.. announcement is made a week later that Grand Met is indeed filing for bankruptcy. By this time, you have reacted too slowly and the market price dives to $5 a share. Is this what you had in mind heading into retirement? Scenarios like this become reality on a regular basis. One of the most famous insider trading scandals in history involved a man named Ivan Boesky.
He illegally obtained secrets about impending mergers to buy and sell stock before the mergers became public knowledge. Mr. Boesky made a “$200 million fortune by profiting off stock price volatility as corporate mergers came together and fell apart.” His case brought national exposure to illegal insider trading in the 1980s and helped pave the way for other big-shot criminals such as Dennis Levine, Martin Siegal, and Michael Milken to pay the price. Boesky cooperated with officials and had to pay $100 million in fines and received 26 months in prison. But that still leaves $100 million in change left over from his illegal activities.
So, in other words, as long as you cooperate, you’ll only lose half on your trade-in. Is that the kind of “hard-core” message we want to send to these white-collar criminals? So why risk lawsuits or even prison? The answer is obvious – greed. The potential of making millions of dollars in a single week greatly outweighs the risk of getting caught in many people’s eyes. In the recent Duracell International takeover of Gillette Co., the SEC found that 18 people netted more than $1 million in trading securities of the two companies in a two-day period before the acquisition became public. The SEC currently has suits pending on those trades. According to William McLucas, director of enforcement at the SEC, about forty-five insider trading cases are pursued every year.
Ironically, that number is the same as the amount of cases pursued in the “go-go 1980s,” when legendary insider trading scandals were continually making headlines. In 1997, the New York Stock Exchange referred forty-eight insider trading investigations to the SEC, while the NASDAQ referred 121. “Regulators say the brisk pace of mergers and acquisitions is behind a lot of insider trading now.” But for the most part, most of the cases today have that “next-door neighbor” feeling. Relatives and friends of employees pocketing a quick $5,000 after buying shares of a company’s stock before a merger has replaced the high profile cases of the 1980s. This has placed greater pressure on enforcement There is always going to be a “gray zone.” “If all the information was public property, there would be no incentive for share analysts and others to seek it.
For markets to work, there have to be private rights to valuable information.” And that is where the line is drawn in the sand. When does private turn into public information? “There’s always going to be a moment when information passes from being confidential business information that the company has guarded to being market gossip.” It is unrealistic to expect our courts to pinpoint the exact time when a company’s secrets become the street’s common news. But steps can be taken to control sensitive information from getting out in the public. First, “close the loop.” The less exposure there is to investment bankers and advisers, the less potential of information leaking to the public. Secondly, “speed it up.” Try not to stretch out the process of negotiations too long.
Thirdly, “think like a spy.” Avoid the use of facsimile machines, cellular phones, and e-mail as much as possible. And finally, “lay it on the line.” Make it clear to both parties involved in the deal that leaks will not be tolerated. In 1980, one out of seventeen U.S. households had money in stocks and bonds. Today, it’s one out of three. The expansion of mutual funds and 401(k) plans in the 1980s dumped huge amounts of money into the market.
Greed follows opportunity, and as money continues to pour into the market, illegal insider trading will continue to grow. In conclusion, knowledge is power in today’s business world. And where power goes, manipulation can’t be far behind. Not a day goes by without talk of a new merger, acquisition, or IPO – that is why illegal insider trading has become an ongoing problem. Just remember one thing.
When faced with a situation where you may be exposed to illegal insider trading, use the golden rule – “If a lead sounds too good to be true, it probably is.” Bibliography Amado, Ralph. “Are You at Risk for Insider Trading Liability?” University of Pennsylvania Almanac. January 13, 1998. http://www.upenn.edu/almanac/v44/n17/traderisk.htm l. Defterios, John. “Insider Trading Persists.” CNNfn. October 16, 1996. http://europe.cnnfn.com/markets/9610/16/insidertra ding pkg/index.htm Galen, Michele.
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Walker, John. “Insiders and Rule 16(b).” http://www.fourmilab.ch/autofile/www/section2 34 5.html. Wells, Rob. “Decade Passed Since Boesky Squealed to Feds.” The Standard Times. November 15, 1996. http://www.s-t.com/daily/11-96/11-15-96/a06bu037.h tm.