Tuesday, October 20, 2009

Insider Trading

On October 16th, a Srilankan tamilian Raj Rajaratnam, head of Galleon Hedge Fund was arrested by the US police on charges of "Insider Trading". Let us try to figure out what this exactly means and when it is legal and when it is not.

Insider trading refers to trading of stocks or other derivatives of a publicly listed company based on potential access to non-public information about that company.

Insider Trading is legal, if in case the CEO of a comapny is buying stocks of the same company based on a non-public information, but files it within 2 days to make it public. Most of the financial websites, like Yahoo Finance have information of "Insider Trading" details of listed companies which were filed.

If the same CEO had bought the shares on his wifes name and not file it, it would become an illegal insider trading.

Another example : suppose my friend is a CEO of a company X and I happen to meet him for a drink and knowingly/unknowlingly he reveals me a private information of that company. If I use that private information to buy/sell stocks of that company or if I even have documents containing those private information, I am performing an illegal Insider Trading.

The theory behind the prohibition on insider trading is that it undermines investor confidence in the fairness and integrity of the securities markets.

The SEC lists top employees of a firm to be Insiders and makes it compulsary for them to declare their trades. Potentially, anyone could be an insider and it is very difficult to normalize the list and have very strict rules.

End of the day, we representing the firm should always remember the confidentiality signature we had signed and make sure we are morally doing justice to the firm. Most of the big shots from the top financial firms may be involved in "Illegal Insider Trading" and to charge them of this, you would have to collect a lot of evidence. For Rajaratnam, they had been observing him for 2 years. He has come out in bail and has announced he is going to defend stating he is innocent.

Final Verdict : If the BOSS has decided to screw you, there is no way you could escape :) ...

Wha about Indian Market?

Very often, one would observe share prices of firms already having moved in anticipation of a major corporate announcement. Based on market gossip, many of these pre-announcement trades are at the behest of the promoters.
While the SEBI has investigated a lot of these trails, it hasn’t been as successful in prosecution as much as SEC. To be fair to SEBI, regulators worldwide have had little success with convictions in insider trading cases. The trades are generally difficult to prove since the evidence can be circumstantial.

India seems to be in the category where insider trading laws exist, but prosecutions are too few to be noteworthy. Hopefully, the Galleon case will prompt Indian policymakers to add more regulatory measures with respect to Insider Trading.


Varunkumar Nagarajan said...

Nice info! Thanks.

Srihari said...

Good reading.. Check out another good article in The Hindu today, http://beta.thehindu.com/opinion/op-ed/article36502.ece

Vijay said...

nice one.. here is another link.. long one though but interesting http://online.wsj.com/article/SB10001424052748704224004574489324091790350.html