You overhear a conversation in a restaurant about a yet-to-be-announced merger. You purchase securities of the target firm and reap a handsome profit in three weeks’ time. What does the law expect you to do?
There are two types of insider trading, legal and illegal. Corporate insiders (officers, directors or employees) buying and selling their own stock is designated legal insider trading. In contrast, illegal trading involves a party buying or selling securities based on a breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Violations of insider trading can include the act of tipping (tipper), trading by those who have been tipped (tippee), and
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Without exception, insider trading relies on two elements: the existence of a relationship that gives access to corporate information, either directly or indirectly, not meant for the personal benefit of anyone, and unfairness involved in a person taking advantage of information knowing it is unavailable to those with whom he is dealing. In SEC v. Texas Gulf Sulphur Co., the Cady ruling was supported specifying that anyone with insider information is required to disclose the information or refrain from trading3. Consequently, the court held that anyone trading on insider information was committing fraud against all others in the market. The US Supreme court reversed the criminal conviction in the case of Chiarella v. United States, a printer in the possession of nonpublic information regarding a M & A documents that he was hired to print4. The SEC then instituted rule 14e-3 of the Exchange Act in which it became illegal for anyone to trade upon material nonpublic information … if they knew the information was from an
Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to nonpublic information about the company. In various countries, trading based on insider information is illegal. A great example for that is when “R. Foster Winans: The Corruptible Columnist Although not high-ranking in terms of dollars, the case of Wall Street Journal columnist R. Foster Winans is a landmark case for its curious outcome. Winans wrote the "Heard on the Street" column profiling a certain stock. The stocks featured in the column often went up or down according to Winans' opinion. Winans leaked the contents of his column to a group of stockbrokers, who used the tip to take up positions in
Looking at the case of the United States v. O’Hagan, 521 U. S. 642-652 (1997) it points out how fraud and how O’Hagan violated § 10(b) of the Security Exchange Act of 1934 and the SEC Rule 10b-5 by allowing misappropriate trading practices. With O’Hagan breaking the rules it leads to direct consequences of all the laws that are governed by the SEC which they often persecute whoever should break them. It also gives us knowledge on why those rules are important and need to abide by them. Rule 14e-3(a) is something that also gives important information on how insider trading is supposed to by introduce within the business world. Rule 14e-3(a) forbids anyone to trade based on material, nonpublic information that concerns a tender offer and that the person knows or should know that it has been acquired by an insider of the offeror or issuer, or someone working their behalf, unless within a reasonable time before any purchase or sale such material and it source are publicly disclosed (United States v. O'Hagan, 521 U.S. 642
Pre-merger filing requirements have a potentially significant impact on the cost and timing of closing a transaction, and even the very likelihood of closing. Parties anticipating the prospect of intensive antitrust review may choose to allocate antitrust risk in their merger agreement, selecting appropriate obligations of mutual cooperation, apportionment of expenses, termination rights, or break-up fees. No one size fits all in allocating antitrust risk in merger agreements. Where appropriate, the parties to a transaction should identify and retain local and/or regulatory counsel to assist them with evaluating the state and regulatory law issues raised by a potential acquisition and developing a plan to address such
When a bank employee makes trades using the firm’s money without its authorization, the practice is called:
The Securities and Exchange Commission can also impose financial penalties on institutions and individuals for violations outside of insider trading for the breach of any Federal Securities Law following a report issued by the National Commission on Fraudulent Financial Reporting, also known as the Treadway Commission. The Treadway Commission’s objective was to detect fraud and identifying acts that contribute to fraudulent financial reporting. As a result, Congress took the Treadway Commission’s recommendations and passed the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 known as the Remedies Act. This gave the Securities and Exchange Commission the authority to seek financial penalties against individuals or institutions
The tipper and the tippee are the the two people that are associated with an insider trading deal. The tipper is the person that has broken his or her fiduciary duty when he or she consciously releases inside information about a company, corporation, person, etc. That has previously been private or unannounced. The tippee is the one who acquires the information from the tipper. This usually happens when a tippee receives inside information from a tipper to tip on a stock and then trade it illegally. The misappropriation theory is a perspective that defines the act of stealing private information from an employer and then trading the information based on the misappropriated insider knowledge.
Insider trading leaves general investors paying their losses – Besides using insider information to profit ahead of the general investing public. Insiders can also use the information they were privy to as a way to eliminate their shares ahead of others knowing the shares of the stock will plummet because of bad news about the company. Massive sell-offs will cause the price to drop tremendously.
It is proper to present a business definition of merger as it found on legal reference with the ultimate goal in the pursuing of an explanation on which this paper intents to present. A merger in accordance with the textbook is legally defined as a contractual and statuary process in which the (surviving corporation) acquires all the assets and liabilities of another corporation (the merged corporation). The definition go even farther to involve and clarify about what happen to shares by explaining the following; “the shareholders of the merged corporation either are paid for their share or receive the shares of the surviving corporation”. But in simple terms is my attempt to define as the product or birth of a corporation on which
§ 78j (b) and 78ff, 17 C.F.R. §§ 240.10b–5 and 240.10b5–2, and 18 U.S.C. § 2.” (United States v. Raj Rajaratnam, 2013) Raj Rajaratnam was sentenced to 11 years in prison, the longest term in history for insider trading crimes, further he was asked to forfeit $53,816,434 and an additional $10 Million fine was imposed. (United States v. Raj Rajaratnam, 2011)
Assume that the Securities and Exchange Commission (SEC) has a rule that it will enforce statutory provisions prohibiting insider trading only when the insiders make monetary profits for themselves. Then the SEC makes a new rule, declaring that it will now bring enforcement actions against individuals for insider trading even if the individuals did not personally profit from the transactions. In making the new rule, the SEC does not conduct a rule making procedure but simply announces its decision. A stockbrokerage firm objects and says that the new rule was unlawfully developed without opportunity for public comment. The brokerage firm challenges the rule in an action that ultimately is reviewed by a federal appellate court. Using the information presented in the chapter, answer the following questions.
Insider trading is a very serious crime that occurs when information is shared about future decisions to get financial gain and then act upon it. Information of this caliber should be public knowledge so that everyone has an equal opportunity to make their investment decisions. An analogy would be if someone gained the answers to the final test and used them while everyone else has an unfair disadvantage. A rather large insider trading incident occurred with Raj Rajaratnam and Rajat Gupta. Gupta told Rajaratnam about a deal going on for preferred stock purchase for Goldman Sachs by the Berkshire Hathaway company. The information was given before any public announcement about the deal was made.
However, in some cases, consensus may not be reached. Then there are different tactics implemented by acquirer firm. Acquirer can make a tender offer. It means that acquirer goes directly to the shareholders of targeted company and buys their shares in return for some premium over the current market price. Before tender offer, there is asymmetric information between parties. Shareholders require a premium because they are informed. Perception to the targeted company in the market changes as fast as possible. We conclude that it is likely to see an overbidding in a hostile merger rather than a friendly merger. The reason is that the acquiring firm may inevitably pay higher premiums in order to gain at least 51% of target firm’s shares and shareholders can be convinced to sell their shares if the target’s management notified them about not to sell.
When the trial began the Government had a very strong case against the firm. Information about who played what role and those involved was known. This was the biggest insider trading trial in a generation with all of Wall Streets eyes on the outcome. Since the Galleon case, findings show that proportional leakage of information has been reduced compared to before the case.
In Tides v. Boeing Co., Matthew Neumann and Nicholas Tides were employed by the company’s SOX audit group. The employees allege that they were pressured by supervisors to provide reports giving favorable reviews to internal controls despite their concerns that said controls were vulnerable to manipulation by unauthorized users. Notwithstanding a published company policy prohibiting employees from speaking to the press, both employees provided information about what occurred to a newspaper reporter who incorporated the information in a published article. The Ninth Circuit held that the plaintiffs could not avail themselves to retaliation remedies in the SOX because “[l]eaks to the media are not protected.” The court articulated that SOX applied only to “employees of publicly-traded companies who disclose certain types of information only to the three categories of recipients specifically enumerated in the Act—federal regulatory and law enforcement agencies, Congress, and employee supervisors.” The Tides court read the three categories of the SOX statute according to their plain meaning. Courts interpreting the DFA statute should interpret the three categories according to the statute’s plain meaning as well.
One of the areas of company law in which the general equitable rules seem to be inadequate to protect the