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Draft:Original research/Insider trading

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An individual who has privileged knowledge of the sales of a publicly traded company is an insider. Usually, these are the top five or six executives of a company. Often, these same individuals have majority ownership of the company. When they buy or sell some of their shares into a depressed or inflated market so as to increase their share of ownership or increase their personal income, they are engaging in insider trading. Such insider trading harms other investors and is usually considered illegal insider trading.

Illegal insider trading raises the cost of capital for securities issuers, thus decreasing overall economic growth.[1]

But, some economists have argued that insider trading should be allowed and could, in fact, benefit markets.[2]

There has long been "considerable academic debate" among business and legal scholars over whether or not insider trading should be illegal.[3] Several arguments against outlawing insider trading have been identified: for example, although insider trading is illegal, most insider trading is never detected by law enforcement, and thus the illegality of insider trading might give the public the potentially misleading impression that "stock market trading is an unrigged game that anyone can play."[3] Some legal analysis has questioned whether insider trading actually harms anyone in the legal sense, since some have questioned whether insider trading causes anyone to suffer an actual "loss," and whether anyone who suffers a loss is owed an actual legal duty by the insiders in question.[3]

Trading

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Def. buying and selling goods and services is called trading.

Insiders

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Def. a "person who has special knowledge about the inner workings of an organization,[4] group, or institution"[5] is called an insider.

Theoretical insider trading

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Def. buying "or selling securities of a publicly held company by a person who has privileged access to information concerning the company's financial condition or plans"[6] is called insider trading.

Monopolistic practices

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Main articles: Income/Monopolistic practices and Monopolistic practices
This two-page illustration portrays the powerful railroad monopoly as an octopus, with its many tentacles controlling such financial interests as the elite of Nob Hill, farmers, lumber interests, shipping, fruit growers, stage lines, mining, and the wine industry. Credit: G. Frederick Keller.

Monopolistic practices are actions that reduce the fair market competition between enterprises or entrepreneurs.

"Monopolistic market structures and their consequences have for long been part of established economic analysis ... However, real-world monopolies do not always fit the textbook categories ... The matter has been brought to a head in recent years by cases initiated by antitrust authorities against allegedly monopolistic firms ... These cases have served to highlight the inadequacies of traditional monopoly analysis ... From these cases has emerged a much better understanding of dominant firms."[7]

"If such a fringe existed and became a threat to the dominant firm then we would expect the dominant group, by predatory action, to do something about it."[8]

A state could be said to "succeed" if it maintains, according to philosopher Max Weber, a monopoly on the legitimate use of physical force within its borders. When this is broken (e.g., through the dominant presence of warlords, paramilitary groups, or terrorism), the very existence of the state becomes dubious, and the state becomes a failed state.

"In each instance, the politically dominant group is attempting to design a constitution that will legitimize its hold on power and allow it to continue to monopolize resource allocation."[9]

"In 1972, the ruling elites in Cameroon hurriedly put together a constitution that abolished the country's federal system and made Cameroon a one-party dictatorship."[9]

Illegality

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Rules prohibiting or criminalizing insider trading on material non-public information exist in most jurisdictions around the world (Bhattacharya and Daouk, 2002), but the details and the efforts to enforce them vary considerably. In the United States, Sections 16(b) and 10(b) of the Securities Exchange Act of 1934 directly and indirectly address insider trading. The U.S. Congress enacted this law after the stock market crash of 1929.[10] While the United States is generally viewed as making the most serious efforts to enforce its insider trading laws,[11] the broader scope of the European model legislation provides a stricter framework against illegal insider trading.[12][13] In the European Union and the United Kingdom all trading on non-public information is, under the rubric of market abuse, subject at a minimum to civil penalties and to possible criminal penalties as well.[13] UK's Financial Conduct Authority has the responsibility to investigate and prosecute insider dealing, defined by the Criminal Justice Act 1993.

"The SEC concluded: "Where 'tippees' — regardless of their motivation or occupation — come into possession of material 'corporate information that they know is confidential and know or should know came from a corporate insider,' they must either publicly disclose that information or refrain from trading." 21 S. E. C. Docket 1401, 1407 (1981) (footnote omitted) (quoting Chiarella v. United States, 445 U. S. 222, 230, n. 12 (1980)). Recognizing, however, that Dirks "played an important role in bringing [Equity Funding's] massive fraud to light," 21 S. E. C. Docket, at 1412,[8] the SEC only censured him.[9]" Dirks v. SEC, 463 US 646 - Supreme Court 1983.

"In the seminal case of In re Cady, Roberts & Co., 40 S. E. C. 907 (1961), the SEC recognized that the common law in some jurisdictions imposes on "corporate `insiders,' particularly officers, directors, or controlling stockholders" an "affirmative duty of disclosure . . . when dealing in securities." Id., at 911, and n. 13.[10] The SEC found that not only did breach of this common-law duty also establish the elements of a Rule 10b-5 violation,[11] but that individuals other than corporate insiders could be obligated either to disclose material nonpublic information[12] before trading or to abstain from trading altogether. Id., at 912. In Chiarella, we accepted the two elements set out in Cady, Roberts for establishing a Rule 10b-5 violation: "(i) the existence of a relationship affording access to inside information intended to be available only for a corporate purpose, and (ii) the unfairness of allowing a corporate insider to take advantage of that information 654*654 by trading without disclosure." 445 U. S., at 227. In examining whether Chiarella had an obligation to disclose or abstain, the Court found that there is no general duty to disclose before trading on material nonpublic information,[13] and held that "a duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information." Id., at 235. Such a duty arises rather from the existence of a fiduciary relationship. See id., at 227-235." Dirks v. SEC, 463 US 646 - Supreme Court 1983.

"Not "all breaches of fiduciary duty in connection with a securities transaction," however, come within the ambit of Rule 10b-5. Santa Fe Industries, Inc. v. Green, 430 U. S. 462, 472 (1977). There must also be "manipulation or deception." Id., at 473. In an inside-trading case this fraud derives from the "inherent unfairness involved where one takes advantage" of "information intended to be available only for a corporate purpose and not for the personal benefit of anyone." In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 S. E. C. 933, 936 (1968). Thus, an insider will be liable under Rule 10b-5 for inside trading only where he fails to disclose material nonpublic information before trading on it and thus makes "secret profits." Cady, Roberts, supra, at 916, n. 31." Dirks v. SEC, 463 US 646 - Supreme Court 1983.

Hypotheses

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Main article: Hypotheses
  1. Insider trading by the top five or six chief executives who own a publicly-traded company should only be allowed with the company itself.

See also

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References

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  1. ↑ "The World Price of Insider Trading" by Utpal Bhattacharya and Hazem Daouk in the Journal of Finance, Vol. LVII, No. 1 (February 2002)
  2. ↑ Matthews, Dylan (2013-07-26). "Insider trading enriches and informs us, and could prevent scandals. Legalize it". Washington Post. ISSN 0190-8286. Retrieved 2018-02-02.
  3. ↑ 3.0 3.1 3.2 Klein, Ramseyer & Bainbridge (2018), p. 481.
  4. ↑ --Stranger (29 August 2005). "insider". San Francisco, California: Wikimedia Foundation, Inc. Retrieved 2017-04-06. {{cite web}}: |author= has generic name (help)
  5. ↑ WikiPedant (22 December 2007). "insider". San Francisco, California: Wikimedia Foundation, Inc. Retrieved 2017-04-06. {{cite web}}: |author= has generic name (help)
  6. ↑ "insider trading, In: Wiktionary". San Francisco, California: Wikimedia Foundation, Inc. 23 December 2013. Retrieved 2014-06-09.
  7. ↑ D. Hay and J. Vickers (1986). D. Hay and J. Vickers. ed. The Economics of Market Dominance. Oxford: Basil Blackwell. pp. 1. 
  8. ↑ Keith Cowling and Dennis C. Mueller (September 1981). "The Social Costs of Monopoly Power Revisited". The Economic Journal 91 (363): 721-5. http://www.jstor.org/stable/10.2307/2232836. Retrieved 2012-01-31. 
  9. ↑ 9.0 9.1 John Mukum Mbaku (March 22, 1998). "Constitutional engineering and the transition to democracy in post-Cold War Africa". The Independent Review 2 (4). http://www.freepatentsonline.com/article/Independent-Review/20640398.html. Retrieved 2012-10-22. 
  10. ↑ Thomas Newkirk. (1998). Speech by SEC Staff: Insider Trading – A U.S. Perspective. 16th International Symposium on Economic Crime at Jesus College, Cambridge, England on September 19, 1998
  11. ↑ "Law and the Market: The Impact of Enforcement" by John C. Coffee, University of Pennsylvania Law Review (December 2007)
  12. ↑ Masters, Brooke; McCrum, Dan (26 January 2012). "Gulf between US and UK 'insider trading'". Financial Times.
  13. ↑ 13.0 13.1 Ventoruzzo, Marco (19 June 2014). "Comparing Insider Trading in the US and Europe". Harvard Law School.

Further reading

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{{Anthropology resources}}{{Dominant group}}{{Economics resources}}{{Humanities resources}}

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