, the information allows them to profit, in

others,avoid a loss.

HISTORY OF INSIDER TRADING

The first 'insider trader' case was reported in the United States way back in 1792. William Duer,the then Assistant Secretary in the US Department of Treasury used his official position to gatherinsider knowledge and involved in speculative trading in the newly issued debt of the USgovernment. He was indicted and spent his days behind bars.

In the early 1920s J.P Morgan & Co., served as an unofficial central bank of the US andreportedly used its high influence with the Republican Party to make profits.

Then the inevitable happened. In early 1929, there was an unprecedented boom in the New YorkStock Exchange and in September the sell off started plunging the prices to new lows and

triggering a panic among investors, and banks.

The Great Depression began to set in. The decade long Great Depression, the shift in publicopinion contributed to the introduction of tough laws on insider trading done to manipulateprofits.

Even till a few decades of the 20th century, insider trading was not considered illegal. In fact inthe 1960s the world followed the Massachusetts Supreme Court ruling in the Goodwin v Agassiz
http://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Security_%28finance%29http://en.wikipedia.org/wiki/Bond_%28finance%29http://en.wikipedia.org/wiki/Option_%28finance%29http://en.wikipedia.org/wiki/Inside_informationhttp://en.wikipedia.org/wiki/Chief_executive_officerhttp://beginnersinvest.about.com/od/Risk-Management/a/5-Types-Of-Investments-New-Investors-Should-Avoid.htmhttp://beginnersinvest.about.com/od/Risk-Management/a/5-Types-Of-Investments-New-Investors-Should-Avoid.htmhttp://en.wikipedia.org/wiki/Chief_executive_officerhttp://en.wikipedia.org/wiki/Inside_informationhttp://en.wikipedia.org/wiki/Option_%28finance%29http://en.wikipedia.org/wiki/Bond_%28finance%29http://en.wikipedia.org/wiki/Security_%28finance%29http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Public_company


2/7

case that insider information is a 'perk.' However, in 1964 the Securities Act Amendments laiddown disciplinary controls for brokers and dealers

WHY FORBID INSIDER TRADING.Insider trading appearsunfair, especially to speculators outside a company who face difficultcompetition in the form of inside traders. Individual speculators and fund managers alike faceinferior returns when markets are more efficient owing to the actions of inside traders. This doesnot, in itself, imply that insider trading is harmful. Insider trading clearly hurts individual andinstitutional speculators, but the interests of the economy and the interests of these professionaltraders are not congruent. Indeed, inside traders competing with professional traders is not unlikeforeign goods competing on the domestic market -- the economy at large benefits even thoughone class of economic agents suffers.

Mainly it depends upon mkt securities in india

In this analysis, it is not clear that insider trading is intrinsically bad. What is at stake is themonopoly of outside speculators in exploiting market inefficiencies. It appears that both islandscan achieve the desired outcome, i.e. a state of market efficiency. Island B expends greaterhuman resources on research and speculation as compared with island A, where these resourcesbecome available for other purposes. Hence the insider trading approach is probably a preferableway for an economy to obtain the allocative function of the efficient market at the minimumcost.

In this perspective, the State could enhance market efficiency by imposing a reportingrequirement. Since trades by insiders are unusually informative, it would help market efficiencyif these were required to be rapidly disclosed. The price, quantity and identity of the insidershould be revealed shortly after a trade is consummated. Such requirements are in place in theUS today.


3/7

CASE STUDY

Rakesh AgarwalFebruary 2, 2012

Rakesh Agarwal, was the Managing Director of ABS Industries Ltd. (ABS), was involved innegotiations with Bayer A.G regarding their intentions to takeover ABS. It was alleged by SEBIthat prior to the announcement of the acquisition, Rakesh Agarwal, through his brother in law,Mr. I.P. Kedia had purchased shares of ABS from the market and tendered the said shares in theopen offer made by Bayer thereby making a substantial profit. The investigations of SEBIaffirmed these allegations. He was an insider as far as ABS is concerned. By dealing in theshares of ABS through his brother-in-law while the information regarding the acquisition of 51%stake by Bayer was not public, the appellant had acted in violation of Regulation 3 and 4 of theInsider Trading Regulations.

Rakesh Agarwal contended that he did this in the interests of the company. He desperatelywanted this deal to click and pursuant to Bayers condition to acquire at least 51% shares of

ABS, he tried his best at his personal level to supply them with the requisite number of shares,thus, resulting in him asking his brother-in-law to buy the aforesaid shares and later sell them toBayer.

The SEBI directed Rakesh Agarwal to deposit Rs. 34, 00,000 with Investor Education &

Protection Funds of Stock Exchange, Mumbai and NSE (in equal proportion i.e. Rs. 17, 00,000in each exchange) to compensate any investor which may make any claim subsequently. On anappeal to the Securities Appellate Tribunal (SAT), Mumbai, the Tribunal, however, held that thepart of the order of the SEBI directing Rakesh Agarwal to pay Rs. 34,00,000 couldnt besustained, on the grounds that Rakesh Agarwal did that in the interests of the company (ABS) tohelp Bayer A. G acquire his company.

SAMIR ARORA

Securities and Exchange Board have set out in its order banning Arorathe former star Asia-Pacific fund manager of Alliance Capital Managementfrom trading in August are far fromconvincing.

There are three main charges. One, that Arora played a pivotal role in thwarting AllianceCapitals efforts to sell its Indiaoperations by resorting to unethical means.

Two, he did not make disclosures or sometimes made wrongful disclosures when some ofAlliances holdings in certain stocks breached limits that required informing the respectivecompanies.


4/7

Third, he sold his entire holding in Digital GlobalSoft based on unpublished, price-sensitiveinformation.

In this case, SEBI conducted investigations into the management, conduct and other affairs of theAlliance Capital Asset Management (I) Pvt. Ltd. (ACAML). Samir Arora was the fund manager

of the company. Knowing that the company was inviting bids for takeover of the same, he madespecial arrangement with Henderson Global Investors. For helping this company takeover hispresent company, he purchased shares and when the price rose sold off the shares to get aconsiderable profit. The Authority found him guilty and directed him not to buy, sell or deal insecurities, in any manner, directly or indirectly, for a period of five years.

The conduct of Samir Arora is not in consonance with the high standards of integrity, fairnessand professionalism expected from a fund manager. His conduct erodes the investors confidence

and is detrimental to their interests as well as the safety and integrity of the securities market. Hisassociation in the securities market in any capacity is prejudicial to the interests of the investorsand the safety and integrity of the securities market.

GOLDMAN SACH

Raj Rajaratnam

In 1997, billionaire Sri Lankan-American businessman Raj Rajaratnam co-founded hedge fund

management company Galleon Group. But, as Industryleadersmagazine.com explains, Rajaratnam got

greedy. In October 2009, he was arrested and charged with leading a team of insider traders. US

Attorney Preet Bharara estimates that the scam yielded more than $60 million. Bharara also said, Like

so many others recently, he let greed and corruption cause his undoing.

According to authorities, between 2006 and 2009, Rajaratnam made his money by trading illegal

stocks, with the help of his network of contacts. The stocks themselves included those of

companies such as Google, eBay, Hilton Worldwide and Goldman Sachs.

In May 2011, a jury found Rajaratman guilty of 14 counts of conspiracy and securities fraud.

And in October the same year, he received a sentence of 11 years in prison. Rajaratman was also

ordered to pay a $10 million fine and relinquish $53.8 million in assets. At the time, his was the

longest jail term ever imposed for insider trading.

Raj Rajaratnam is a Sri Lankan-born American citizen of Tamil descent who founded the

Galleon Group, a New York-based hedge fund management firm.

On October 16, 2009, he was arrested by the FBI on allegations of insider trading, which alsocaused the Galleon Group to close.

His attorney indicated that Rajaratnam would plead not guilty and fight the charges of insidertrading in court.


5/7

On October 13, 2011, Rajaratnam was sentenced to 11 years in prison.

He was the 236th richest American in 2009, with an estimated net worth of $1.8 billion.

Rajaratnam started his career as a lending officer at the Chase Manhattan Bank where he made

loans to high-tech companies.

He joined the investment banking boutique Needham and Co as an analyst in 1985, where hisfocus was on the electronics industry.

He became the head of research in 1987 and the president in 1991, at the age of 34.

At the company's behest, he started a hedge fund - the Needham Emerging Growth Partnership -in March 1992, which he later bought and renamed 'Galleon'.

Reliance industries

Insider trading case: Sebi slaps Rs 11 crore fine on RIL firm

ENS Economic Bureau : Mumbai, Fri May 03 2013,

The Securities and Exchange Board of India (Sebi) has fined Reliance Industries group entityReliance Petroinvestments (RPIL) Rs 11 crore for violating insider trading norms in the shares of

erstwhile IPCL before its merger with RIL.

"It may be concluded that by virtue of RPIL having control over IPCL, it was reasonablyexpected to have access to unpublished price sensitive information of IPCL. RPIL being thepromoter having control over the company holding 46 per cent shares of IPCL is inherentlyexpected to have access to price sensitive information. The company being in such a position it isunacceptable that it was not aware of such major/ important decisions of the company IPCL," theSebi order said.

Share price of IPCL on March 5, 2007, declined by 8.13 per cent on the BSE when the Sensexdeclined by 3.79 per cent. However, in a divergence from the index, the scrip witnessed

substantial price gain on March 8, 2007, and March 9, 2007, subsequent to the announcement ofamalgamation of IPCL with Reliance Industries.

The findings of the investigation led to the allegation that RPIL was in the possession ofunpublished price sensitive information while trading in the scrip of IPCL prior to announcementof declaration of interim dividend and amalgamation of IPCL with Reliance Industries whichresulted in violation of regulation 3 of SEBI (Prohibition of Insider Trading) Regulations, 1992.
http://www.indianexpress.com/columnist/enseconomicbureau/http://www.indianexpress.com/columnist/enseconomicbureau/


6/7

RECENT NEWS OF INSIDER TRADING

Safety measures to detect insider trading

In India, the first set of regulations for insider trading was introduced in 1992 by the Securitiesand Exchange Board of India (SEBI). The regulations restricted insiders and companies intrading securities during times of possession of undisclosed price-sensitive information andbarred them from sharing it with any other person outside the company.

Sebi has also prescribed disclosure norms for any directors/officers holding shares in thecompany besides amending the Model Code of Conduct in 2008 that restricts thedirectors/officers who have bought or sold shares from getting into an opposite transactionwithin the next six months to sell and buy shares.

The penalty is high for insider trading which is at three times the amount of profits made out ofinsider trading subject to a minimum of Rs 25 crore (Rs 250 million).

Further, Sebi is empowered to investigate into insider trading irregularities and also initiatecriminal proceedings if found guilty.

How to protect yourself

As an investor, you should be cautious to avoid getting into the quagmire of insider tradingscams. Never invest in a company or an industry that you have never heard of even if you get a

tip-off.

RECOMMENDATIONS

How does insider trading works?

In an illegal insider trading, an insider in a company buys the stock, shares price-sensitiveinformation with a small group of people who buy the stocks and spread the word. Soon a hugeartificial demand is created for the particular stock resulting in higher prices.

At a certain point when the prices hits the 'satisfactory' level the insider exits along with his smallgroup of people or in other words sells the stocks and make profits. Soon the stocks plummetresulting in huge losses for the public investors.

How it affects the market?


7/7

The impact of illegal insider trading is considered negative for both the small investors and forthe markets. Illegal insider trading ensures that there is no fair play involved and there is no fairdemand and supply of stocks, all detrimental to the functioning of a healthy capital market.

Illegal insider trading weakens the faith of investors in the investing system and an unchecked

insider trading could keep off people from investing capital and this could potentially harm theeconomy as a whole.

CONCLUSION

1. Knowledge and vision into the future are the keys in making smart investment decisions2. The insiders possess the knowledge and the vision. They are the ones who make

corporate decisions and business plans, and therefore are the ones you must pay closeattention to

3.

Any benefit we derive from the understanding of insider trading comes predominantlyfrom buying. However, because of the difference between buying and selling motivation,there are always more insider sales than buys

4. Your would still need your normal due diligence

final insider trading word

Documents