WRITTEN ASSIGNMENT CASE STUDY 4
6.5Written Assignment Case Study
Insidertrading is any trading based on non-public information that isrelevant to the basic value of a company and thus the stock price(Macey, 1991). Insider trading also entails an activity whichinvolves asymmetrical information whereby, one party in atransaction has more information than the other especially when theseller has more information than the buyer. Events that led toaccusations of insider trading at Galleon are that Galleon is beingaccused of creating a set of connections to executives at McKinsey,Intel, IBM, and Goldman Sachs among others. These executives actedas insiders who provided Galleon with non-public information that thegovernment’s attorney argued that they used to make approximately$60 million dishonest profits (De, 2010).
Regulators,investors, and executives can do wiretapping so as to reduce thepractice of insider trading. This can be an aggressive tactic ofprosecuting insider-trading cases. Wiretapping is the procedure ofconnecting a listening gadget to a telephone line to secretly screena conversation. This act of wiretapping will reduce insider-tradingsince managers, directors, and employees who share the company’sconfidential information with the outsiders will be caught easily andprosecuted.
Sharingmaterial confidential information will have different implications.Regular insider trading would decrease largely in markets since itallows only a small group of insiders to benefit from the non-publicinformation. This group of insiders mainly consists of greedy fundmanagers and the chief executives of the corporations. Insidertrading is dangerous because if it is allowed to take place on thelarge scale and over an extensive period, the common investor willthen be at a disadvantage all the time (Macey, 1991). Also, Insidertrading can also be a costly activity to investors since they will beforced to pay money for a professional money manager thus incurringmore expenses. Furthermore, inside trading can compel investors toavoid the market altogether and start investing elsewhere like in thetreasuries due to the destabilized public trust and increasedunfairness in the market. This will, in the long run, lead toincreased inefficiency in the market. Legalizing insider tradingwould merely allow employees and their seniors to Trade Company’sstock to amass personal wealth. Insider trade affects my decision toinvest in the stock market negatively since my trust in the markethas deteriorated considerably after realizing that there is a smallgroup of privileged people with inside information of the companies Iwas eyeing to make investment.
Ibelieve that secret investigation and conviction of those in theGalleon network will deter other funds managers and investors fromsharing non-public information. Convicting those involved in theinsider trade will further discourage inside trading since potentialinside traders will fear to suffer the same consequences that havebeen suffered by those involved in the trade. The secretinvestigation is also a brilliant way of deterring insider tradesince when employees realize that there is a secret investigation,which is taking place they will automatically quit from the trade,and will take all precautionary measures to avoid inside trading.Secret investigations such as wiretapping will help in catching thoseinvolved in leaking non-public information to the public. Wiretappingmay also deter other insiders who might be having intentions to doinside trading.
Lessonslearned from the Galleon’s case are that insider trading increasesmarket inefficiencies it does not provide incentives to employees,and it is unethical and illegal. Insider trading is unethical for tworeasons. First, it is unfair due to unequal possession of informationand secondly, the greatest commodity for the society is not achievedaccording to utilitarian basis.
De,L. L. J. (2010). FinancialTimes guide to investing in funds: How to generate wealth and protectyour money.Harlow: Financial Times Prentice Hall.
Macey,J. R. (1991). InsiderTrading: Economics, politics, and policy.New York: American Enterprise Institute.