Insider trading.

[jmt]

An interesting array of responses!

Obviously, I am not moving forward on this info; is it because I have a conscience? Or is it because I have misgivings as to the nature and quality of the info, and don't want to take the punt?

All I know, is that there was a little voice inside, that said clearly, "NO" !

It will certainly be interesting to view the chain of events come Monday, and then I can congratulate myself for either honesty or foresight, or recriminate with myself for failure to act!

Offshore

Good for you! This was never a good idea. The consequences are just way too bad.

[subzero1]

No one has really answered my questions. I understand that it's illegal, so a bad idea to break the law. But I don't really see how it's 'wrong' (putting legality aside).

[jmt]

No one has really answered my questions. I understand that it's illegal, so a bad idea to break the law. But I don't really see how it's 'wrong' (putting legality aside).

You know something that you only know because you are entrusted to do something on behalf of the company and you are using it for personal gain. If its just a tip from someone who is not entrusted in that way, I dont think it is wrong... your just acting on someone's opinions.... what makes it insider trading and wrong is that someone KNOWS something and they know it for a reason and that reason is that someone trusted them and they are misusing that trust...

[Guest carlsbadrolex]

GO AHEAD AND DO IT MARTHA!!!!

[highoeyazmuhudee]

bear stearns has been tanking for way longer than just recently.

whats unethical is paying taxes on your income

[milsub5517]

bull$hit. they still need proof to charge you. emails, phone conversations, witness ... anything. i say if properly executed one can not get caught. people get busted because of stupid mistakes. in this case passing info to a 3rd party who is not connected to him and reliable would be a way to go. the thing is that he may not have such trustworthy person.

Offshore and RWG Guest, It is all too easy to get caught in insider trading. I am in the securities business, and no, I am not a trader, but rather a planner (buy and hold). Let me try to educate those who may ever wish to trade on insider information.

First, Insider trading is when a person with inside information, acts upon a "tip" or knowledge, that is not available to the public, or better said, non public information.

When an average or worse yet, a person who has never traded stock, purchase a large number of lots (bundles of 100 shares), that triggers a red flag. Most investors will purchase blue chip stocks, when a purchase of a little known company is exercised, and you have little investment history or experience, that raises red flag #2. The next question, how long do you keep the stock? If the first two weren't enough evidence to charge on insider trading, this part here is your "finger print in the crime scene." Shortly after you have purchased the lots, you quickly turn around and sell those shares, in a matter of minutes, hours, days, or months, is how you can be spotted very, very easily.

Now, if you don't think that the SEC hasn't already flagged the company, and the clearing firm doesn't have their "policeman" looking at this, you are a fool, and you will be busted.

All the best.

[Pugwash]

Friend, life is far simpler than this.

1) Tell the truth.

2) Be kind.

3) Act with integrity.

Excellent advice for all things. It's so much easier to keep track of what you're supposed to have told people when it's the truth.

[Pugwash]

Insider trading is a serious crime. And it is not, as some believe, a victimless crime [...] it is still stealing.

The entire stock market is based on making money by taking it off people. Nothing is ever produced from nothing in the stock market. Little wonder it's a den of vipers.

[Pugwash]

No one has really answered my questions. I understand that it's illegal, so a bad idea to break the law. But I don't really see how it's 'wrong' (putting legality aside).

Um, seriously?

[JohnG]

No one has really answered my questions. I understand that it's illegal, so a bad idea to break the law. But I don't really see how it's 'wrong' (putting legality aside).

I will try to explain again.

It is stealing because when I buy using insider information I am not just making an extra profit - it is not "free" money that comes from nowhere. I enter the market to purchase stocks that I would otherwise not have bought. I increase demand for that stock - by my one transaction. It is probably a small increase - minuscule - perhaps not even measurable - but I increase demand for that stock nevertheless. That means that the price goes UP. On Monday morning when everyone jumps to buy on the new information, the stock opens at a higher price because of my transaction. The price is also higher for the person who buys after me on Friday afternoon without knowledge of the transaction - and reduces the windfall he should have realized when the information is released on Monday. As a result, profits that should have incurred to other investors are sitting in my pocket. They will make a little less money when they sell because, unbeknown to them, they paid a higher price than they should have when they purchased.

If my transaction is small the effect is small. When the leak of information is significant there are measurable effects on the stock price before the announcement and in fact this occurs frequently. It is very common for share prices to move irregularly right before important announcements.

Mil_sub is correct that proving a transaction was illegal is very difficult. But just because you can get away with something is not a moral defense. One of the true measures of a man is how he conducts himself when he knows that others are not watching him. Mil_sub appears to be one of those people who will not tell the cashier when they have received too much change back on their purchase. Or perhaps he does - because the harm to that cashier when her register doesn't balance is easier to perceive and the crime harder to rationalize. But make no mistake about it, insider trading is not merely "technically" wrong - it is a moral wrong against fellow market participants. It is theft.

[highoeyazmuhudee]

hmmm most sotck brokers i know personally drive ferraris and porsches, there goes that ivory backscratcher they wanted : )

[jdkno]

So basicly buying stock based on inside information is "Stealing" and the extra profit you make is not "Free" money.

We are talking about money people never had, how can I be stealing it?

So I get inside info on Thursday evening that a specific stock will skyrocket on Monday. Friday morning I buy 100 shares at $1.00 per share. My purchase drives the price up a bit. Now its mid day Friday and someone else comes along to purchase a few shares and he has to pay $1.25 per share. Now it is getting close to market closing time and someone else decides to pick up a few shares because they saw the price go from $1.00 at opening, to $1.25 mid-day, and now it is selling for $1.50.

Monday morning comes, the information is made public, and now the stock is selling for $3.00 per share. More people start buying and by close on Monday each share of stock is worth $5.00.

So you are telling me that since I knew the information on Friday any money I make above and beyond the people who did not buy until the information was released is considered stealing????

What about the extra money that people who managed to buy as soon as the info was made public vs. the people who did not buy until the price was $4.00 per share? Are they stealing too?

What about the guy who got in for $1.25 and made extra money, or the guy who got in for $1.50 because my purchase made the stock price rise a bit. Would he not be stealing as well by proxy?

Insider trading...cheating maybe, stealing.....not by a longshot.

I could see if YOU had the ability to manipulate profit postings and such but simply acting on information......

[tomhorn]

One alternative play to make would be to buy the stock immediately after the announcement being made public. It can take a few minutes for the stock to rally up to the buyout price. You won't make as much money, but there will still be some profit to be had. Make it a limit order to protect yourself on the buy price and fire away.

[bubu]

First: Is it the TRUTH?

Second: Is it FAIR to all concerned?

Third: Will it build GOOD WILL and BETTER FRIENDSHIPS?

Fourth: Will it be BENEFICIAL to all concerned?

This simple test works for over 1,200,000 service oriented Rotarians throughout the world. Put it to the test in the things you think, say, or do.

FOLLOW THE ROTARY FOUR WAY TEST

[subzero1]

The argument seems to be that people own stock at a certain price ($1) are somehow 'cheated' if I come in and buy some of it. But the fact is that they are perfectly happy selling for $1, otherwise they would not have offered it at that price. They agree to sell it for $1, and I agree to buy it for $1. Where is the crime there?

My 'knowledge' may (or may not) help me in the future, but the fact is that the transaction for $1 is not based on fraud, it is a free trade where both sides know exactly what is being sold and bought, and for what price. Now, the stock may go up in the future, but then again it may not. That's a risk. And the more money I put up based on my 'knowledge', the greater my financial risk.

The fact is that the seller is selling, and someone is going to buy. Whether that someone is me, or a different person is irrelevant, since in no way will the seller ever see the future profits, since they sold the stock for $1. The buyer is the benefactor. So if I have a 'hunch' or a 'tip', why should I not act on it? These 'tips' aren't always accurate, and they don't always work out the way you think they will, so there's still a level of uncertainty and risk involved.

I mean, take the reverse, and I'm the seller, selling for $1. 2 days after I sell, I see it go to $5. If the person buying it from me had more info that I did, am I able to cry 'foul' and whine 'But you should have told me not to sell it!'. That's ridiculous. A disparity of knowledge (or skills, or whatever) is the very foundation of all business.

Let's take another example - say I know that the cost of producing baseballs is going to increase 100%, causing the price to double to consumers. So I go out and buy a bunch of baseballs at their current price, hold them for a few weeks, then turn around and sell them at the higher price. That's perfectly legitimate, and I don't see why stocks would be any different than baseballs.

[Pugwash]

Wow. Some of the "take it and screw the morals" opinions here certainly demonstrate why the stock Market is so heavily regulated. Have you no shame?

Insider trading is illegal for good reason.

[subzero1]

But that's the whole point, I don't concede that it's 'wrong'. Doing something immoral is wrong, but I don't see how this is wrong, particularly in context of my last post. If someone can show me exactly how/why it's wrong, I'm more than happy to change my opinion. But claiming 'unfair advantage' as a basis for a moral argument is ridiculous. That's like me saying that Kobe Bryant has an unfair advantage over me in Basketball, so it is immoral for him to play me in a game of basketball. Stupid thinking for basketball, stupid thinking for stocks.

[jdkno]

If I buy 10,000 shares today at $1 instead of at $4 immediately after an important announcement, the windfall savings of $30,000 does not just come out of thin air - it is not "free" money. It comes out of the pockets of those who had to buy at a slightly higher price due to my premature intervention.

If this money does not come out of thin air then you show me where it comes from.

Lets say Friday, acting on inside information, you were able to purchase 100 shares at $1.00 per share. The seller wanted to sell it for $1.00 per share and you paid him what he wanted so there is no stealing there. Now on Monday information was made publicly available that increased the stocks worth from $1.00 per share to $4.00 per share. Now you are sitting on $400.00 worth of stock that you only paid $100.00 for. Where did the other $300.00 come from???

If I decide I want to buy that stock I know its cost is $4.00 per share, what difference does it make to me what you paid for it? If I want it and it is being sold for $4.00 per share thats what I have to pay for it.

Now your inside track is what led you to purchase the stock, on the other hand had you not purchased it and its value increased to benifit the original shareholder what is the difference? Someone still got in while it was low and made a bigger profit than thoes who did not get in until the price went up.

So again I ask, if the money did not come out of thin air then you explain to me how one persons savings of $30,000 in your example came out of another persons pocket directly, WITHOUT THEM WILLINGLY GIVING UP THAT MONEY TO BUY THE STOCK FROM YOU.

[JohnG]

So you are telling me that since I knew the information on Friday any money I make above and beyond the people who did not buy until the information was released is considered stealing????

Yes if you trade on that information. If you are told the information and you already had placed a buy order, or intended to, and you do not alter your trading behaviour based on that information, that is not insider trading.

What about the extra money that people who managed to buy as soon as the info was made public vs. the people who did not buy until the price was $4.00 per share? Are they stealing too?

No because the people who waited had exactly the same chance to buy at opening bell on Monday. They were not at a disadvantage - they were lazy or slow or slept late or hesitated or forgot.

What about the guy who got in for $1.25 and made extra money, or the guy who got in for $1.50 because my purchase made the stock price rise a bit. Would he not be stealing as well by proxy?

No. They were using the same information that was available to the public at large.

Insider trading...cheating maybe, stealing.....not by a longshot.

Ok, I challenge you to go to a serious poker game, cheat, and when you get caught tell the other guys, "Yeah I was cheating but I was not stealing from you!"

It is stealing. This is not some semantic debate nor is there any argument about this question within the finance world. Anyone who understand market dynamics at the most basic level knows (unless he is delusional) that making money by trading on insider information necessarily comes at the expense of the investor who trades only on information available to the public. You are taking money out of honest investors' pockets. The money does not materialize out of nowhere and it is not a vicitmless crime. That is why it is a felony crime under Federal law and why the SEC pursues cases vigorously.

[Pugwash]

So again I ask, if the money did not come out of thin air then you explain to me how one persons savings of $30,000 in your example came out of another persons pocket directly, WITHOUT THEM WILLINGLY GIVING UP THAT MONEY TO BUY THE STOCK FROM YOU.

If the person that sold them to you knew what you knew, they would not willingly sell them. That's where the fraud comes in.

When you sell shares, you do so on the grounds that the person doing the buying has access to the same information to you and vise-versa. For the whole stock market to work, it has to be that way.

How hard is it to understand that the system requires this kind of honesty to work. It's why it's so heavily monitored and regulated. Unfortunately, the shares business attracts that predatory bastardesque kind of man that will literally sell their morals to the highest bidder.

Without these regulations, in a true unregulated libertarian free market, the largest shark gets bigger and wage slavery becomes a reality once more. I'm all for equality and freedom, but some people simply don't deserve it.

[JohnG]

If this money does not come out of thin air then you show me where it comes from.

Read my post above. If you still don't get it then buy a rudimentary textbook on financial markets. I am not going to keep explaining it. Or, alternatively, you could assume just for a moment that you are not better informed and educated on the subject than all of the minds at the SEC and other Federal regulatory agencies that oversee market activity in some way and all of the legislators who enacted the laws that created these agencies in oder to keep our markets honest and transparent.

If you need some sort of rationalization find it yourself (or just keep believing whatever you want to believe) - but don't expect me to help you.

Edited April 25, 2008 by JuanG

[subzero1]

Here is a more rigorous treatment of the ethical position I take with regard to insider trading. I did not write this paper, but it is amazing how similar his thoughts are to mine:

ETHICAL ISSUES IN INSIDER TRADING: CASE STUDIES

Robert W. McGee

Barry University

Revised August 20, 2004

Published in the Proceedings of the Global Conference on Business Economics, Association for

Business and Economics Research, Amsterdam, July 9-11, 2004, pp. 712-721.

ABSTRACT

Insider trading has received a bad name in recent decades. The popular press makes it

sound like an evil practice where those who engage in it are totally devoid of ethical

principles. Yet not all insider trading is illegal and some studies have concluded that

certain kinds of insider trading are actually beneficial to the greater investment

community. Some scholars in philosophy, law and economics have disputed whether

insider trading should be punished at all while others assert that it should be illegal in all

cases. Appeals often tend to be based on emotion rather than logic and academic

analysis. This paper reviews the literature on insider trading and applies utilitarian

ethics and rights theory to some recent case studies of insider trading in an attempt to

determine which forms of insider trading are ethically acceptable.

INTRODUCTION

Practically all the articles that have been written on insider trading in recent years have treated it

as something evil. The notable exception is the work of Henry G. Manne. [51] [52] [53] [54] [55] [56]

[57] [58] [59] [60] [61] For two particularly hostile and vociferous attacks on Manne's position, see

Hetherington [39] and Schotland [88]. Whenever the term "insider trading" is used, the average

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listener/reader immediately classifies it as a bad practice, or something that is immoral or unethical.

Inside traders are viewed as common criminals. [65] The purpose of this paper is to explore the nature

of insider trading and analyze the issues to determine the positive and negative aspects of insider

trading, and how policy should be changed, if at all.

Before proceeding any further, a definition of justice would be appropriate. Once "justice" is

defined, the definition can be applied to the practice of insider trading to determine whether the practice

is just. A just act can be between individuals or between the State and one or more individuals although,

in the final analysis, an act involving the State is carried out by an individual. According to one popular

theory, justice is the absence of coercion. Acts between consenting adults are just. Individuals or

governments that prevent such acts are acting unjustly, and individuals who commit acts that aggress

against others, except in self-defense, are acting unjustly. Robert Nozick's [70] and Murray N.

Rothbard's [84] definitions are along the same lines, but John Rawls' [79] is not. Brian Barry [7] and

Otto Bird [11] have also expressed views on this point. Perhaps the most detailed bibliography on the

theory of justice, at least for books first published before 1900, is in The Great Ideas: A Syntopicon,

[37].

A corollary to this view is that the proper scope of government is to protect life, liberty and

property, and any act by government that goes beyond this scope results in injustice because it must

necessarily use coercion to take from some to give to others. A similar view is taken by John Locke in

his The Second Treatise on Civil Government [47] and at least some of America's founding fathers. The

view is also developed by Robert Nozick [70], Richard A. Epstein [29], Frederic Bastiat [9], and Dean

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Russell [86]. Space does not permit a detailed defense of this position, but others have already

discussed this point thoroughly anyway [9][29][70][86].

If injustice results when one individual takes the property of another without that person's

consent, and the proper scope of government includes prevention of such acts, then government should

attempt to prevent coercive (or fraudulent) takings and should refrain from interfering in nonfraudulent

transactions that are between consenting adults. In the case of insider trading, the Securities and

Exchange Commission might be the proper agency of government to prevent such transactions, if

insider trading is deemed to be an unjust act. However, at least one former SEC Commissioner has

pointed out the potential abuses that can occur when the SEC is given such regulatory authority. [43]

Perhaps regular common law contract and tort would be sufficient to protect individuals from harm.

Using existing law to protect against violations of property and contract and to prevent fraud might

provide a better solution than using insider trading laws that are vague and that may result in punishing

individuals who have committed no offenses against property or contract rights.

Whether insider trading is fraudulent is questionable. St. Admin Aquinas said that fraud can be

perpetrated in three ways, either by selling one thing for another or by giving the wrong quality or

quantity. [22, p. 105] [4] A more modern definition is "intentional deception to cause a person to give

up property or some lawful right." [94].

A typical case of insider trading occurs when a buyer with inside information calls his stock

broker and tells him to buy, knowing that the stock price is likely to rise as soon as the inside

information becomes public. In this case, the buyer does not deceive the seller into giving up property.

Indeed, the buyer does not even know who the seller is, and the seller would have sold anyway,

4

anonymously, through the same broker. The seller's action would have been the same whether an inside

trader was the other party to the transaction or not. If the inside trader had not purchased the stock,

someone else would have. Yet this "someone else" would not be accused of reaping unjust profits, even

if the identical stock was purchased for the same price the insider would have paid.

Insider trading does not seem to fit the definition of fraud, so there does not seem to be

anything fraudulent about it. Furthermore, according to Aquinas, there is no moral duty to inform a

potential buyer that the price of the good you are trying to sell is likely to change in the near future.

[4][6, p. 420] [8, pp. 359-360].

In the case Aquinas discusses, a wheat merchant

"...carries wheat to a place where wheat fetches a high price, knowing that many will

come after him carrying wheat...if the buyers knew this they would give a lower price.

But...the seller need not give the buyer this information...the seller, since he sells his

goods at the price actually offered him, does not seem to act contrary to justice through

not stating what is going to happen. If however he were to do so, or if he lowered his

price, it would be exceedingly virtuous on his part: although he does not seem to be

bound to do this as a debt of justice." [4]

Based on this view, an insider who knows the stock price is likely to rise in the near future has

no moral duty to inform potential buyers of this fact. Where there is no moral duty, certainly there

5

should be no legal duty either. In fact, the Supreme Court has ruled at least twice that those in

possession of nonpublic information do not have a general duty to disclose the information to the

marketplace [19] [24]. Jonathan R. Macey has also spoken on this point [49].

WHO IS HARMED BY INSIDER TRADING?

While the transaction of buying and selling stock by an insider does not meet either the

dictionary's or Aquinas' definition of fraud, the question of justice still remains. If no one is harmed, the

act is not unjust; if someone who does not deserve to be harmed is harmed, the act is unjust. The

obvious question to raise is: "Who is harmed by insider trading?"

The most obvious potential "victims" of insider trading are the potential sellers who sell their

stock anonymously to an inside trader. But as was mentioned above, they would have sold anyway, so

whether the inside trader buys from them or not does not affect the proceeds they receive from the

sale. If the sellers are hurt by having an inside trader in the market, it is difficult to measure the damage,

and it appears that there is no damage. In fact, the academic literature recognizes that insider trading

does not result in any harm to any identifiable group [60] and those who sell to inside traders may

actually be helped rather than harmed because they received a better price, so it appears illogical to

allow them to sue for damages if, in fact, there are no damages. [17][28][68] From the perspective of

utilitarian ethics [21][36][90], buyers are no worse off as a result of having purchased from an insider

than they would have been if they had purchased from a noninsiders. Thus, there is nothing wrong with

the practice from the perspective of utilitarian ethics. Of course, utilitarian ethics has been criticized for

having certain structural flaws [34][64][85], but time and space do not permit an adequate analysis of

6

those arguments. Furthermore, the main problem with utilitarian analyses

[JohnG]

If the person that sold them to you knew what you knew, they would not willingly sell them.

At least not at the same price. They would sell them at a price closer to the price at close on Monday after the market had assimilated the new information.

I ignored the other victim here - the seller. As Pugwash states, if you do not share your improperly acquired and not generally available information with the seller you are stealing from him as well. The market is structured so that all players should (in the absence of misconduct) have access to the same information. That does not mean they actually have the information, but that they can get it if they so desire. The market does not require that participants be well informed, only that they have equal access to all relevant information.

If you sell a car and hide a defect to deceive another and cause him to pay a higher price, you have stolen from him. That is precisely what trading on insider information is.

[slay]

if you dont risk anything, you will win nothing.

[subzero1]

If you sell a car and hide a defect to deceive another and cause him to pay a higher price, you have stolen from him. That is precisely what trading on insider information is.

That's simply a wrong analogy, sorry. A better analogy would be to say that if I work for Porsche and I know that the 911 is about to be discontinued, I can go out and buy a bunch of 911's, knowing that the future scarcity will likely drive the price up. Are you saying that is immoral? Clearly I have information that the sellers do not, so should I tell them that they should not sell?