Definition of a stock
labibmouri
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Jun 24, 2013
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About This Presentation
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Slide Content
Definition of a Stock:In plain and simple, stock is share in the ownership of a
company. Stock represents a claim on the company's assets and earnings. As you
acquire more stock, your ownership stake in the company becomes greater. Whether
you say shares, equity or stock, it all means the same thing.
Why does a company issue stock? A company could keep the profits and earnings
to the owner's of the company. It is only possible if a company does not extend its
market share and stays in minimum profits limit. In order to extend market share or
be market leader or get bigger asset, at some point every company needs to raise
money. To do so, companies can either borrow it from somebody or raise it by
selling part of the company, which is known as issuing stock. A company can borrow
by taking a loan from a bank or by issuing bonds and both methods are called debt
financing. Conversely issuing stock in the market is called equity financing. The
advantages in issuing stock is a company does not require to pay back the loan or
interest payments along the way. No chances involving into debt and creating
obstacle in expanding market share or adapting the advancement. However, it only
leaves shareholder on hope the company will achieve its target profit and earning
per share which leads the capital gains on holding a stock. If the trend shows
negative growth shareholder can sell instantly without having big loss. The first sale
of stock by a company is called the initial public offering (IPO).
Risk Involvement in a Stock: this is a very important factor believing in Risk when
you want to invest in the stock market. There is no guarantee what percentage you
can get capital gain, where and when the stock price stops in up-end or low-end
and how long it takes to get the profits. It is true, no company or institute can
guarantee. However, you can measure the risk various ways. That's why, it is
essential to do some "Home Work" on a company before you invest. The "Home
work" should be calculating earning per share, total debt, relative price strength,
profit margins, volumes, industry leader and so on. You can also reducing the risk
by diversifying the portfolios ( selecting stocks from different industries) and
measuring the correlation between a stock and market index. A less risk taker has
options to invest in Bond ( fixed returns) or a company who provides dividends at
the end of year. However, investors need to measure "expected rate of returns"
first, and it should be high enough to compensate the investors for the perceived
risk of the investment. Risk is contrary to the positive profit, but there is also
bright side. Taking-on greater risk demands a greater return on the investment.
This is the reason why stocks have historically outperformed other investments such
as bonds or savings accounts.
How Stocks Trade: most stocks are traded on exchange, which are places where
buyers and sellers meet and decide on a price. Some exchange are physical
locations where transactions are carried out on a trading floor. Two trading floor
are located in Bangladesh, DSE which is located in Dhaka, CSE is located in
Chittagong. Chittagong stock exchange is expanded to compose of a network of
company. Stock represents a claim on the company's assets and earnings. As you
acquire more stock, your ownership stake in the company becomes greater. Whether
you say shares, equity or stock, it all means the same thing.
Why does a company issue stock? A company could keep the profits and earnings
to the owner's of the company. It is only possible if a company does not extend its
market share and stays in minimum profits limit. In order to extend market share or
be market leader or get bigger asset, at some point every company needs to raise
money. To do so, companies can either borrow it from somebody or raise it by
selling part of the company, which is known as issuing stock. A company can borrow
by taking a loan from a bank or by issuing bonds and both methods are called debt
financing. Conversely issuing stock in the market is called equity financing. The
advantages in issuing stock is a company does not require to pay back the loan or
interest payments along the way. No chances involving into debt and creating
obstacle in expanding market share or adapting the advancement. However, it only
leaves shareholder on hope the company will achieve its target profit and earning
per share which leads the capital gains on holding a stock. If the trend shows
negative growth shareholder can sell instantly without having big loss. The first sale
of stock by a company is called the initial public offering (IPO).
Risk Involvement in a Stock: this is a very important factor believing in Risk when
you want to invest in the stock market. There is no guarantee what percentage you
can get capital gain, where and when the stock price stops in up-end or low-end
and how long it takes to get the profits. It is true, no company or institute can
guarantee. However, you can measure the risk various ways. That's why, it is
essential to do some "Home Work" on a company before you invest. The "Home
work" should be calculating earning per share, total debt, relative price strength,
profit margins, volumes, industry leader and so on. You can also reducing the risk
by diversifying the portfolios ( selecting stocks from different industries) and
measuring the correlation between a stock and market index. A less risk taker has
options to invest in Bond ( fixed returns) or a company who provides dividends at
the end of year. However, investors need to measure "expected rate of returns"
first, and it should be high enough to compensate the investors for the perceived
risk of the investment. Risk is contrary to the positive profit, but there is also
bright side. Taking-on greater risk demands a greater return on the investment.
This is the reason why stocks have historically outperformed other investments such
as bonds or savings accounts.
How Stocks Trade: most stocks are traded on exchange, which are places where
buyers and sellers meet and decide on a price. Some exchange are physical
locations where transactions are carried out on a trading floor. Two trading floor
are located in Bangladesh, DSE which is located in Dhaka, CSE is located in
Chittagong. Chittagong stock exchange is expanded to compose of a network of
computers where trades can be made electronically. We should distinguish between
the "primary" and "secondary" market. The primary market is the first phase of
stock where securities created before trading at the floor which is called IPO. In
the secondary market, investors trade previously issued securities without the
involvement of the issuing companies. The secondary market is what people are
referring to when they talk about "the stock market."
What causes prices to change: stock prices change everyday by market forces. By
this we mean that share prices change because of supply and demand. Any single
time, if more people want to buy a stock (demand) than sell it (supply), then the
price moves up. Conversely, if more people want to sell a stock than buy it, which
is a greater supply than demand, then the price falls.
Understanding supply and demand is pretty much easy. What is difficult to
comprehend is what makes people like a particular stock and dislike another stock.
This comes down to figuring out what news is positive for a company and what
news is negative. There are many answers to this problem and just about any
investor you ask has their own ideas and strategies.
That being said, the principal theory is that the price movement of a stock
indicates what investors feel a company is worth. The company's value is different
than its stock price. The value of a company is its market capitalization, which is
the stock price multiplied by the number of shares outstanding. For example, a
company that trades at $100 per share and has 1,000,000 shares outstanding ($100
x 1,000,000 = $100,000,000)has a lesser value than a company that trades at $50
but has 5,000,000 shares outstanding ($50 x 5,000,000 = $250,000,000). To further
complicate things, the price of a stock doesn't only reflect a company's current
value--it also reflects the growth that investors expect in the future.
The most important factor that affects the value of a company is its earnings.
Earnings are the profit a company makes, and in the long run no company can
survive without them. It makes sense when you think about it. If a company never
makes money, they aren't going to stay in business. Public companies are required
to report their earnings four times a year. Many analysts forecast earning per share
four times a year. If a company's results surprise (are better than expected), the
price jumps up. If a company's results disappoint (are worse than expected), then
the price will fall.
Of course, it's not just earnings that can change the sentiment towards a stock
price. It would be a rather simple world if this were the case! During the dot-com
bubble, for example, dozens of Internet companies rose to have market
capitalizations in the billions of dollars without ever making even the smallest
profit. As we all know, these valuations did not hold, In fact they are corrected by
market value. There are factors other than current earnings that influence stocks.
Investors have developed literally hundreds of these variables, ratios and
indicators.
the "primary" and "secondary" market. The primary market is the first phase of
stock where securities created before trading at the floor which is called IPO. In
the secondary market, investors trade previously issued securities without the
involvement of the issuing companies. The secondary market is what people are
referring to when they talk about "the stock market."
What causes prices to change: stock prices change everyday by market forces. By
this we mean that share prices change because of supply and demand. Any single
time, if more people want to buy a stock (demand) than sell it (supply), then the
price moves up. Conversely, if more people want to sell a stock than buy it, which
is a greater supply than demand, then the price falls.
Understanding supply and demand is pretty much easy. What is difficult to
comprehend is what makes people like a particular stock and dislike another stock.
This comes down to figuring out what news is positive for a company and what
news is negative. There are many answers to this problem and just about any
investor you ask has their own ideas and strategies.
That being said, the principal theory is that the price movement of a stock
indicates what investors feel a company is worth. The company's value is different
than its stock price. The value of a company is its market capitalization, which is
the stock price multiplied by the number of shares outstanding. For example, a
company that trades at $100 per share and has 1,000,000 shares outstanding ($100
x 1,000,000 = $100,000,000)has a lesser value than a company that trades at $50
but has 5,000,000 shares outstanding ($50 x 5,000,000 = $250,000,000). To further
complicate things, the price of a stock doesn't only reflect a company's current
value--it also reflects the growth that investors expect in the future.
The most important factor that affects the value of a company is its earnings.
Earnings are the profit a company makes, and in the long run no company can
survive without them. It makes sense when you think about it. If a company never
makes money, they aren't going to stay in business. Public companies are required
to report their earnings four times a year. Many analysts forecast earning per share
four times a year. If a company's results surprise (are better than expected), the
price jumps up. If a company's results disappoint (are worse than expected), then
the price will fall.
Of course, it's not just earnings that can change the sentiment towards a stock
price. It would be a rather simple world if this were the case! During the dot-com
bubble, for example, dozens of Internet companies rose to have market
capitalizations in the billions of dollars without ever making even the smallest
profit. As we all know, these valuations did not hold, In fact they are corrected by
market value. There are factors other than current earnings that influence stocks.
Investors have developed literally hundreds of these variables, ratios and
indicators.
So, why do stock prices change? The best answer is that nobody really knows for
sure. Some believe that it isn't possible to predict how stocks will change in price
while others think that by drawing charts and looking at past price movements, you
can determine when to buy and sell. The only thing we do know as a certainty is
that stocks are volatile and can change in price extremely rapidly.
The important things to grasp about this subject are the following:
1. At the most fundamental level, supply and demand in the market determine
stock price.
2. Price times the number of shares outstanding (market capitalization) is the value
of a company. Who is the market leader in terms of growth and has most relative
strength and profit margin.
3. Theoretically earnings are what affect investors' valuation of a company, but
there are other indicators that investors use to predict stock price. Remember, it is
investors' sentiments, attitudes, and expectations that ultimately affect stock
prices.
4. There are many theories that try to explain the way stock prices move the way
they do. Unfortunately, there is no one theory that can explain everything.
The Bulls, the Bears, and the Farm: On Wall Street, the bulls and bears are in a
constant struggle. If you haven't heard of these terms already, you undoubtedly will
as you begin invest. The Bulls: a bull market is when everything in the economy is
great, people are finding jobs, GDP is growing and stocks are rising. Things are just
plain rosy, picking stocks during a bull market is easier because everything is going
up. Bull markets can't last forever though, and sometimes they can lead to
dangerous situations if stocks become overvalued. If a person is optimistic,
believing that stocks will go up, he or she is called a bull and said to have a bullish
outlook. The Bears: a bear market is when the economy is bad, recession is
looming, and stock prices are falling.
All About Dividends:
One of best way to invest in dividend stocks is the buy-and-hold strategy. That
means you buy a dividend paying stock and hold it until you find another company
paying higher-yield dividend for enough period of time. Basically you will have
fixed income as dividends in addition to stock price gain or loss.
What you should consider to own a dividend stock forever, you want three things
from that stock:
1. High yield dividends.
2. Continued payment history.
3. Payout ratio follows less than 70% on Net-income.
Dividend payments: when a company declares dividend usually quoted either as a
Dollar/Taka amount or as a percentage. The Dollar/Taka amount is how much you
will get paid per year on each share of stock you own. The percentage is calculated
sure. Some believe that it isn't possible to predict how stocks will change in price
while others think that by drawing charts and looking at past price movements, you
can determine when to buy and sell. The only thing we do know as a certainty is
that stocks are volatile and can change in price extremely rapidly.
The important things to grasp about this subject are the following:
1. At the most fundamental level, supply and demand in the market determine
stock price.
2. Price times the number of shares outstanding (market capitalization) is the value
of a company. Who is the market leader in terms of growth and has most relative
strength and profit margin.
3. Theoretically earnings are what affect investors' valuation of a company, but
there are other indicators that investors use to predict stock price. Remember, it is
investors' sentiments, attitudes, and expectations that ultimately affect stock
prices.
4. There are many theories that try to explain the way stock prices move the way
they do. Unfortunately, there is no one theory that can explain everything.
The Bulls, the Bears, and the Farm: On Wall Street, the bulls and bears are in a
constant struggle. If you haven't heard of these terms already, you undoubtedly will
as you begin invest. The Bulls: a bull market is when everything in the economy is
great, people are finding jobs, GDP is growing and stocks are rising. Things are just
plain rosy, picking stocks during a bull market is easier because everything is going
up. Bull markets can't last forever though, and sometimes they can lead to
dangerous situations if stocks become overvalued. If a person is optimistic,
believing that stocks will go up, he or she is called a bull and said to have a bullish
outlook. The Bears: a bear market is when the economy is bad, recession is
looming, and stock prices are falling.
All About Dividends:
One of best way to invest in dividend stocks is the buy-and-hold strategy. That
means you buy a dividend paying stock and hold it until you find another company
paying higher-yield dividend for enough period of time. Basically you will have
fixed income as dividends in addition to stock price gain or loss.
What you should consider to own a dividend stock forever, you want three things
from that stock:
1. High yield dividends.
2. Continued payment history.
3. Payout ratio follows less than 70% on Net-income.
Dividend payments: when a company declares dividend usually quoted either as a
Dollar/Taka amount or as a percentage. The Dollar/Taka amount is how much you
will get paid per year on each share of stock you own. The percentage is calculated
as the dollar/taka amount on each stock own divided by the current per stock price
times 100 that is called dividend yield.
Yield explained: by looking at the percentage you can easily compare better
investments strategy and grasp which stock will pay you most on your amount of
investment. You will learn why dividends yield is crucial factor of choosing dividend
paying stocks.
For example: if you purchase 100 shares of stock at $10 per share, you will have
invested a total of $1,000 (100 shares X $10 per share = $1,000 invested)
How much you will get on every share of stock you own?
Let’s say a company is paying 8% dividend yield, so there will be $80 earnings on
your investment of $1,000 (1,000 invested X 8% = $80) $80 dividends per year.
This means that this stock pays you $.80 for every shares of stock you own (earnings
$80/100 shares). Now, if another stock also paying $.80 per share, but the stock
price of that stock is $20 per share. In your $1,000 investment you will have 50
shares a price of $20 per share. On your $1000 investment, on this second company
you will earn ($.80 X 50) $40 every year.
Let’s calculate the yield of second stock, it pays $.80 per share, and its share price
is $20. So, the yield is (.80X100/20) 4%. Your plan is to get highest return on a fixed
of $1,000 investment, keeping this strategy well-planned you can see that you get
100 shares on a first stock and 50 shares on a second stock, but both pay you
exactly $.80 per share you own. In this scenario, you can comprehend which stock
will pay more earnings with the $1,000 investments because of highest yield with
same amount of payment per share.
Only your yield matters: note that the only thing matter is the yield for the price
that you bought at. Even if the price of the stock goes up or down after you have
bought it. You will earn same amount of money because you still own the same
number of shares. So, the key is to compare their yields.
Trend of continued payment: your only concern is to minimize the risk on every
penny you investment. Then you research high-yield paying dividend stocks those
companies have record of paying dividends for at least 4/5 years. History of
dividends payment in the past for years most likely will continue to pay in coming
years. Owning a share of stock is the same as owning a piece of a company. The
dividends are paid out of what a company earns in Net-income and have savings. If
a company does not have growth in net-income or enough cash savings in balance-
sheet how long will a company continue to pay dividends? So, it is important that a
company is able to pay dividends based on their profits over a year, and you want
to make sure their payout is less than they earn in income. One way to determine
this is by checking the stock’s payout ratio.
Payout Ratios explained: the payout ratio is the amount a company pays in
dividends divided the company’s income. Let’s say a company pays out $1,000
times 100 that is called dividend yield.
Yield explained: by looking at the percentage you can easily compare better
investments strategy and grasp which stock will pay you most on your amount of
investment. You will learn why dividends yield is crucial factor of choosing dividend
paying stocks.
For example: if you purchase 100 shares of stock at $10 per share, you will have
invested a total of $1,000 (100 shares X $10 per share = $1,000 invested)
How much you will get on every share of stock you own?
Let’s say a company is paying 8% dividend yield, so there will be $80 earnings on
your investment of $1,000 (1,000 invested X 8% = $80) $80 dividends per year.
This means that this stock pays you $.80 for every shares of stock you own (earnings
$80/100 shares). Now, if another stock also paying $.80 per share, but the stock
price of that stock is $20 per share. In your $1,000 investment you will have 50
shares a price of $20 per share. On your $1000 investment, on this second company
you will earn ($.80 X 50) $40 every year.
Let’s calculate the yield of second stock, it pays $.80 per share, and its share price
is $20. So, the yield is (.80X100/20) 4%. Your plan is to get highest return on a fixed
of $1,000 investment, keeping this strategy well-planned you can see that you get
100 shares on a first stock and 50 shares on a second stock, but both pay you
exactly $.80 per share you own. In this scenario, you can comprehend which stock
will pay more earnings with the $1,000 investments because of highest yield with
same amount of payment per share.
Only your yield matters: note that the only thing matter is the yield for the price
that you bought at. Even if the price of the stock goes up or down after you have
bought it. You will earn same amount of money because you still own the same
number of shares. So, the key is to compare their yields.
Trend of continued payment: your only concern is to minimize the risk on every
penny you investment. Then you research high-yield paying dividend stocks those
companies have record of paying dividends for at least 4/5 years. History of
dividends payment in the past for years most likely will continue to pay in coming
years. Owning a share of stock is the same as owning a piece of a company. The
dividends are paid out of what a company earns in Net-income and have savings. If
a company does not have growth in net-income or enough cash savings in balance-
sheet how long will a company continue to pay dividends? So, it is important that a
company is able to pay dividends based on their profits over a year, and you want
to make sure their payout is less than they earn in income. One way to determine
this is by checking the stock’s payout ratio.
Payout Ratios explained: the payout ratio is the amount a company pays in
dividends divided the company’s income. Let’s say a company pays out $1,000
worth of dividends and earns $10,000 income end of the year, then it’s payout ratio
is
10% ($1,000/$10,000 income times 100).
Now, if a company’s payout ratio greater than 100% means that the company is
paying out more in dividends than they make in income. Think carefully about how
long a company could continue to stay in business if they spend more money than
they make. Obvious answer is not very long. And definitely not forever, which is
how long you expect to own the stock.
Sustainable Payout Ratio: a sustainable payout ratio is generally considered less
than 75%. That means a company pays dividends to investors out of 75% its income
and remaining 25% of income is going to company’s reinvestment plan. A company
needs enough cash to create new products, advertise to new customers, new
business plant, and generally just keep continuous business growth. If no
reinvestment is made then the company’s income could shrink over time.
What would happen when company’s income shrinks? How much would it hurt
keeping business same phase of expansion? It shows that if company’s income slows
down that will lead the payout ratio for the stock to go up. Let’s say that the above
company’s income drops to $5,000 from $10,000 over year and its payout payment
is same $1,000 as before.
$1,000 dividends / $5,000 income = 20%.
So it is very important for a company to maintain growth in business expansion and
its net-income by reinvesting in itself.
There should be a cap to maintain reasonable payout ratio which is standard for
most companies. A payout ratio of 75% or less also provides a cushion for the
company in case of hard times arrives. As economy slows down, most companies’
income also go down. If a company is paying 100% of the previous income as
dividends, then they will have to lower the total dividends payment to match the
current income.
What is P/E and why investors often calculate company's P/E?
Many successful investors use P/E ratio to find out what the market is paying for a
company's earnings at any given time. Any one can understand easily and calculate
P/E as a company's price-per-share divided by its earnings-per-share. Let's say
BATASHOE is trading at 160 taka per share in the market, for instance, and earnings
came in at 8 taka a share over the year, its P/E would be 20 (160/8). That means
investors are paying 20 taka for every 1 taka of the company's earnings. In this
example, investors are willing to pay extra 20 taka every one taka in BATASHOE's
earning. It is some point crucial to find out how much investors willing to pay a best
is
10% ($1,000/$10,000 income times 100).
Now, if a company’s payout ratio greater than 100% means that the company is
paying out more in dividends than they make in income. Think carefully about how
long a company could continue to stay in business if they spend more money than
they make. Obvious answer is not very long. And definitely not forever, which is
how long you expect to own the stock.
Sustainable Payout Ratio: a sustainable payout ratio is generally considered less
than 75%. That means a company pays dividends to investors out of 75% its income
and remaining 25% of income is going to company’s reinvestment plan. A company
needs enough cash to create new products, advertise to new customers, new
business plant, and generally just keep continuous business growth. If no
reinvestment is made then the company’s income could shrink over time.
What would happen when company’s income shrinks? How much would it hurt
keeping business same phase of expansion? It shows that if company’s income slows
down that will lead the payout ratio for the stock to go up. Let’s say that the above
company’s income drops to $5,000 from $10,000 over year and its payout payment
is same $1,000 as before.
$1,000 dividends / $5,000 income = 20%.
So it is very important for a company to maintain growth in business expansion and
its net-income by reinvesting in itself.
There should be a cap to maintain reasonable payout ratio which is standard for
most companies. A payout ratio of 75% or less also provides a cushion for the
company in case of hard times arrives. As economy slows down, most companies’
income also go down. If a company is paying 100% of the previous income as
dividends, then they will have to lower the total dividends payment to match the
current income.
What is P/E and why investors often calculate company's P/E?
Many successful investors use P/E ratio to find out what the market is paying for a
company's earnings at any given time. Any one can understand easily and calculate
P/E as a company's price-per-share divided by its earnings-per-share. Let's say
BATASHOE is trading at 160 taka per share in the market, for instance, and earnings
came in at 8 taka a share over the year, its P/E would be 20 (160/8). That means
investors are paying 20 taka for every 1 taka of the company's earnings. In this
example, investors are willing to pay extra 20 taka every one taka in BATASHOE's
earning. It is some point crucial to find out how much investors willing to pay a best
and blue chips companies stock according to their earnings. Let's say, there are 20
blue chips companies and how much their stocks are selling at current market and
how much their earnings per share that will give us to calculate P/E which could be
an industry standard market paying based on company's earnings.
About Mutual Funds Right Issues & Bonus Shares, Close-End and Open-End Mutual
Funds
THE SEC implemented revised mutual fund regulations on July 22. According to the amended
rule, mutual funds are prohibited from issuing new shares either in the form of right or bonus
shares to increase their capital bases. The SEC also imposed restrictions on mutual funds asking
them not to offer pre-emptive rights shares or private placement. This implies that mutual fund
shares should be offered and sold to the public through brokers/dealers but not to a pre-selected
buyer or a group of buyers.
The SEC's decision to amend fund rules brought numerous investors into the street as most of the
mutual funds lost value (in some cases more than 20% in a single trading session) during that
volatile market (late June to mid-July) and worried investors began demonstrating against the
officials of SEC.
The SEC was forced to suspend mutual fund trading several times during that market turmoil. A
group of investors filed a petition against SEC's decision to change mutual fund rules. As such,
the High Court asked fund managers not to distribute dividends until the SEC resolves the issue.
To date, the total number of mutual funds in Bangladesh is below 20 and they account for less
than 3% of our market capitalization. The US is the largest mutual fund market in the world with
approximately 25,000 funds and $12 trillion assets under management.
By definition, mutual funds are portfolios of different securities such as stocks, bonds, treasuries,
derivatives, etc. Mutual funds pool money of both individual and institutional investors allowing
the funds to achieve: (i) economies of scale by reducing costs and increasing investment returns;
(ii) divisibility and diversification; (iii) active management with superior stock picking and
market timing; (iv) reinvestment of dividends, interest and capital gains; (v) tax-efficiency; and
(vi) buying and selling flexibility. There might be varieties of mutual funds that differ in terms of
their investment objectives, underlying portfolios of shares, risks and returns, fees and expenses,
etc.
It should be noted here that mutual funds are widely known as open-end mutual funds in global
capital markets. But most of the mutual funds in Bangladesh are close-end mutual funds. A
close-end fund differs from an open-end fund mainly due to the fact that the number of shares in
a close-end fund is fixed at its inception. Moreover, a close-end fund, unlike the open-end fund is
traded in the stock exchange and priced intra-day. As such, price of a close-end fund is
blue chips companies and how much their stocks are selling at current market and
how much their earnings per share that will give us to calculate P/E which could be
an industry standard market paying based on company's earnings.
About Mutual Funds Right Issues & Bonus Shares, Close-End and Open-End Mutual
Funds
THE SEC implemented revised mutual fund regulations on July 22. According to the amended
rule, mutual funds are prohibited from issuing new shares either in the form of right or bonus
shares to increase their capital bases. The SEC also imposed restrictions on mutual funds asking
them not to offer pre-emptive rights shares or private placement. This implies that mutual fund
shares should be offered and sold to the public through brokers/dealers but not to a pre-selected
buyer or a group of buyers.
The SEC's decision to amend fund rules brought numerous investors into the street as most of the
mutual funds lost value (in some cases more than 20% in a single trading session) during that
volatile market (late June to mid-July) and worried investors began demonstrating against the
officials of SEC.
The SEC was forced to suspend mutual fund trading several times during that market turmoil. A
group of investors filed a petition against SEC's decision to change mutual fund rules. As such,
the High Court asked fund managers not to distribute dividends until the SEC resolves the issue.
To date, the total number of mutual funds in Bangladesh is below 20 and they account for less
than 3% of our market capitalization. The US is the largest mutual fund market in the world with
approximately 25,000 funds and $12 trillion assets under management.
By definition, mutual funds are portfolios of different securities such as stocks, bonds, treasuries,
derivatives, etc. Mutual funds pool money of both individual and institutional investors allowing
the funds to achieve: (i) economies of scale by reducing costs and increasing investment returns;
(ii) divisibility and diversification; (iii) active management with superior stock picking and
market timing; (iv) reinvestment of dividends, interest and capital gains; (v) tax-efficiency; and
(vi) buying and selling flexibility. There might be varieties of mutual funds that differ in terms of
their investment objectives, underlying portfolios of shares, risks and returns, fees and expenses,
etc.
It should be noted here that mutual funds are widely known as open-end mutual funds in global
capital markets. But most of the mutual funds in Bangladesh are close-end mutual funds. A
close-end fund differs from an open-end fund mainly due to the fact that the number of shares in
a close-end fund is fixed at its inception. Moreover, a close-end fund, unlike the open-end fund is
traded in the stock exchange and priced intra-day. As such, price of a close-end fund is
determined in the secondary market similar to individual stocks. Investors can also execute either
limit or stop trade order in close-end funds' transactions.
On the other hand, the price of an open-end fund is its net asset value (NAV) which is computed
once after the close of the stock exchange each trading day by taking the closing market value of
all underlying securities of a fund plus other assets (usually cash) and subtracting all liabilities of
the fund, and dividing the total net assets of the fund by total number of outstanding shares.
Thus, there is only one price (i.e. NAV) for open-end mutual fund. Total net assets and the
number of outstanding shares of an open-end fund may vary because of inflows (purchases of
fund by investors) and outflows (redemptions of fund by investors) of money from the fund. This
suggests that the number of shares in an open-end fund is not fixed.
It is worthy to mention here that a new type of security, widely known as "Exchange-Traded
Fund" or ETF (a blend between open-end and close-end funds), was introduced in the US in late
1990s. ETFs are similar to close-end funds as these are exchange traded and priced intra-day and
allow investors to buy or sell shares based on the collective performance of an entire portfolio.
Since the prices of ETFs do not deviate much from NAV, they have greater advantages over the
close-end funds. As such, many close-end funds were converted to ETFs. Since our capital
market does not offer ETF as an investment vehicle, we will leave its discussion here and focus
on close-end fund, the predominant source of mutual funds in Bangladesh, and its recent glitch.
Theoretically, a close-end fund neither redeems its existing shares nor issues new shares after its
initial public offering. As such, a fixed number of close-end fund shares are traded in the stock
exchange. Due to this fixed capital structure, fund managers do not worry about inflows and
outflows of money from funds. Accordingly, a close-end fund manager concentrates in long-term
capital investment and higher yields. However, under special circumstances, close-end funds are
permitted to raise capital either by issuing preferred stock or taking short-term loans which are
collateralised by the fund's original portfolio. The issuance of either right offerings, or bonus
shares, or secondary offerings, or dividend reinvestments to increase the capital base of a close-
end fund is considered to be detrimental to the fund as it may dilute fund returns.
Since close-end mutual funds in Bangladesh were previously allowed to issue new shares
(whether in terms of right, bonus, or dividend reinvestments), this was inconsistent with the true
definition and objective of a close-end fund. It is apparent that SEC took the right decision by
amending the mutual fund rules. However, this raises some questions and concerns about the
quality of our financial securities and capital market.
Finally, our capital market also lacks professional portfolio managers because of SEC's
favoritism toward ICB and lack of private mutual funds. An ADB audit team in 2004 reported
that ICB enjoys enormous facilities (e.g. non-payment of SEC fees, unlimited borrowing,
undisclosed daily NAV, etc).
These extra-ordinary facilities are major impediments to the growth of private investment
companies and a competitive mutual fund market in Bangladesh. As such, we also see no light at
the end of the tunnel for a market for derivative securities.
limit or stop trade order in close-end funds' transactions.
On the other hand, the price of an open-end fund is its net asset value (NAV) which is computed
once after the close of the stock exchange each trading day by taking the closing market value of
all underlying securities of a fund plus other assets (usually cash) and subtracting all liabilities of
the fund, and dividing the total net assets of the fund by total number of outstanding shares.
Thus, there is only one price (i.e. NAV) for open-end mutual fund. Total net assets and the
number of outstanding shares of an open-end fund may vary because of inflows (purchases of
fund by investors) and outflows (redemptions of fund by investors) of money from the fund. This
suggests that the number of shares in an open-end fund is not fixed.
It is worthy to mention here that a new type of security, widely known as "Exchange-Traded
Fund" or ETF (a blend between open-end and close-end funds), was introduced in the US in late
1990s. ETFs are similar to close-end funds as these are exchange traded and priced intra-day and
allow investors to buy or sell shares based on the collective performance of an entire portfolio.
Since the prices of ETFs do not deviate much from NAV, they have greater advantages over the
close-end funds. As such, many close-end funds were converted to ETFs. Since our capital
market does not offer ETF as an investment vehicle, we will leave its discussion here and focus
on close-end fund, the predominant source of mutual funds in Bangladesh, and its recent glitch.
Theoretically, a close-end fund neither redeems its existing shares nor issues new shares after its
initial public offering. As such, a fixed number of close-end fund shares are traded in the stock
exchange. Due to this fixed capital structure, fund managers do not worry about inflows and
outflows of money from funds. Accordingly, a close-end fund manager concentrates in long-term
capital investment and higher yields. However, under special circumstances, close-end funds are
permitted to raise capital either by issuing preferred stock or taking short-term loans which are
collateralised by the fund's original portfolio. The issuance of either right offerings, or bonus
shares, or secondary offerings, or dividend reinvestments to increase the capital base of a close-
end fund is considered to be detrimental to the fund as it may dilute fund returns.
Since close-end mutual funds in Bangladesh were previously allowed to issue new shares
(whether in terms of right, bonus, or dividend reinvestments), this was inconsistent with the true
definition and objective of a close-end fund. It is apparent that SEC took the right decision by
amending the mutual fund rules. However, this raises some questions and concerns about the
quality of our financial securities and capital market.
Finally, our capital market also lacks professional portfolio managers because of SEC's
favoritism toward ICB and lack of private mutual funds. An ADB audit team in 2004 reported
that ICB enjoys enormous facilities (e.g. non-payment of SEC fees, unlimited borrowing,
undisclosed daily NAV, etc).
These extra-ordinary facilities are major impediments to the growth of private investment
companies and a competitive mutual fund market in Bangladesh. As such, we also see no light at
the end of the tunnel for a market for derivative securities.
The author is an Assistant Professor of Finance at State University of New York Institute of
Technology
Guidelines for Capital Market Investment in Bangladesh through BRAC Bank
Limited Prepared for Non-Resident Bangladeshis (NRBs) & Foreign Investors
Bangladesh Capital Market
o Bangladesh Capital Market consists of the Dhaka Stock Exchange (DSE) & the
Chittagong Stock Exchange which were incorporated in 1954 & 1995 respectively.
o Both are members of South ASIAN Federation of Exchanges (SAFE), a forum in
South Asia to promote the development of securities markets in the region.
o The Securities & Exchange Commission (SEC) supervises activities of the bourses
and its members.
o Automated trading facilities available at both bourses since 1998.
o The Central Depository Bangladesh Limited (CDBL) introduced its first electronic
book entry in 2004.
o Market Intermediaries include 238 members of DSE, 135 members of CSE, 28 Full-
Fledged Merchant Banks, 6 Asset Management Companies and 5 Custodians6 (Six)
Bangladeshi Companies have been added to Dow Jones Safe-100 Index.
Why should you invest in Bangladesh Capital Market?
o 100% repatriation of capital, dividend and investment profits.
o Reinvestment of repatriable dividend treated as new investment.
o No tax on capital gains
o 10% of all IPOs are reserved for NRBs.
o World’s Bank Investor Protection Ranking for Bangladesh 19th, Pakistan 25th, India
38th & Sri Lanka 70th.
o Bangladesh was considered as one of the Goldman Sachs Next 11 countries for a
high potential of becoming the world’s largest economies in the 21st century along with
the BRICs (Brazil, Russia, India and China).
o Easy access to ownership of Infrastructure Development companies, high net worth
private banks and companies through Capital Market. Requirements for NRBs &
Foreign Investors to invest in Bangladesh
o A Foreign Currency (FC) Account is needed for inward and outward remittance.
o A Non-resident Investor’s Taka Account (NITA) is required for converting foreign
currency into Taka.
o All Capital Market investors are required to conduct trading through a Stock Broking
Account
o maintained with any Stock Broker/Member of the respective Stock Exchange.
o In order to trade dematerialized shares listed with the Stock Exchanges, investors
must have a Beneficiary Owners (BO) Account with CDBL.
Technology
Guidelines for Capital Market Investment in Bangladesh through BRAC Bank
Limited Prepared for Non-Resident Bangladeshis (NRBs) & Foreign Investors
Bangladesh Capital Market
o Bangladesh Capital Market consists of the Dhaka Stock Exchange (DSE) & the
Chittagong Stock Exchange which were incorporated in 1954 & 1995 respectively.
o Both are members of South ASIAN Federation of Exchanges (SAFE), a forum in
South Asia to promote the development of securities markets in the region.
o The Securities & Exchange Commission (SEC) supervises activities of the bourses
and its members.
o Automated trading facilities available at both bourses since 1998.
o The Central Depository Bangladesh Limited (CDBL) introduced its first electronic
book entry in 2004.
o Market Intermediaries include 238 members of DSE, 135 members of CSE, 28 Full-
Fledged Merchant Banks, 6 Asset Management Companies and 5 Custodians6 (Six)
Bangladeshi Companies have been added to Dow Jones Safe-100 Index.
Why should you invest in Bangladesh Capital Market?
o 100% repatriation of capital, dividend and investment profits.
o Reinvestment of repatriable dividend treated as new investment.
o No tax on capital gains
o 10% of all IPOs are reserved for NRBs.
o World’s Bank Investor Protection Ranking for Bangladesh 19th, Pakistan 25th, India
38th & Sri Lanka 70th.
o Bangladesh was considered as one of the Goldman Sachs Next 11 countries for a
high potential of becoming the world’s largest economies in the 21st century along with
the BRICs (Brazil, Russia, India and China).
o Easy access to ownership of Infrastructure Development companies, high net worth
private banks and companies through Capital Market. Requirements for NRBs &
Foreign Investors to invest in Bangladesh
o A Foreign Currency (FC) Account is needed for inward and outward remittance.
o A Non-resident Investor’s Taka Account (NITA) is required for converting foreign
currency into Taka.
o All Capital Market investors are required to conduct trading through a Stock Broking
Account
o maintained with any Stock Broker/Member of the respective Stock Exchange.
o In order to trade dematerialized shares listed with the Stock Exchanges, investors
must have a Beneficiary Owners (BO) Account with CDBL.
o NRB & Foreign Investors may choose to appoint a Custodian to ensure trade
execution and safe custody of shares.
Why NITA & Stock Broking Accounts
According to Chapter 14 9Sec-1 of Vol-1) of the Bangladesh Bank’s Foreign Exchange
Transaction Regulations, 1947:
o Non-resident persons/institutions including NRBs may buy securities in Bangladesh
against freely convertible foreign currency remitted from abroad through the banking
channel.
o Non-resident investors shall open a NITA with any Authorized Dealer (AD) in
Bangladesh (i.e. an authorized commercial bank/ bank branch)
o Balances in NITA may freely be used to buy Bangladeshi shares and such balance
including dividend and sale proceeds is freely remittable abroad in equivalent foreign
exchange.
o Purchase and sale of shares listed in Bangladesh Stock Exchanges shall be made
only through a member /registered broker of the Stock Exchange & purchase of new
public issues not yet listed with the stock exchange may be made directly from the
issuing company.
o No local funds except dividend/interest earning on securities, share sale proceeds &
freely
o convertible foreign currency remitted from abroad can be credited to NITA.
o No loan facilities shall be allowed in NITA.
How to invest through a Custodian in Bangladesh?
o Open a FC account and NITA with any AD of the Bangladesh Bank.
o Open a Custodian Account with any of the SEC registered Securities Custodian.
o Your Custodian will open a Stock Broking Account with any member of the Stock
Exchange.
o Custodian will act as an Operator of your Stock Broking Account.
o The Custodian will also open a BO Account with CDBL in order to trade
dematerialized shares and act as a POA to your BO Account.
o Remit foreign currency in the local FC Account from abroad with instruction to the
Custodian for crediting NITA.
o The Custodian will arrange payment to the member for crediting Stock Broking
Account.
o Send securities trading instruction to your Custodian through e-mail or fax.
o Receive securities transaction statement through e-mail or fax from your Custodian.
o Instruct your Custodian for remitting fund from Bangladesh to you.
o You can open FC Account, NITA, BO Account & Custodian Account with the same
bank and your Stock Broking Account can be opened at the same place provided the
bank has Custodian license, Subsidiary Brokerage & Authorized Dealership for one-
stop solution.
execution and safe custody of shares.
Why NITA & Stock Broking Accounts
According to Chapter 14 9Sec-1 of Vol-1) of the Bangladesh Bank’s Foreign Exchange
Transaction Regulations, 1947:
o Non-resident persons/institutions including NRBs may buy securities in Bangladesh
against freely convertible foreign currency remitted from abroad through the banking
channel.
o Non-resident investors shall open a NITA with any Authorized Dealer (AD) in
Bangladesh (i.e. an authorized commercial bank/ bank branch)
o Balances in NITA may freely be used to buy Bangladeshi shares and such balance
including dividend and sale proceeds is freely remittable abroad in equivalent foreign
exchange.
o Purchase and sale of shares listed in Bangladesh Stock Exchanges shall be made
only through a member /registered broker of the Stock Exchange & purchase of new
public issues not yet listed with the stock exchange may be made directly from the
issuing company.
o No local funds except dividend/interest earning on securities, share sale proceeds &
freely
o convertible foreign currency remitted from abroad can be credited to NITA.
o No loan facilities shall be allowed in NITA.
How to invest through a Custodian in Bangladesh?
o Open a FC account and NITA with any AD of the Bangladesh Bank.
o Open a Custodian Account with any of the SEC registered Securities Custodian.
o Your Custodian will open a Stock Broking Account with any member of the Stock
Exchange.
o Custodian will act as an Operator of your Stock Broking Account.
o The Custodian will also open a BO Account with CDBL in order to trade
dematerialized shares and act as a POA to your BO Account.
o Remit foreign currency in the local FC Account from abroad with instruction to the
Custodian for crediting NITA.
o The Custodian will arrange payment to the member for crediting Stock Broking
Account.
o Send securities trading instruction to your Custodian through e-mail or fax.
o Receive securities transaction statement through e-mail or fax from your Custodian.
o Instruct your Custodian for remitting fund from Bangladesh to you.
o You can open FC Account, NITA, BO Account & Custodian Account with the same
bank and your Stock Broking Account can be opened at the same place provided the
bank has Custodian license, Subsidiary Brokerage & Authorized Dealership for one-
stop solution.
Why BRAC Bank Limited?
Being your One-Stop Capital Market service provider, you can avail the following
services from BRAC Bank Limited under One-Umbrella:
1. NITA & FC Account opening
2. Stock Broking Account opening through its subsidiary BRAC EPL Stock Brokerage
Ltd.
3. BO Account opening
4. Custodian Account opening
Document Checklists
Required documents for
NITA and FC A/C
NRBs Foreign Nationals Foreign Institutions
Photocopy of passport Bangladeshi
Passport
Foreign Passport Passport of the CEO
Photographs (Account
holder)
4 copies PP size
(Attested by
introducer)
4 copies PP size
(Attested by
introducer)
4 copies PP size photos of
all signatories & authorized
persons
Photographs (Nominee) 2 copies PP size
(Attested by
Account holder)
2 copies PP
(Attested by
Account holder)
Not Applicable
Employee Statement/
Business Document
Required Required Not Applicable
Resident Permit Required Not Applicable Not Applicable
Memorandum &article of
Association, Tax
Certificate & Trade
License
Not Applicable Not Applicable Required
Approval from the Board
of Directors for Investment
& Authorized Person, if
any
Not Applicable Not Applicable Required
Required documents for
Stock Broking and BO
A/C
NRBs Foreign Nationals Foreign Institutions
Approval from the Board
of Directors for
Investment & Authorized
Person
Not Applicable Not Applicable Required
Photocopy of Passport Bangladeshi passport
(with valid visa), Foreign
Foreign Passport Passport of the Authorized
person
Being your One-Stop Capital Market service provider, you can avail the following
services from BRAC Bank Limited under One-Umbrella:
1. NITA & FC Account opening
2. Stock Broking Account opening through its subsidiary BRAC EPL Stock Brokerage
Ltd.
3. BO Account opening
4. Custodian Account opening
Document Checklists
Required documents for
NITA and FC A/C
NRBs Foreign Nationals Foreign Institutions
Photocopy of passport Bangladeshi
Passport
Foreign Passport Passport of the CEO
Photographs (Account
holder)
4 copies PP size
(Attested by
introducer)
4 copies PP size
(Attested by
introducer)
4 copies PP size photos of
all signatories & authorized
persons
Photographs (Nominee) 2 copies PP size
(Attested by
Account holder)
2 copies PP
(Attested by
Account holder)
Not Applicable
Employee Statement/
Business Document
Required Required Not Applicable
Resident Permit Required Not Applicable Not Applicable
Memorandum &article of
Association, Tax
Certificate & Trade
License
Not Applicable Not Applicable Required
Approval from the Board
of Directors for Investment
& Authorized Person, if
any
Not Applicable Not Applicable Required
Required documents for
Stock Broking and BO
A/C
NRBs Foreign Nationals Foreign Institutions
Approval from the Board
of Directors for
Investment & Authorized
Person
Not Applicable Not Applicable Required
Photocopy of Passport Bangladeshi passport
(with valid visa), Foreign
Foreign Passport Passport of the Authorized
person
passport (with no
obligations seal from
Bangladesh Embassy)
Photographs (Account
holder)
3 copies PP size (Attested
by introducer)
3 copies PP size
(Attested by introducer)
Not Applicable
Photographs (Authorized
Person)
2 copies (Attested by
Account holder)
2 copies (Attested by
Account holder)
3 copies PP size
Power of Attorney
(Photographs of POA)
Required (2 copies PP
size Attested by Account
holder)
Not required Not required
Photographs (Nominee) 1 copy PP size (Attested
by Account holder)
1 copy PP size (Attested
by Account holder)
Not Applicable
Bank A/c number
certificate/statement
FC account FC account & NITA FC account & NITA
Memorandum & Article of
Association
Not Applicable Not Applicable Required
Required documents for
Custodian A/C
NRBs Foreign Nationals Foreign Institutions
Approval from the Board of
Directors for Investment &
Authorized Person
Not Applicable Not Applicable Required
Photocopy of Passport Bangladeshi passport Foreign Passport Passport of the Authorized
person
Photographs (Account
holder)
3 copies pp size 3 copies pp size Not Applicable
Photographs (Authorized
person)
2 Copies pp size (attested
by account holder)
2 Copies pp size
(attested by account
holder)
3 copies pp size (authorized
person by board)
Photographs (Nominee) 1 copy PP size (Attested
by Account holder)
1 copy PP size (Attested
by Account holder)
Not Applicable
Bank A/C No.
Certificate/Statement
FC account & NITA FC account & NITA FC account & NITA
Memorandum & Article of
Association
Not Applicable Not Applicable Required
Work Permit Required Not Applicable Not Applicable
Insider trading
obligations seal from
Bangladesh Embassy)
Photographs (Account
holder)
3 copies PP size (Attested
by introducer)
3 copies PP size
(Attested by introducer)
Not Applicable
Photographs (Authorized
Person)
2 copies (Attested by
Account holder)
2 copies (Attested by
Account holder)
3 copies PP size
Power of Attorney
(Photographs of POA)
Required (2 copies PP
size Attested by Account
holder)
Not required Not required
Photographs (Nominee) 1 copy PP size (Attested
by Account holder)
1 copy PP size (Attested
by Account holder)
Not Applicable
Bank A/c number
certificate/statement
FC account FC account & NITA FC account & NITA
Memorandum & Article of
Association
Not Applicable Not Applicable Required
Required documents for
Custodian A/C
NRBs Foreign Nationals Foreign Institutions
Approval from the Board of
Directors for Investment &
Authorized Person
Not Applicable Not Applicable Required
Photocopy of Passport Bangladeshi passport Foreign Passport Passport of the Authorized
person
Photographs (Account
holder)
3 copies pp size 3 copies pp size Not Applicable
Photographs (Authorized
person)
2 Copies pp size (attested
by account holder)
2 Copies pp size
(attested by account
holder)
3 copies pp size (authorized
person by board)
Photographs (Nominee) 1 copy PP size (Attested
by Account holder)
1 copy PP size (Attested
by Account holder)
Not Applicable
Bank A/C No.
Certificate/Statement
FC account & NITA FC account & NITA FC account & NITA
Memorandum & Article of
Association
Not Applicable Not Applicable Required
Work Permit Required Not Applicable Not Applicable
Insider trading
From Wikipedia, the free encyclopedia
Jump to: navigation, search
Criminal law
Part of the common law series
Element (criminal law)
Actus reus
Mens rea
Causation
Concurrence
Scope of criminal liability
Complicity
Corporate
Vicarious
Inchoate offenses
Attempt
Conspiracy
Solicitation
Offence against the person
Assault
Battery
False imprisonment
Kidnapping
Mayhem
Jump to: navigation, search
Criminal law
Part of the common law series
Element (criminal law)
Actus reus
Mens rea
Causation
Concurrence
Scope of criminal liability
Complicity
Corporate
Vicarious
Inchoate offenses
Attempt
Conspiracy
Solicitation
Offence against the person
Assault
Battery
False imprisonment
Kidnapping
Mayhem
Sexual assault
Homicide crimes
Murder
Felony murder
Manslaughter
Negligent homicide
Vehicular homicide
Crimes against property
Arson
Blackmail
Burglary
Embezzlement
Extortion
False pretenses
Fraud
Larceny
Possessing stolen property
Robbery
Theft
Crimes against justice
Compounding
Misprision
Homicide crimes
Murder
Felony murder
Manslaughter
Negligent homicide
Vehicular homicide
Crimes against property
Arson
Blackmail
Burglary
Embezzlement
Extortion
False pretenses
Fraud
Larceny
Possessing stolen property
Robbery
Theft
Crimes against justice
Compounding
Misprision
Obstruction
Perjury
Malfeasance in office
Perverting the course of justice
Defenses to liability
Defense of self
Defence of property
Consent
Diminished responsibility
Duress
Entrapment
Ignorantia juris non excusat
Infancy
Insanity
Intoxication defense
Justification
Mistake (of law)
Necessity
Loss of Control (Provocation)
Other common law areas
Contracts
Evidence
Property
Perjury
Malfeasance in office
Perverting the course of justice
Defenses to liability
Defense of self
Defence of property
Consent
Diminished responsibility
Duress
Entrapment
Ignorantia juris non excusat
Infancy
Insanity
Intoxication defense
Justification
Mistake (of law)
Necessity
Loss of Control (Provocation)
Other common law areas
Contracts
Evidence
Property
Torts
Wills, trusts and estates
Portals
Criminal justice
Law
v
t
e
Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock
options) by individuals with potential access to non-public information about the company. In
most countries, trading by corporate insiders such as officers, key employees, directors, and large
shareholders may be legal, if this trading is done in a way that does not take advantage of non-
public information. However, the term is frequently used to refer to a practice in which an insider
or a related party trades based on material non-public information obtained during the
performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or
other relationship of trust and confidence or where the non-public information was
misappropriated from the company.
[1]
In the United States and several other jurisdictions, trading conducted by corporate officers, key
employees, directors, or significant shareholders (in the U.S., defined as beneficial owners of ten
percent or more of the firm's equity securities) must be reported to the regulator or publicly
disclosed, usually within a few business days of the trade. Many investors follow the summaries
of these insider trades in the hope that mimicking these trades will be profitable. While "legal"
insider trading cannot be based on material non-public information, some investors believe
corporate insiders nonetheless may have better insights into the health of a corporation (broadly
speaking) and that their trades otherwise convey important information (e.g., about the pending
retirement of an important officer selling shares, greater commitment to the corporation by
officers purchasing shares, etc.)
Illegal insider trading is believed to raise the cost of capital for securities issuers, thus decreasing
overall economic growth.
[2]
However, it is relatively easy for insiders to capture insider-trading like gains through the use of
transactions known as "open market repurchases." Such transactions are legal and generally
encouraged by regulators through safeharbours against insider trading liability.
[3][4]
Wills, trusts and estates
Portals
Criminal justice
Law
v
t
e
Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock
options) by individuals with potential access to non-public information about the company. In
most countries, trading by corporate insiders such as officers, key employees, directors, and large
shareholders may be legal, if this trading is done in a way that does not take advantage of non-
public information. However, the term is frequently used to refer to a practice in which an insider
or a related party trades based on material non-public information obtained during the
performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or
other relationship of trust and confidence or where the non-public information was
misappropriated from the company.
[1]
In the United States and several other jurisdictions, trading conducted by corporate officers, key
employees, directors, or significant shareholders (in the U.S., defined as beneficial owners of ten
percent or more of the firm's equity securities) must be reported to the regulator or publicly
disclosed, usually within a few business days of the trade. Many investors follow the summaries
of these insider trades in the hope that mimicking these trades will be profitable. While "legal"
insider trading cannot be based on material non-public information, some investors believe
corporate insiders nonetheless may have better insights into the health of a corporation (broadly
speaking) and that their trades otherwise convey important information (e.g., about the pending
retirement of an important officer selling shares, greater commitment to the corporation by
officers purchasing shares, etc.)
Illegal insider trading is believed to raise the cost of capital for securities issuers, thus decreasing
overall economic growth.
[2]
However, it is relatively easy for insiders to capture insider-trading like gains through the use of
transactions known as "open market repurchases." Such transactions are legal and generally
encouraged by regulators through safeharbours against insider trading liability.
[3][4]
Contents
1 Legal insider trading
2 Illegal insider trading
o 2.1 Definition of "insider"
o 2.2 Liability for insider trading
o 2.3 Misappropriation theory
o 2.4 Proof of responsibility
o 2.5 Trading on information in general
o 2.6 Tracking insider trades
3 American insider trading law
o 3.1 Common law
o 3.2 SEC regulations
o 3.3 Court decisions
o 3.4 Insider trading by members of Congress
4 Security analysis and insider trading
5 Arguments for legalizing insider trading
6 Legal differences among jurisdictions
7 By nation
o 7.1 Norway
8 See also
9 Notes
10 References
11 External links
Legal insider trading
Legal trades by insiders are common, as employees of publicly traded corporations often have
stock or stock options. These trades are made public in the United States through Securities and
Exchange Commission filings, mainly Form 4. Prior to 2001, U.S. law restricted trading such
that insiders mainly traded during windows when their inside information was public, such as
soon after earnings releases.
[5]
SEC Rule 10b5-1 clarified that the prohibition against insider
trading does not require proof that an insider actually used material nonpublic information when
conducting a trade; possession of such information alone is sufficient to violate the provision,
and the SEC would infer that an insider in possession of material nonpublic information used this
information when conducting a trade. However, SEC Rule 10b5-1 also created for insiders an
affirmative defense if the insider can demonstrate that the trades conducted on behalf of the
insider were conducted as part of a pre-existing contract or written binding plan for trading in the
future.
[5]
For example, if an insider expects to retire after a specific period of time and, as part of
his or her retirement planning, the insider has adopted a written binding plan to sell a specific
amount of the company's stock every month for two years and later comes into possession of
material nonpublic information about the company, trades based on the original plan might not
constitute prohibited insider trading.
1 Legal insider trading
2 Illegal insider trading
o 2.1 Definition of "insider"
o 2.2 Liability for insider trading
o 2.3 Misappropriation theory
o 2.4 Proof of responsibility
o 2.5 Trading on information in general
o 2.6 Tracking insider trades
3 American insider trading law
o 3.1 Common law
o 3.2 SEC regulations
o 3.3 Court decisions
o 3.4 Insider trading by members of Congress
4 Security analysis and insider trading
5 Arguments for legalizing insider trading
6 Legal differences among jurisdictions
7 By nation
o 7.1 Norway
8 See also
9 Notes
10 References
11 External links
Legal insider trading
Legal trades by insiders are common, as employees of publicly traded corporations often have
stock or stock options. These trades are made public in the United States through Securities and
Exchange Commission filings, mainly Form 4. Prior to 2001, U.S. law restricted trading such
that insiders mainly traded during windows when their inside information was public, such as
soon after earnings releases.
[5]
SEC Rule 10b5-1 clarified that the prohibition against insider
trading does not require proof that an insider actually used material nonpublic information when
conducting a trade; possession of such information alone is sufficient to violate the provision,
and the SEC would infer that an insider in possession of material nonpublic information used this
information when conducting a trade. However, SEC Rule 10b5-1 also created for insiders an
affirmative defense if the insider can demonstrate that the trades conducted on behalf of the
insider were conducted as part of a pre-existing contract or written binding plan for trading in the
future.
[5]
For example, if an insider expects to retire after a specific period of time and, as part of
his or her retirement planning, the insider has adopted a written binding plan to sell a specific
amount of the company's stock every month for two years and later comes into possession of
material nonpublic information about the company, trades based on the original plan might not
constitute prohibited insider trading.
Illegal insider trading
Rules against insider trading on material non-public information exist in most jurisdictions
around the world, though the details and the efforts to enforce them vary considerably. Sections
16(b) and 10(b) of the Securities Exchange Act of 1934 directly and indirectly address insider
trading. Congress enacted this act after the stock market crash of 1929.
[6]
The United States is
generally viewed as having the strictest laws against illegal insider trading, and makes the most
serious efforts to enforce them.
[7]
Definition of "insider"
In the United States and Germany, for mandatory reporting purposes, corporate insiders are
defined as a company's officers, directors and any beneficial owners of more than ten percent of
a class of the company's equity securities. Trades made by these types of insiders in the
company's own stock, based on material non-public information, are considered to be fraudulent
since the insiders are violating the fiduciary duty that they owe to the shareholders. The
corporate insider, simply by accepting employment, has undertaken a legal obligation to the
shareholders to put the shareholders' interests before their own, in matters related to the
corporation. When the insider buys or sells based upon company owned information, he is
violating his obligation to the shareholders.
For example, illegal insider trading would occur if the chief executive officer of Company A
learned (prior to a public announcement) that Company A will be taken over, and bought shares
in Company A knowing that the share price would likely rise.
In the United States and many other jurisdictions, however, "insiders" are not just limited to
corporate officials and major shareholders where illegal insider trading is concerned, but can
include any individual who trades shares based on material non-public information in violation
of some duty of trust. This duty may be imputed; for example, in many jurisdictions, in cases of
where a corporate insider "tips" a friend about non-public information likely to have an effect on
the company's share price, the duty the corporate insider owes the company is now imputed to
the friend and the friend violates a duty to the company if he or she trades on the basis of this
information.
Liability for insider trading
Liability for inside trading violations cannot be avoided by passing on the information in an "I
scratch your back, you scratch mine" or quid pro quo arrangement, as long as the person
receiving the information knew or should have known that the information was company
property. It should be noted that when allegations of a potential inside deal occur, all parties that
may have been involved are at risk of being found guilty.
For example, if Company A's CEO did not trade on the undisclosed takeover news, but instead
passed the information on to his brother-in-law who traded on it, illegal insider trading would
still have occurred (albeit by proxy by passing it on to a "non-insider" so Company A's CEO
wouldn't get his hands dirty).
[8]
Rules against insider trading on material non-public information exist in most jurisdictions
around the world, though the details and the efforts to enforce them vary considerably. Sections
16(b) and 10(b) of the Securities Exchange Act of 1934 directly and indirectly address insider
trading. Congress enacted this act after the stock market crash of 1929.
[6]
The United States is
generally viewed as having the strictest laws against illegal insider trading, and makes the most
serious efforts to enforce them.
[7]
Definition of "insider"
In the United States and Germany, for mandatory reporting purposes, corporate insiders are
defined as a company's officers, directors and any beneficial owners of more than ten percent of
a class of the company's equity securities. Trades made by these types of insiders in the
company's own stock, based on material non-public information, are considered to be fraudulent
since the insiders are violating the fiduciary duty that they owe to the shareholders. The
corporate insider, simply by accepting employment, has undertaken a legal obligation to the
shareholders to put the shareholders' interests before their own, in matters related to the
corporation. When the insider buys or sells based upon company owned information, he is
violating his obligation to the shareholders.
For example, illegal insider trading would occur if the chief executive officer of Company A
learned (prior to a public announcement) that Company A will be taken over, and bought shares
in Company A knowing that the share price would likely rise.
In the United States and many other jurisdictions, however, "insiders" are not just limited to
corporate officials and major shareholders where illegal insider trading is concerned, but can
include any individual who trades shares based on material non-public information in violation
of some duty of trust. This duty may be imputed; for example, in many jurisdictions, in cases of
where a corporate insider "tips" a friend about non-public information likely to have an effect on
the company's share price, the duty the corporate insider owes the company is now imputed to
the friend and the friend violates a duty to the company if he or she trades on the basis of this
information.
Liability for insider trading
Liability for inside trading violations cannot be avoided by passing on the information in an "I
scratch your back, you scratch mine" or quid pro quo arrangement, as long as the person
receiving the information knew or should have known that the information was company
property. It should be noted that when allegations of a potential inside deal occur, all parties that
may have been involved are at risk of being found guilty.
For example, if Company A's CEO did not trade on the undisclosed takeover news, but instead
passed the information on to his brother-in-law who traded on it, illegal insider trading would
still have occurred (albeit by proxy by passing it on to a "non-insider" so Company A's CEO
wouldn't get his hands dirty).
[8]
Misappropriation theory
A newer view of insider trading, the "misappropriation theory," is now part of US law. It states
that anyone who misappropriates (steals) information from their employer and trades on that
information in any stock (either the employer's stock or the company's competitor stocks) is
guilty of insider trading.
For example, if a journalist who worked for Company B learned about the takeover of Company
A while performing his work duties, and bought stock in Company A, illegal insider trading
might still have occurred. Even though the journalist did not violate a fiduciary duty to Company
A's shareholders, he might have violated a fiduciary duty to Company B's shareholders
(assuming the newspaper had a policy of not allowing reporters to trade on stories they were
covering).
[9]
Proof of responsibility
Proving that someone has been responsible for a trade can be difficult, because traders may try to
hide behind nominees, offshore companies, and other proxies. Nevertheless, the U.S. Securities
and Exchange Commission prosecutes over 50 cases each year, with many being settled
administratively out of court. The SEC and several stock exchanges actively monitor trading,
looking for suspicious activity.
Trading on information in general
Not all trading on information is illegal insider trading, however. For example: if, while dining at
a restaurant, you hear the CEO of Company A at the next table telling the CFO that the
company's profits will be higher than expected, and then you buy the stock, you are not guilty of
insider trading unless there was some closer connection between you, the company, or the
company officers. However, information about a tender offer (usually regarding a merger or
acquisition) is held to a higher standard. If this type of information is obtained (directly or
indirectly) and there is reason to believe it is non-public, there is a duty to disclose it or abstain
from trading.
[10]
Tracking insider trades
Since insiders are required to report their trades, others often track these traders, and there is a
school of investing which follows the lead of insiders. This is of course subject to the risk that an
insider is making a buy specifically to increase investor confidence, or making a sell for reasons
unrelated to the health of the company (e.g. a desire to diversify or pay a personal expense).
American insider trading law
The United States has been the leading country in prohibiting insider trading made on the basis
of material non-public information. Thomas Newkirk and Melissa Robertson of the U.S.
A newer view of insider trading, the "misappropriation theory," is now part of US law. It states
that anyone who misappropriates (steals) information from their employer and trades on that
information in any stock (either the employer's stock or the company's competitor stocks) is
guilty of insider trading.
For example, if a journalist who worked for Company B learned about the takeover of Company
A while performing his work duties, and bought stock in Company A, illegal insider trading
might still have occurred. Even though the journalist did not violate a fiduciary duty to Company
A's shareholders, he might have violated a fiduciary duty to Company B's shareholders
(assuming the newspaper had a policy of not allowing reporters to trade on stories they were
covering).
[9]
Proof of responsibility
Proving that someone has been responsible for a trade can be difficult, because traders may try to
hide behind nominees, offshore companies, and other proxies. Nevertheless, the U.S. Securities
and Exchange Commission prosecutes over 50 cases each year, with many being settled
administratively out of court. The SEC and several stock exchanges actively monitor trading,
looking for suspicious activity.
Trading on information in general
Not all trading on information is illegal insider trading, however. For example: if, while dining at
a restaurant, you hear the CEO of Company A at the next table telling the CFO that the
company's profits will be higher than expected, and then you buy the stock, you are not guilty of
insider trading unless there was some closer connection between you, the company, or the
company officers. However, information about a tender offer (usually regarding a merger or
acquisition) is held to a higher standard. If this type of information is obtained (directly or
indirectly) and there is reason to believe it is non-public, there is a duty to disclose it or abstain
from trading.
[10]
Tracking insider trades
Since insiders are required to report their trades, others often track these traders, and there is a
school of investing which follows the lead of insiders. This is of course subject to the risk that an
insider is making a buy specifically to increase investor confidence, or making a sell for reasons
unrelated to the health of the company (e.g. a desire to diversify or pay a personal expense).
American insider trading law
The United States has been the leading country in prohibiting insider trading made on the basis
of material non-public information. Thomas Newkirk and Melissa Robertson of the U.S.
Securities and Exchange Commission (SEC) summarize the development of U.S. insider trading
laws.
[11]
Insider trading has a base offense level of 8, which puts it in Zone A under the U.S.
Sentencing Guidelines. This means that first-time offenders are eligible to receive probation
rather than incarceration.
[12]
Members of the U.S. Congress are not exempt from the laws that ban insider trading, however,
they generally do not have a confidential or fiduciary relationship with the source of the
information they receive and accordingly, do not meet the definition of an "insider".
[13]
Common law
U.S. insider trading prohibitions are based on English and American common law prohibitions
against fraud. In 1909, well before the Securities Exchange Act was passed, the United States
Supreme Court ruled that a corporate director who bought that company’s stock when he knew it
was about to jump up in price committed fraud by buying while not disclosing his inside
information.
Section 15 of the Securities Act of 1933
[14]
contained prohibitions of fraud in the sale of
securities which were greatly strengthened by the Securities Exchange Act of 1934.
[15]
Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits (from any
purchases and sales within any six month period) made by corporate directors, officers, or
stockholders owning more than 10% of a firm’s shares. Under Section 10(b) of the 1934 Act,
SEC Rule 10b-5, prohibits fraud related to securities trading.
The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud
Enforcement Act of 1988 provide for penalties for illegal insider trading to be as high as three
times the profit gained or the loss avoided from the illegal trading.
[16]
SEC regulations
SEC regulation FD ("Fair Disclosure") requires that if a company intentionally discloses material
non-public information to one person, it must simultaneously disclose that information to the
public at large. In the case of an unintentional disclosure of material non-public information to
one person, the company must make a public disclosure "promptly."
[17]
Insider trading, or similar practices, are also regulated by the SEC under its rules on takeovers
and tender offers under the Williams Act.
Court decisions
Much of the development of insider trading law has resulted from court decisions.
In SEC v. Texas Gulf Sulphur Co. (1966), a federal circuit court stated that anyone in possession
of inside information must either disclose the information or refrain from trading.
[18]
laws.
[11]
Insider trading has a base offense level of 8, which puts it in Zone A under the U.S.
Sentencing Guidelines. This means that first-time offenders are eligible to receive probation
rather than incarceration.
[12]
Members of the U.S. Congress are not exempt from the laws that ban insider trading, however,
they generally do not have a confidential or fiduciary relationship with the source of the
information they receive and accordingly, do not meet the definition of an "insider".
[13]
Common law
U.S. insider trading prohibitions are based on English and American common law prohibitions
against fraud. In 1909, well before the Securities Exchange Act was passed, the United States
Supreme Court ruled that a corporate director who bought that company’s stock when he knew it
was about to jump up in price committed fraud by buying while not disclosing his inside
information.
Section 15 of the Securities Act of 1933
[14]
contained prohibitions of fraud in the sale of
securities which were greatly strengthened by the Securities Exchange Act of 1934.
[15]
Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits (from any
purchases and sales within any six month period) made by corporate directors, officers, or
stockholders owning more than 10% of a firm’s shares. Under Section 10(b) of the 1934 Act,
SEC Rule 10b-5, prohibits fraud related to securities trading.
The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud
Enforcement Act of 1988 provide for penalties for illegal insider trading to be as high as three
times the profit gained or the loss avoided from the illegal trading.
[16]
SEC regulations
SEC regulation FD ("Fair Disclosure") requires that if a company intentionally discloses material
non-public information to one person, it must simultaneously disclose that information to the
public at large. In the case of an unintentional disclosure of material non-public information to
one person, the company must make a public disclosure "promptly."
[17]
Insider trading, or similar practices, are also regulated by the SEC under its rules on takeovers
and tender offers under the Williams Act.
Court decisions
Much of the development of insider trading law has resulted from court decisions.
In SEC v. Texas Gulf Sulphur Co. (1966), a federal circuit court stated that anyone in possession
of inside information must either disclose the information or refrain from trading.
[18]
In 1909, the Supreme Court of the United States ruled in Strong v. Repide that a director upon
whose action the value of the shares depends cannot avail of his knowledge of what his own
action will be to acquire shares from those whom he intentionally keeps in ignorance of his
expected action and the resulting value of the shares. Even though in general, ordinary relations
between directors and shareholders in a business corporation are not of such a fiduciary nature as
to make it the duty of a director to disclose to a shareholder the general knowledge which he may
possess regarding the value of the shares of the company before he purchases any from a
shareholder, yet there are cases where, by reason of the special facts, such duty exists.
In 1984, the Supreme Court of the United States ruled in the case of Dirks v. SEC that tippees
(receivers of second-hand information) are liable if they had reason to believe that the tipper had
breached a fiduciary duty in disclosing confidential information and the tipper received any
personal benefit from the disclosure. (Since Dirks disclosed the information in order to expose a
fraud, rather than for personal gain, nobody was liable for insider trading violations in his case.)
The Dirks case also defined the concept of "constructive insiders," who are lawyers, investment
bankers and others who receive confidential information from a corporation while providing
services to the corporation. Constructive insiders are also liable for insider trading violations if
the corporation expects the information to remain confidential, since they acquire the fiduciary
duties of the true insider.
In United States v. Carpenter (1986) the U.S. Supreme Court cited an earlier ruling while
unanimously upholding mail and wire fraud convictions for a defendant who received his
information from a journalist rather than from the company itself. The journalist R. Foster
Winans was also convicted, on the grounds that he had misappropriated information belonging to
his employer, the Wall Street Journal. In that widely publicized case, Winans traded in advance
of "Heard on the Street" columns appearing in the Journal.
[19]
The court ruled in Carpenter: "It is well established, as a general proposition, that a person who
acquires special knowledge or information by virtue of a confidential or fiduciary relationship
with another is not free to exploit that knowledge or information for his own personal benefit but
must account to his principal for any profits derived therefrom."
However, in upholding the securities fraud (insider trading) convictions, the justices were evenly
split.
In 1997 the U.S. Supreme Court adopted the misappropriation theory of insider trading in United
States v. O'Hagan, 521 U.S. 642, 655 (1997). O'Hagan was a partner in a law firm representing
Grand Metropolitan, while it was considering a tender offer for Pillsbury Co. O'Hagan used this
inside information by buying call options on Pillsbury stock, resulting in profits of over $4
million. O'Hagan claimed that neither he nor his firm owed a fiduciary duty to Pillsbury, so that
he did not commit fraud by purchasing Pillsbury options.
[20]
The Court rejected O'Hagan's arguments and upheld his conviction.
whose action the value of the shares depends cannot avail of his knowledge of what his own
action will be to acquire shares from those whom he intentionally keeps in ignorance of his
expected action and the resulting value of the shares. Even though in general, ordinary relations
between directors and shareholders in a business corporation are not of such a fiduciary nature as
to make it the duty of a director to disclose to a shareholder the general knowledge which he may
possess regarding the value of the shares of the company before he purchases any from a
shareholder, yet there are cases where, by reason of the special facts, such duty exists.
In 1984, the Supreme Court of the United States ruled in the case of Dirks v. SEC that tippees
(receivers of second-hand information) are liable if they had reason to believe that the tipper had
breached a fiduciary duty in disclosing confidential information and the tipper received any
personal benefit from the disclosure. (Since Dirks disclosed the information in order to expose a
fraud, rather than for personal gain, nobody was liable for insider trading violations in his case.)
The Dirks case also defined the concept of "constructive insiders," who are lawyers, investment
bankers and others who receive confidential information from a corporation while providing
services to the corporation. Constructive insiders are also liable for insider trading violations if
the corporation expects the information to remain confidential, since they acquire the fiduciary
duties of the true insider.
In United States v. Carpenter (1986) the U.S. Supreme Court cited an earlier ruling while
unanimously upholding mail and wire fraud convictions for a defendant who received his
information from a journalist rather than from the company itself. The journalist R. Foster
Winans was also convicted, on the grounds that he had misappropriated information belonging to
his employer, the Wall Street Journal. In that widely publicized case, Winans traded in advance
of "Heard on the Street" columns appearing in the Journal.
[19]
The court ruled in Carpenter: "It is well established, as a general proposition, that a person who
acquires special knowledge or information by virtue of a confidential or fiduciary relationship
with another is not free to exploit that knowledge or information for his own personal benefit but
must account to his principal for any profits derived therefrom."
However, in upholding the securities fraud (insider trading) convictions, the justices were evenly
split.
In 1997 the U.S. Supreme Court adopted the misappropriation theory of insider trading in United
States v. O'Hagan, 521 U.S. 642, 655 (1997). O'Hagan was a partner in a law firm representing
Grand Metropolitan, while it was considering a tender offer for Pillsbury Co. O'Hagan used this
inside information by buying call options on Pillsbury stock, resulting in profits of over $4
million. O'Hagan claimed that neither he nor his firm owed a fiduciary duty to Pillsbury, so that
he did not commit fraud by purchasing Pillsbury options.
[20]
The Court rejected O'Hagan's arguments and upheld his conviction.
The "misappropriation theory" holds that a person commits fraud "in connection with" a
securities transaction, and thereby violates 10(b) and Rule 10b-5, when he misappropriates
confidential information for securities trading purposes, in breach of a duty owed to the source of
the information. Under this theory, a fiduciary's undisclosed, self-serving use of a principal's
information to purchase or sell securities, in breach of a duty of loyalty and confidentiality,
defrauds the principal of the exclusive use of the information. In lieu of premising liability on a
fiduciary relationship between company insider and purchaser or seller of the company's stock,
the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those
who entrusted him with access to confidential information.
The Court specifically recognized that a corporation’s information is its property: "A company's
confidential information...qualifies as property to which the company has a right of exclusive
use. The undisclosed misappropriation of such information in violation of a fiduciary
duty...constitutes fraud akin to embezzlement – the fraudulent appropriation to one's own use of
the money or goods entrusted to one's care by another."
In 2000, the SEC enacted Rule 10b5-1, which defined trading "on the basis of" inside
information as any time a person trades while aware of material nonpublic information – so that
it is no defense for one to say that she would have made the trade anyway. This rule also created
an affirmative defense for pre-planned trades.
Insider trading by members of Congress
Members of Congress are exempted from insider trading laws and thus can act on information
they are bound to gain in the course of their congressional activities, although house rules
[21]
may consider it unethical. A 2004 study found that stock sales and purchases by Senators
outperformed the market by 12.3% per year.
[citation needed]
Peter Schweizer points out several
examples of insider trading by members of Congress, including action taken by Spencer Bachus
following a private, behind-the-doors meeting on the evening of September 18, 2008 when Hank
Paulson and Ben Bernanke informed members of Congress about the imminent financial crisis,
Bachus then shorted stocks the next morning and cashed in his profits within a week.
[22]
Also
attending the same meeting were Senator Dick Durbin and John Boehner; the same day (trade
effective the next day), Durbin sold mutual-fund shares worth $42,696, and reinvested it all with
Warren Buffett. Also the same day (trade effective the next day), Congressman Boehner cashed
out of an equity mutual fund.
[23][24]
Security analysis and insider trading
Security analysts gather and compile information, talk to corporate officers and other insiders,
and issue recommendations to traders. Thus their activities may easily cross legal lines if they are
not especially careful. The CFA Institute in its code of ethics states that analysts should make
every effort to make all reports available to all the broker's clients on a timely basis. Analysts
should never report material nonpublic information, except in an effort to make that information
available to the general public. Nevertheless, analysts' reports may contain a variety of
information that is "pieced together" without violating insider trading laws, under the Mosaic
securities transaction, and thereby violates 10(b) and Rule 10b-5, when he misappropriates
confidential information for securities trading purposes, in breach of a duty owed to the source of
the information. Under this theory, a fiduciary's undisclosed, self-serving use of a principal's
information to purchase or sell securities, in breach of a duty of loyalty and confidentiality,
defrauds the principal of the exclusive use of the information. In lieu of premising liability on a
fiduciary relationship between company insider and purchaser or seller of the company's stock,
the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those
who entrusted him with access to confidential information.
The Court specifically recognized that a corporation’s information is its property: "A company's
confidential information...qualifies as property to which the company has a right of exclusive
use. The undisclosed misappropriation of such information in violation of a fiduciary
duty...constitutes fraud akin to embezzlement – the fraudulent appropriation to one's own use of
the money or goods entrusted to one's care by another."
In 2000, the SEC enacted Rule 10b5-1, which defined trading "on the basis of" inside
information as any time a person trades while aware of material nonpublic information – so that
it is no defense for one to say that she would have made the trade anyway. This rule also created
an affirmative defense for pre-planned trades.
Insider trading by members of Congress
Members of Congress are exempted from insider trading laws and thus can act on information
they are bound to gain in the course of their congressional activities, although house rules
[21]
may consider it unethical. A 2004 study found that stock sales and purchases by Senators
outperformed the market by 12.3% per year.
[citation needed]
Peter Schweizer points out several
examples of insider trading by members of Congress, including action taken by Spencer Bachus
following a private, behind-the-doors meeting on the evening of September 18, 2008 when Hank
Paulson and Ben Bernanke informed members of Congress about the imminent financial crisis,
Bachus then shorted stocks the next morning and cashed in his profits within a week.
[22]
Also
attending the same meeting were Senator Dick Durbin and John Boehner; the same day (trade
effective the next day), Durbin sold mutual-fund shares worth $42,696, and reinvested it all with
Warren Buffett. Also the same day (trade effective the next day), Congressman Boehner cashed
out of an equity mutual fund.
[23][24]
Security analysis and insider trading
Security analysts gather and compile information, talk to corporate officers and other insiders,
and issue recommendations to traders. Thus their activities may easily cross legal lines if they are
not especially careful. The CFA Institute in its code of ethics states that analysts should make
every effort to make all reports available to all the broker's clients on a timely basis. Analysts
should never report material nonpublic information, except in an effort to make that information
available to the general public. Nevertheless, analysts' reports may contain a variety of
information that is "pieced together" without violating insider trading laws, under the Mosaic
theory.
[25]
This information may include non-material nonpublic information as well as material
public information, which may increase in value when properly compiled and documented.
In May 2007, a bill entitled the "Stop Trading on Congressional Knowledge Act, or STOCK
Act" was introduced that would hold congressional and federal employees liable for stock trades
they made using information they gained through their jobs and also regulate analysts or
"Political Intelligence" firms that research government activities.
[26]
The bill has not passed.
[27]
Arguments for legalizing insider trading
Some economists and legal scholars (e.g. Henry Manne, Milton Friedman, Thomas Sowell,
Daniel Fischel, Frank H. Easterbrook) argue that laws making insider trading illegal should be
revoked. They claim that insider trading based on material nonpublic information benefits
investors, in general, by more quickly introducing new information into the market.
[28]
Milton Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more
insider trading, not less. You want to give the people most likely to have knowledge about
deficiencies of the company an incentive to make the public aware of that." Friedman did not
believe that the trader should be required to make his trade known to the public, because the
buying or selling pressure itself is information for the market.
[29]
Other critics argue that insider trading is a victimless act: A willing buyer and a willing seller
agree to trade property which the seller rightfully owns, with no prior contract (according to this
view) having been made between the parties to refrain from trading if there is asymmetric
information. The Atlantic has described the process as "arguably the closest thing that modern
finance has to a victimless crime".
[30]
Legalization advocates also question why "trading" where one party has more information than
the other is legal in other markets, such as real estate, but not in the stock market. For example, if
a geologist knows there is a high likelihood of the discovery of petroleum under Farmer Smith's
land, he may be entitled to make Smith an offer for the land, and buy it, without first telling
Farmer Smith of the geological data.
[18]
Nevertheless, circumstances can occur when the
geologist would be committing fraud if, because he owes a duty to the farmer, he did not disclose
the information; e.g., if he had been hired by Farmer Smith to assess the geology of the farm.
Advocates of legalization make free speech arguments. Punishment for communicating about a
development pertinent to the next day's stock price might seem to be an act of censorship.
[31]
If
the information being conveyed is proprietary information and the corporate insider has
contracted to not expose it, he has no more right to communicate it than he would to tell others
about the company's confidential new product designs, formulas, or bank account passwords.
There are very limited laws against "insider trading" in the commodities markets, if, for no other
reason, than that the concept of an "insider" is not immediately analogous to commodities
themselves (e.g., corn, wheat, steel, etc.). However, analogous activities such as front running are
illegal under U.S. commodity and futures trading laws. For example, a commodity broker can be
charged with fraud if he or she receives a large purchase order from a client (one likely to affect
[25]
This information may include non-material nonpublic information as well as material
public information, which may increase in value when properly compiled and documented.
In May 2007, a bill entitled the "Stop Trading on Congressional Knowledge Act, or STOCK
Act" was introduced that would hold congressional and federal employees liable for stock trades
they made using information they gained through their jobs and also regulate analysts or
"Political Intelligence" firms that research government activities.
[26]
The bill has not passed.
[27]
Arguments for legalizing insider trading
Some economists and legal scholars (e.g. Henry Manne, Milton Friedman, Thomas Sowell,
Daniel Fischel, Frank H. Easterbrook) argue that laws making insider trading illegal should be
revoked. They claim that insider trading based on material nonpublic information benefits
investors, in general, by more quickly introducing new information into the market.
[28]
Milton Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more
insider trading, not less. You want to give the people most likely to have knowledge about
deficiencies of the company an incentive to make the public aware of that." Friedman did not
believe that the trader should be required to make his trade known to the public, because the
buying or selling pressure itself is information for the market.
[29]
Other critics argue that insider trading is a victimless act: A willing buyer and a willing seller
agree to trade property which the seller rightfully owns, with no prior contract (according to this
view) having been made between the parties to refrain from trading if there is asymmetric
information. The Atlantic has described the process as "arguably the closest thing that modern
finance has to a victimless crime".
[30]
Legalization advocates also question why "trading" where one party has more information than
the other is legal in other markets, such as real estate, but not in the stock market. For example, if
a geologist knows there is a high likelihood of the discovery of petroleum under Farmer Smith's
land, he may be entitled to make Smith an offer for the land, and buy it, without first telling
Farmer Smith of the geological data.
[18]
Nevertheless, circumstances can occur when the
geologist would be committing fraud if, because he owes a duty to the farmer, he did not disclose
the information; e.g., if he had been hired by Farmer Smith to assess the geology of the farm.
Advocates of legalization make free speech arguments. Punishment for communicating about a
development pertinent to the next day's stock price might seem to be an act of censorship.
[31]
If
the information being conveyed is proprietary information and the corporate insider has
contracted to not expose it, he has no more right to communicate it than he would to tell others
about the company's confidential new product designs, formulas, or bank account passwords.
There are very limited laws against "insider trading" in the commodities markets, if, for no other
reason, than that the concept of an "insider" is not immediately analogous to commodities
themselves (e.g., corn, wheat, steel, etc.). However, analogous activities such as front running are
illegal under U.S. commodity and futures trading laws. For example, a commodity broker can be
charged with fraud if he or she receives a large purchase order from a client (one likely to affect
the price of that commodity) and then purchases that commodity before executing the client's
order in order to benefit from the anticipated price increase.
Legal differences among jurisdictions
The US and the UK vary in the way the law is interpreted and applied with regard to insider
trading.
In the UK, the relevant laws are the Criminal Justice Act 1993 Part V Schedule 1 and the
Financial Services and Markets Act 2000, which defines an offence of Market Abuse.
[32]
It is
also illegal to fail to trade based on inside information (whereas without the inside information
the trade would have taken place). The principle is that it is illegal to trade on the basis of
market-sensitive information that is not generally known. No relationship to the issuer of the
security is required; all that is required is that the guilty party traded (or caused trading) whilst
having inside information.
Japan enacted its first law against insider trading in 1988. Roderick Seeman says: "Even today
many Japanese do not understand why this is illegal. Indeed, previously it was regarded as
common sense to make a profit from your knowledge."
[33]
In accordance with EU Directives, Malta enacted the Financial Markets Abuse Act in 2002,
which effectively replaced the Insider Dealing and Market Abuse Act of 1994.
The "Objectives and Principles of Securities Regulation"
[34]
published by the International
Organization of Securities Commissions (IOSCO) in 1998 and updated in 2003 states that the
three objectives of good securities market regulation are (1) investor protection, (2) ensuring that
markets are fair, efficient and transparent, and (3) reducing systemic risk. The discussion of these
"Core Principles" state that "investor protection" in this context means "Investors should be
protected from misleading, manipulative or fraudulent practices, including insider trading, front
running or trading ahead of customers and the misuse of client assets." More than 85 percent of
the world's securities and commodities market regulators are members of IOSCO and have
signed on to these Core Principles.
The World Bank and International Monetary Fund now use the IOSCO Core Principles in
reviewing the financial health of different country's regulatory systems as part of these
organization's financial sector assessment program, so laws against insider trading based on non-
public information are now expected by the international community. Enforcement of insider
trading laws varies widely from country to country, but the vast majority of jurisdictions now
outlaw the practice, at least in principle.
Larry Harris claims that differences in the effectiveness with which countries restrict insider
trading help to explain the differences in executive compensation among those countries. The
U.S., for example, has much higher CEO salaries than do Japan or Germany, where insider
trading is less effectively restrained.
[35]
order in order to benefit from the anticipated price increase.
Legal differences among jurisdictions
The US and the UK vary in the way the law is interpreted and applied with regard to insider
trading.
In the UK, the relevant laws are the Criminal Justice Act 1993 Part V Schedule 1 and the
Financial Services and Markets Act 2000, which defines an offence of Market Abuse.
[32]
It is
also illegal to fail to trade based on inside information (whereas without the inside information
the trade would have taken place). The principle is that it is illegal to trade on the basis of
market-sensitive information that is not generally known. No relationship to the issuer of the
security is required; all that is required is that the guilty party traded (or caused trading) whilst
having inside information.
Japan enacted its first law against insider trading in 1988. Roderick Seeman says: "Even today
many Japanese do not understand why this is illegal. Indeed, previously it was regarded as
common sense to make a profit from your knowledge."
[33]
In accordance with EU Directives, Malta enacted the Financial Markets Abuse Act in 2002,
which effectively replaced the Insider Dealing and Market Abuse Act of 1994.
The "Objectives and Principles of Securities Regulation"
[34]
published by the International
Organization of Securities Commissions (IOSCO) in 1998 and updated in 2003 states that the
three objectives of good securities market regulation are (1) investor protection, (2) ensuring that
markets are fair, efficient and transparent, and (3) reducing systemic risk. The discussion of these
"Core Principles" state that "investor protection" in this context means "Investors should be
protected from misleading, manipulative or fraudulent practices, including insider trading, front
running or trading ahead of customers and the misuse of client assets." More than 85 percent of
the world's securities and commodities market regulators are members of IOSCO and have
signed on to these Core Principles.
The World Bank and International Monetary Fund now use the IOSCO Core Principles in
reviewing the financial health of different country's regulatory systems as part of these
organization's financial sector assessment program, so laws against insider trading based on non-
public information are now expected by the international community. Enforcement of insider
trading laws varies widely from country to country, but the vast majority of jurisdictions now
outlaw the practice, at least in principle.
Larry Harris claims that differences in the effectiveness with which countries restrict insider
trading help to explain the differences in executive compensation among those countries. The
U.S., for example, has much higher CEO salaries than do Japan or Germany, where insider
trading is less effectively restrained.
[35]
See what insiders are buying, earlier than everybody else!
For Real-time insider transactions. Enter Stock Symbol: (e.g. IBM)
Insider behavior matters because research based on real-time signals has shown that a properly
modeled picture of insider actions can provide the most accurate reflection of the prospects for
the company, industry, economic sector, or even the stock market in general, going forward.
This makes perfect sense from an intuitive perspective. Corporate insiders possess all the
necessary skills and characteristics that one could use to describe the "successful" investor.
These include: A deep knowledge and understanding of the company and/or industry; A
demonstrated ability to produce success; The training necessary to understand risk and to control
it; The wherewithal (capital) to take advantage of opportunity when it presents itself and finally;
A tendency to go against the crowd.
In general, insider buys are more useful. Since insiders have exclusive information on the
company performance, if they are risking their own money on the stock, usually they should
have good reasons, especially when several insiders buy the stock at the same time.
Below are some sample insider trades:
SYMBOL BUY Date
Close PRICE on
Buy Date (Or
Open PRICE Next
Day for After-
Hour Insider
Buys)
SELL Date
Close PRICE on
Sell Date
1-Month
RETURN
ACFN 03/26/2012 $8.95 04/26/2012 $11.62 30%
MGT 03/22/2012 $1.5 04/23/2012 $2.71 81%
SALM 03/16/2012 $3.99 04/16/2012 $5.45 37%
BLIN 03/06/2012 $0.97 04/06/2012 $1.3 34%
CWBC 02/10/2012 $1.7 03/12/2012 $2.17 28%
CAFI 02/03/2012 $1.56 03/05/2012 $2.19 40%
ANCI 12/23/2011 $0.38 01/23/2012 $0.54 42%
UWN 12/20/2011 $1.19 01/20/2012 $1.54 29%
BYD 12/15/2011 $6.11 01/16/2012 $8.05 32%
CDXC 12/13/2011 $0.66 01/13/2012 $0.95 44%
U.S. Charges 7 for Insider Trading of Dell
Stock
For Real-time insider transactions. Enter Stock Symbol: (e.g. IBM)
Insider behavior matters because research based on real-time signals has shown that a properly
modeled picture of insider actions can provide the most accurate reflection of the prospects for
the company, industry, economic sector, or even the stock market in general, going forward.
This makes perfect sense from an intuitive perspective. Corporate insiders possess all the
necessary skills and characteristics that one could use to describe the "successful" investor.
These include: A deep knowledge and understanding of the company and/or industry; A
demonstrated ability to produce success; The training necessary to understand risk and to control
it; The wherewithal (capital) to take advantage of opportunity when it presents itself and finally;
A tendency to go against the crowd.
In general, insider buys are more useful. Since insiders have exclusive information on the
company performance, if they are risking their own money on the stock, usually they should
have good reasons, especially when several insiders buy the stock at the same time.
Below are some sample insider trades:
SYMBOL BUY Date
Close PRICE on
Buy Date (Or
Open PRICE Next
Day for After-
Hour Insider
Buys)
SELL Date
Close PRICE on
Sell Date
1-Month
RETURN
ACFN 03/26/2012 $8.95 04/26/2012 $11.62 30%
MGT 03/22/2012 $1.5 04/23/2012 $2.71 81%
SALM 03/16/2012 $3.99 04/16/2012 $5.45 37%
BLIN 03/06/2012 $0.97 04/06/2012 $1.3 34%
CWBC 02/10/2012 $1.7 03/12/2012 $2.17 28%
CAFI 02/03/2012 $1.56 03/05/2012 $2.19 40%
ANCI 12/23/2011 $0.38 01/23/2012 $0.54 42%
UWN 12/20/2011 $1.19 01/20/2012 $1.54 29%
BYD 12/15/2011 $6.11 01/16/2012 $8.05 32%
CDXC 12/13/2011 $0.66 01/13/2012 $0.95 44%
U.S. Charges 7 for Insider Trading of Dell
Stock
By PETER LATTMAN and AZAM AHMED
Robert Stolarik for The New York Times“It was a club where everyone
scratched everyone else’s back,” said Preet S. Bharara, a U.S. attorney in Manhattan.
9:05 p.m. | Updated
Sandeep Goyal was a small-time stock analyst with a big connection.
Before pursuing a career on Wall Street, Mr. Goyal spent three years at Dell, and after he left in
2006, he kept close ties to his colleagues at the computer maker. In 2008, while working at a
mutual fund company, Mr. Goyal received illegal tips from a Dell employee about the
company’s financial results, federal authorities say.
Mr. Goyal, they say, used the secret information as currency, passing it around to his expanding
network of fellow stock pickers. The leaks, emanating from Dell’s headquarters in Texas,
ricocheted around the country, reaching a fund manager at a small trust company in California
and three powerful hedge funds in New York and Connecticut.
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Robert Stolarik for The New York Times“It was a club where everyone
scratched everyone else’s back,” said Preet S. Bharara, a U.S. attorney in Manhattan.
9:05 p.m. | Updated
Sandeep Goyal was a small-time stock analyst with a big connection.
Before pursuing a career on Wall Street, Mr. Goyal spent three years at Dell, and after he left in
2006, he kept close ties to his colleagues at the computer maker. In 2008, while working at a
mutual fund company, Mr. Goyal received illegal tips from a Dell employee about the
company’s financial results, federal authorities say.
Mr. Goyal, they say, used the secret information as currency, passing it around to his expanding
network of fellow stock pickers. The leaks, emanating from Dell’s headquarters in Texas,
ricocheted around the country, reaching a fund manager at a small trust company in California
and three powerful hedge funds in New York and Connecticut.
Article Tools
47 Comments
Recommend
Share
o Tumblr
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o Reddit
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o
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The complaint
On Wednesday, federal prosecutors announced criminal charges against Mr. Goyal and six
others, depicting a ―circle of friends‖ that together earned about $62 million in illegal gains in
Dell stock.
One hedge fund, Level Global Investors, made $53 million of those profits, the government said.
Level Global is the most prominent hedge fund touched by the government’s insider trading
prosecutions since the Galleon Group closed in 2009 after the arrest of its co-founder, Raj
Rajaratnam.
Timothy A. Clary/Agence France-Presse — Getty ImagesAnthony
Chiasson, right, a co-founder of Level Global, a hedge fund that is said to have made $53 million from
illegal trades.
A co-founder of Level Global, Anthony Chiasson, 38, was among those charged on Wednesday.
Also charged were Todd Newman, 47, a former trader at Diamondback; Daniel Kuo, 36, a
former portfolio manager at Whittier Trust Company in Pasadena, Calif., and Jon Horvath, 42,
an analyst at Sigma Capital, a unit of SAC Capital Advisors, the hedge fund run by the
billionaire investor Steven A. Cohen.
The Dell executive was not named in the government’s complaint. A company spokesman said
that if the accusations were true, the action was a clear violation of Dell’s policies.
Lawyers for Mr. Chiasson and Mr. Horvath issued separate statements denying the government’s
charges against their clients. The other defendants’ lawyers did not immediately respond to
requests for comment.
The arrest of Mr. Horvath, who is accused of making $1 million in illegal profits, adds to the list
of former SAC Capital employees ensnared by the government’s insider trading crackdown. Last
year, two former SAC portfolio managers, Noah Freeman and Donald Longueuil, pleaded guilty
to trading on illegal stock tips while at the company.
The complaint
On Wednesday, federal prosecutors announced criminal charges against Mr. Goyal and six
others, depicting a ―circle of friends‖ that together earned about $62 million in illegal gains in
Dell stock.
One hedge fund, Level Global Investors, made $53 million of those profits, the government said.
Level Global is the most prominent hedge fund touched by the government’s insider trading
prosecutions since the Galleon Group closed in 2009 after the arrest of its co-founder, Raj
Rajaratnam.
Timothy A. Clary/Agence France-Presse — Getty ImagesAnthony
Chiasson, right, a co-founder of Level Global, a hedge fund that is said to have made $53 million from
illegal trades.
A co-founder of Level Global, Anthony Chiasson, 38, was among those charged on Wednesday.
Also charged were Todd Newman, 47, a former trader at Diamondback; Daniel Kuo, 36, a
former portfolio manager at Whittier Trust Company in Pasadena, Calif., and Jon Horvath, 42,
an analyst at Sigma Capital, a unit of SAC Capital Advisors, the hedge fund run by the
billionaire investor Steven A. Cohen.
The Dell executive was not named in the government’s complaint. A company spokesman said
that if the accusations were true, the action was a clear violation of Dell’s policies.
Lawyers for Mr. Chiasson and Mr. Horvath issued separate statements denying the government’s
charges against their clients. The other defendants’ lawyers did not immediately respond to
requests for comment.
The arrest of Mr. Horvath, who is accused of making $1 million in illegal profits, adds to the list
of former SAC Capital employees ensnared by the government’s insider trading crackdown. Last
year, two former SAC portfolio managers, Noah Freeman and Donald Longueuil, pleaded guilty
to trading on illegal stock tips while at the company.
Another pair of former SAC Capital traders, David Ganek and Mr. Chiasson, started Level
Global, which closed last year. Mr. Ganek has not been accused of any wrongdoing.
Diamondback was also started by SAC Capital alumni, including Mr. Cohen’s brother-in-law,
Richard Shimel. Mr. Shimel has not been accused of any wrongdoing, and Diamondback
continues to operate. On Wednesday, the company sent a letter to its investors that said it had
assisted in the investigation and that the government’s charges were ―an important step towards
putting this matter behind us.‖
An SAC spokesman said the firm was continuing to cooperate with the investigation.
Though hedge funds are again at the center of insider trading charges, the case is the first time
that charges from the government’s insider trading inquiry has reached into the sleepier mutual
fund industry. Mr. Goyal worked at Neuberger Berman, a New York money manager with a
large mutual fund business.
The 39-year-old Mr. Goyal, who has pleaded guilty and is cooperating with the government,
received about $175,000 in illicit payments from Diamondback for ―consulting‖ work. He did
not make any illegal trades at Neuberger Berman, which has not been accused of any
wrongdoing.
―This unethical behavior is contrary to the core values of our firm and the culture of compliance
in which we operate,‖ a Neuberger spokesman said.
Jesse Tortora, 36, a former trader at Diamondback, and Spyridon Andondakis, 40, a former
trader at Level Global, also pleaded guilty and have been cooperating with the government.
The case is the latest round of prosecutions in a multiyear government campaign to root out
insider trading. Nicknamed ―Operation Perfect Hedge,‖ the investigation has led to more than 60
guilty pleas or convictions.
―If you are engaged in insider trading, what distinguishes you from the dozens who have been
charged is not that you haven’t been caught; it’s that you haven’t been caught yet,‖ said Janice
K. Fedarcyk, the head of the Federal Bureau of Investigation’s New York office.
The Securities and Exchange Commission filed a parallel civil action against the seven
defendants on Wednesday.
Wednesday’s charges again highlighted the web of connections on Wall Street. Mr. Goyal, Mr.
Tortora and Mr. Andondakis, for instance, all worked together earlier in their careers at
Prudential Equity Group, and they socialized together in Manhattan and the Hamptons.
―It was a club where everyone scratched everyone else’s back,‖ Preet S. Bharara, the United
States attorney in Manhattan who brought the charges, said at a news conference.
Global, which closed last year. Mr. Ganek has not been accused of any wrongdoing.
Diamondback was also started by SAC Capital alumni, including Mr. Cohen’s brother-in-law,
Richard Shimel. Mr. Shimel has not been accused of any wrongdoing, and Diamondback
continues to operate. On Wednesday, the company sent a letter to its investors that said it had
assisted in the investigation and that the government’s charges were ―an important step towards
putting this matter behind us.‖
An SAC spokesman said the firm was continuing to cooperate with the investigation.
Though hedge funds are again at the center of insider trading charges, the case is the first time
that charges from the government’s insider trading inquiry has reached into the sleepier mutual
fund industry. Mr. Goyal worked at Neuberger Berman, a New York money manager with a
large mutual fund business.
The 39-year-old Mr. Goyal, who has pleaded guilty and is cooperating with the government,
received about $175,000 in illicit payments from Diamondback for ―consulting‖ work. He did
not make any illegal trades at Neuberger Berman, which has not been accused of any
wrongdoing.
―This unethical behavior is contrary to the core values of our firm and the culture of compliance
in which we operate,‖ a Neuberger spokesman said.
Jesse Tortora, 36, a former trader at Diamondback, and Spyridon Andondakis, 40, a former
trader at Level Global, also pleaded guilty and have been cooperating with the government.
The case is the latest round of prosecutions in a multiyear government campaign to root out
insider trading. Nicknamed ―Operation Perfect Hedge,‖ the investigation has led to more than 60
guilty pleas or convictions.
―If you are engaged in insider trading, what distinguishes you from the dozens who have been
charged is not that you haven’t been caught; it’s that you haven’t been caught yet,‖ said Janice
K. Fedarcyk, the head of the Federal Bureau of Investigation’s New York office.
The Securities and Exchange Commission filed a parallel civil action against the seven
defendants on Wednesday.
Wednesday’s charges again highlighted the web of connections on Wall Street. Mr. Goyal, Mr.
Tortora and Mr. Andondakis, for instance, all worked together earlier in their careers at
Prudential Equity Group, and they socialized together in Manhattan and the Hamptons.
―It was a club where everyone scratched everyone else’s back,‖ Preet S. Bharara, the United
States attorney in Manhattan who brought the charges, said at a news conference.
More than a year ago, the government raided a series of hedge funds. Federal agent stormed the
offices of Level Global, Diamondback Capital Management and two others in November 2010 to
retrieve documents and other materials. Months after the November raid, Level Global closed.
Mr. Chiasson and Mr. Ganek started Level Global in 2003 shortly after leaving SAC Capital.
They used ―Level‖ in its name because, Mr. Chiasson once said, ―Level is a palindrome which
connotes balance and adaptability — two key investing traits.‖
In a few years, the fund’s assets swelled to nearly $4 billion, attracting major clients like the
New York state pension fund.
Inside the firm, the two men exhibited different styles, according to former employees. Mr.
Chiasson had a calm and even demeanor, peppering his analysts with questions while rarely
raising his voice.
Mr. Ganek, by contrast, often barked out directions over the Bloomberg terminals and was a
more excitable trader.
Their different styles were also apparent in their personal lives.
While Mr. Ganek was prominent in the Manhattan social scene, serving on boards and buying
millions of dollars worth of modern art, Mr. Chiasson, who grew up near Portland, Me.,
eschewed the limelight.
Since closing the hedge fund, Mr. Ganek has kept a low profile on Wall Street. He is said to be
planning a new investment venture, financed mostly by his own wealth, according to a person
with knowledge of the matter spoke only anonymously because the discussions were private.
Level Global made by far the largest profits in the scheme, according to the government’s
accusations. After learning from Mr. Andondakis that a source inside Dell had leaked the
company’s bleak financial outlook, Mr. Chiasson oversaw a large negative bet on the computer
company, according to the government.
The fund accumulated a short position in Dell of 8.6 million shares in the weeks leading up to
the company’s earnings announcement. It also bought at least 10,900 put option contracts, a
derivatives trade that would magnify the fund’s profits if the price of Dell’s stock dropped.
Dell shares declined 14 percent on its earnings announcement. It continued to sink until Level
Global closed out its position on Sept. 16, 2008 — the day after the collapse of Lehman
Brothers. The fund’s total illegal profits were $53 million, the government said.
―You might call that the big short,‖ said Mr. Bharara, a reference to ―The Big Short,‖ Michael
Lewis’s book about the financial crisis.
―Or more precisely: the big illegal short,‖ Mr. Bharara added.
offices of Level Global, Diamondback Capital Management and two others in November 2010 to
retrieve documents and other materials. Months after the November raid, Level Global closed.
Mr. Chiasson and Mr. Ganek started Level Global in 2003 shortly after leaving SAC Capital.
They used ―Level‖ in its name because, Mr. Chiasson once said, ―Level is a palindrome which
connotes balance and adaptability — two key investing traits.‖
In a few years, the fund’s assets swelled to nearly $4 billion, attracting major clients like the
New York state pension fund.
Inside the firm, the two men exhibited different styles, according to former employees. Mr.
Chiasson had a calm and even demeanor, peppering his analysts with questions while rarely
raising his voice.
Mr. Ganek, by contrast, often barked out directions over the Bloomberg terminals and was a
more excitable trader.
Their different styles were also apparent in their personal lives.
While Mr. Ganek was prominent in the Manhattan social scene, serving on boards and buying
millions of dollars worth of modern art, Mr. Chiasson, who grew up near Portland, Me.,
eschewed the limelight.
Since closing the hedge fund, Mr. Ganek has kept a low profile on Wall Street. He is said to be
planning a new investment venture, financed mostly by his own wealth, according to a person
with knowledge of the matter spoke only anonymously because the discussions were private.
Level Global made by far the largest profits in the scheme, according to the government’s
accusations. After learning from Mr. Andondakis that a source inside Dell had leaked the
company’s bleak financial outlook, Mr. Chiasson oversaw a large negative bet on the computer
company, according to the government.
The fund accumulated a short position in Dell of 8.6 million shares in the weeks leading up to
the company’s earnings announcement. It also bought at least 10,900 put option contracts, a
derivatives trade that would magnify the fund’s profits if the price of Dell’s stock dropped.
Dell shares declined 14 percent on its earnings announcement. It continued to sink until Level
Global closed out its position on Sept. 16, 2008 — the day after the collapse of Lehman
Brothers. The fund’s total illegal profits were $53 million, the government said.
―You might call that the big short,‖ said Mr. Bharara, a reference to ―The Big Short,‖ Michael
Lewis’s book about the financial crisis.
―Or more precisely: the big illegal short,‖ Mr. Bharara added.
Ben Protess contributed reporting.
More details revealed on inside trader's
jailing
English.news.cn 2012-05-22 15:01:40
File photo of Huang Guangyu.(Photo Source: chinadaily.com.cn)
BEIJING, May 22 (Xinhua) -- The Supreme People's Court (SPC) on Tuesday revealed more
details about the insider trading case that saw Chinese home appliance tycoon Huang Guangyu
jailed in 2010.
SPC spokesman Sun Jungong told a press conference that Huang, as the major shareholder of
Shenzhen-listed Beijing Centergate Technologies (Holding) Co. Ltd., instructed accomplices to
open dummy trading accounts using more than 79 individuals' IDs and to buy the company's
stock before statements of major transactions and corporate restructuring were issued.
In three such insider deals, Huang acquired more than 140 million shares with a value of 1.8
billion yuan (286 million U.S. dollars) and profits of nearly 400 million yuan, according to a
press release posted on the SPC website.
Sun cited the case of Huang, former chairman of Chinese electronics retail giant Gome, as an
example of insider trading that has "seriously jeopardized the security of the capital market and
economic and social order."
Huang was sentenced to 14 years in prison in May 2010 after being convicted of illegal business
dealings, insider trading and corporate bribery.
More details revealed on inside trader's
jailing
English.news.cn 2012-05-22 15:01:40
File photo of Huang Guangyu.(Photo Source: chinadaily.com.cn)
BEIJING, May 22 (Xinhua) -- The Supreme People's Court (SPC) on Tuesday revealed more
details about the insider trading case that saw Chinese home appliance tycoon Huang Guangyu
jailed in 2010.
SPC spokesman Sun Jungong told a press conference that Huang, as the major shareholder of
Shenzhen-listed Beijing Centergate Technologies (Holding) Co. Ltd., instructed accomplices to
open dummy trading accounts using more than 79 individuals' IDs and to buy the company's
stock before statements of major transactions and corporate restructuring were issued.
In three such insider deals, Huang acquired more than 140 million shares with a value of 1.8
billion yuan (286 million U.S. dollars) and profits of nearly 400 million yuan, according to a
press release posted on the SPC website.
Sun cited the case of Huang, former chairman of Chinese electronics retail giant Gome, as an
example of insider trading that has "seriously jeopardized the security of the capital market and
economic and social order."
Huang was sentenced to 14 years in prison in May 2010 after being convicted of illegal business
dealings, insider trading and corporate bribery.
Also known as Wong Kwong-yu, he was once the richest man in China's mainland and the legal
representative of both Gome and Beijing Pengrun Real Estate Development Company.
According to the SPC, the number of insider trading cases closed by Chinese courts has
increased annually, from one in 2007 to 11 in 2011.
A new statutory interpretation on insider trading, issued by the SPC, will take effect from June 1
in hopes of easing some of the difficulties associated with combating this crime.
Sun warned that insider trading causes very negative impacts, and it involves sophisticated and
highly professional criminals with financial, legal and IT backgrounds.
It is very hard to track these crimes and convict the perpetrators. The China Securities
Regulatory Commission obtained tip-offs on 426 insider trading cases from 2008 to 2011, but
only 153 of them were opened for investigation.
The new statutory interpretation was drafted by the SPC and the Supreme People's Procuratorate
on articles related to insider trading in criminal law, securities law and the regulation of futures
trading.
It clarifies the definition of an insider, which refers to an individual, not an institution, that is
either a senior manager or major shareholder -- one holding more than a 5-percent stake -- of a
listed company or its affiliates, an employee of a security firm involved with trade or an official
with the security watchdog.
It also defines people who obtain confidential transaction information through illegal means and
how investigators should define the act of insider trading.
In addition, the interpretation explains that an insider securities transaction with a value of over
500,000 yuan constitutes a grave crime. A futures transaction with a value of more than 300,000
yuan and a deal yielding profits of more than 150,000 yuan will also be considered grave crimes.
Defining Illegal Insider Trading
September 25 2010 | Filed Under » Laws, Stocks
When hearing news stories about illegal insider trading activity, investors usually take notice
because it's an activity that affects them. Although there are legal forms of insider trading (which
you can learn more about in the articles Uncovering Insider Trading and When Insiders Buy,
Should You Join Them?) , the better you understand why illegal insider trading is a crime, the
better you'll understand how the market works. Here we discuss what an illegal insider is, how it
compromises the essential conditions of a capital market and what defines an insider.
What Is It and Why Is It Harmful?
Insider trading occurs when a trade has been influenced by the privileged possession of corporate
representative of both Gome and Beijing Pengrun Real Estate Development Company.
According to the SPC, the number of insider trading cases closed by Chinese courts has
increased annually, from one in 2007 to 11 in 2011.
A new statutory interpretation on insider trading, issued by the SPC, will take effect from June 1
in hopes of easing some of the difficulties associated with combating this crime.
Sun warned that insider trading causes very negative impacts, and it involves sophisticated and
highly professional criminals with financial, legal and IT backgrounds.
It is very hard to track these crimes and convict the perpetrators. The China Securities
Regulatory Commission obtained tip-offs on 426 insider trading cases from 2008 to 2011, but
only 153 of them were opened for investigation.
The new statutory interpretation was drafted by the SPC and the Supreme People's Procuratorate
on articles related to insider trading in criminal law, securities law and the regulation of futures
trading.
It clarifies the definition of an insider, which refers to an individual, not an institution, that is
either a senior manager or major shareholder -- one holding more than a 5-percent stake -- of a
listed company or its affiliates, an employee of a security firm involved with trade or an official
with the security watchdog.
It also defines people who obtain confidential transaction information through illegal means and
how investigators should define the act of insider trading.
In addition, the interpretation explains that an insider securities transaction with a value of over
500,000 yuan constitutes a grave crime. A futures transaction with a value of more than 300,000
yuan and a deal yielding profits of more than 150,000 yuan will also be considered grave crimes.
Defining Illegal Insider Trading
September 25 2010 | Filed Under » Laws, Stocks
When hearing news stories about illegal insider trading activity, investors usually take notice
because it's an activity that affects them. Although there are legal forms of insider trading (which
you can learn more about in the articles Uncovering Insider Trading and When Insiders Buy,
Should You Join Them?) , the better you understand why illegal insider trading is a crime, the
better you'll understand how the market works. Here we discuss what an illegal insider is, how it
compromises the essential conditions of a capital market and what defines an insider.
What Is It and Why Is It Harmful?
Insider trading occurs when a trade has been influenced by the privileged possession of corporate
information that has not yet been made public. Because the information is not available to other
investors, a person using such knowledge is trying to gain an unfair advantage over the rest of
the market.
Using nonpublic information for making a trade violates transparency, which is the basis of a
capital market. Information in a transparent market is disseminated in a manner by which all
market participants receive it at more or less the same time. Under these conditions, one investor
can gain an advantage over another only through acquiring skill in analyzing and interpreting
available information. This skill is based on individual merit and awareness. If one person trades
with nonpublic information, he or she gains an advantage that is impossible for the rest of the
public. This is not only unfair but disruptive to a properly functioning market: if insider trading
were allowed, investors would lose confidence in their disadvantaged position (in comparison to
insiders) and would no longer invest.
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The Law
In August 2000, the Securities and Exchange Commission (SEC) adopted new rules regarding
insider trading (made effective in October of the same year). Under Rule 10b5-1, the SEC
defines insider trading as any securities transaction made when the person behind the trade is
aware of nonpublic material information, and is hence violating his or her duty to maintain
confidentiality of such knowledge.
Information is defined as being material if its release could affect the company's stock price. The
following are examples of material information: the announcement that the company will receive
a tender offer, the declaration of a merger, a positive earnings announcement, the release of the
company's discovery such as a new drug, an upcoming dividend announcement, an unreleased
buy recommendation by an analyst and finally, an imminent exclusive in a financial news
column.
Trade Forex and make big profits. Try Now!
In a further effort to limit the possibility of insider trading, the SEC has also stated in Regulation
Fair Disclosure (Reg FD), which was released at the same time as Rule10b5-1, that companies
can no longer be selective as to how they release information. This means that analysts or
institutional clients cannot be privy to information ahead of retail clients or the general public.
Everyone who is not a part of the company is to receive information at the same time.
Who Is an Insider?
For the purposes of defining illegal insider trading, a corporate insider is someone who is privy
to information that has yet to be released to the public. If a person is an insider, he or she is
expected to maintain a fiduciary duty to the company and to the shareholders and is obligated to
retain in confidence the possession of the nonpublic material information. A person is liable of
insider trading when he or she has acted on privileged knowledge in the attempt to make a profit.
Sometimes it is easy to identify who insiders are: CEOs, executives and directors are of course
directly exposed to material information before it's made public. However, according to the
investors, a person using such knowledge is trying to gain an unfair advantage over the rest of
the market.
Using nonpublic information for making a trade violates transparency, which is the basis of a
capital market. Information in a transparent market is disseminated in a manner by which all
market participants receive it at more or less the same time. Under these conditions, one investor
can gain an advantage over another only through acquiring skill in analyzing and interpreting
available information. This skill is based on individual merit and awareness. If one person trades
with nonpublic information, he or she gains an advantage that is impossible for the rest of the
public. This is not only unfair but disruptive to a properly functioning market: if insider trading
were allowed, investors would lose confidence in their disadvantaged position (in comparison to
insiders) and would no longer invest.
Advertisement - Article continues below.
The Law
In August 2000, the Securities and Exchange Commission (SEC) adopted new rules regarding
insider trading (made effective in October of the same year). Under Rule 10b5-1, the SEC
defines insider trading as any securities transaction made when the person behind the trade is
aware of nonpublic material information, and is hence violating his or her duty to maintain
confidentiality of such knowledge.
Information is defined as being material if its release could affect the company's stock price. The
following are examples of material information: the announcement that the company will receive
a tender offer, the declaration of a merger, a positive earnings announcement, the release of the
company's discovery such as a new drug, an upcoming dividend announcement, an unreleased
buy recommendation by an analyst and finally, an imminent exclusive in a financial news
column.
Trade Forex and make big profits. Try Now!
In a further effort to limit the possibility of insider trading, the SEC has also stated in Regulation
Fair Disclosure (Reg FD), which was released at the same time as Rule10b5-1, that companies
can no longer be selective as to how they release information. This means that analysts or
institutional clients cannot be privy to information ahead of retail clients or the general public.
Everyone who is not a part of the company is to receive information at the same time.
Who Is an Insider?
For the purposes of defining illegal insider trading, a corporate insider is someone who is privy
to information that has yet to be released to the public. If a person is an insider, he or she is
expected to maintain a fiduciary duty to the company and to the shareholders and is obligated to
retain in confidence the possession of the nonpublic material information. A person is liable of
insider trading when he or she has acted on privileged knowledge in the attempt to make a profit.
Sometimes it is easy to identify who insiders are: CEOs, executives and directors are of course
directly exposed to material information before it's made public. However, according to the
misappropriation theory of insider trading cases, certain other relationships automatically give
rise to confidentiality. In the second part of Rule 10b5-2, the SEC has outlined three
nonexclusive instances that call for a duty of trust or confidentiality:
1. When a person expresses his or her agreement to maintain confidentiality
2. When history, pattern and/or practice show that a relationship has mutual confidentiality
3. When a person hears information from a spouse, parent, child or sibling (unless it can be
proven that such a relationship has not and does not give rise to confidentiality).
Partners in Crime
In insider trading that occurs as a result of information leaking outside of company walls, there is
what is known as the "tipper" and the "tippee". The tipper is the person who has broken his or
her fiduciary duty when he or she has consciously revealed inside information. The tippee is the
person who knowingly uses such information to make a trade (in turn also breaking his or her
confidentiality). Both parties typically do so for a mutual monetary benefit. A tipper could be the
spouse of a CEO who goes ahead and tells his neighbor inside information. If the neighbor in
turn knowingly uses this inside information in a securities transaction, he or she is guilty of
insider trading. Even if the tippee does not use the information to trade, the tipper can still be
liable for releasing it.
It may be difficult for the SEC to prove whether or not a person is a tippee. The route of insider
information and its influence over people's trading is not so easy to track. Take for example a
person who initiates a trade because his or her broker advised him or her to buy/sell a share. If
the broker broker based the advice on material non-public information, the person who made the
trade may or may not have had awareness of the broker's knowledge - evidence to prove what the
person knew before the trade may be hard to uncover.
Excuses, Excuses
Oftentimes, people accused of the crime claim that they just overheard someone talking. Take for
example a neighbor who overhears a conversation between a CEO and her husband regarding
confidential corporate information. If the neighbor then goes ahead and makes a trade based on
what was overheard, he or she would be violating the law even though the information was just
"innocently" overheard: the neighbor becomes an insider with a fiduciary duty and obligation to
confidentiality the moment he or she comes to possess the nonpublic material information. Since,
however, the CEO and her husband did not try to profit from their insider knowledge, they are
not necessarily liable of insider trading. In their carelessness, they may, however, be in breach of
their confidentiality.
rise to confidentiality. In the second part of Rule 10b5-2, the SEC has outlined three
nonexclusive instances that call for a duty of trust or confidentiality:
1. When a person expresses his or her agreement to maintain confidentiality
2. When history, pattern and/or practice show that a relationship has mutual confidentiality
3. When a person hears information from a spouse, parent, child or sibling (unless it can be
proven that such a relationship has not and does not give rise to confidentiality).
Partners in Crime
In insider trading that occurs as a result of information leaking outside of company walls, there is
what is known as the "tipper" and the "tippee". The tipper is the person who has broken his or
her fiduciary duty when he or she has consciously revealed inside information. The tippee is the
person who knowingly uses such information to make a trade (in turn also breaking his or her
confidentiality). Both parties typically do so for a mutual monetary benefit. A tipper could be the
spouse of a CEO who goes ahead and tells his neighbor inside information. If the neighbor in
turn knowingly uses this inside information in a securities transaction, he or she is guilty of
insider trading. Even if the tippee does not use the information to trade, the tipper can still be
liable for releasing it.
It may be difficult for the SEC to prove whether or not a person is a tippee. The route of insider
information and its influence over people's trading is not so easy to track. Take for example a
person who initiates a trade because his or her broker advised him or her to buy/sell a share. If
the broker broker based the advice on material non-public information, the person who made the
trade may or may not have had awareness of the broker's knowledge - evidence to prove what the
person knew before the trade may be hard to uncover.
Excuses, Excuses
Oftentimes, people accused of the crime claim that they just overheard someone talking. Take for
example a neighbor who overhears a conversation between a CEO and her husband regarding
confidential corporate information. If the neighbor then goes ahead and makes a trade based on
what was overheard, he or she would be violating the law even though the information was just
"innocently" overheard: the neighbor becomes an insider with a fiduciary duty and obligation to
confidentiality the moment he or she comes to possess the nonpublic material information. Since,
however, the CEO and her husband did not try to profit from their insider knowledge, they are
not necessarily liable of insider trading. In their carelessness, they may, however, be in breach of
their confidentiality.
Home | Previous Page
Insider Trading
"Insider trading" is a term that most investors have heard and usually
associate with illegal conduct. But the term actually includes both legal
and illegal conduct. The legal version is when corporate insiders—officers,
directors, and employees—buy and sell stock in their own companies.
When corporate insiders trade in their own securities, they must report
their trades to the SEC. For more information about this type of insider
trading and the reports insiders must file, please read "Forms 3, 4, 5" in
our Fast Answers databank.
Illegal insider trading refers generally to buying or selling a security, in
breach of a fiduciary duty or other relationship of trust and confidence,
while in possession of material, nonpublic information about the security.
Insider trading violations may also include "tipping" such information,
securities trading by the person "tipped," and securities trading by those
who misappropriate such information.
Examples of insider trading cases that have been brought by the SEC are
cases against:
Corporate officers, directors, and employees who traded the
corporation's securities after learning of significant, confidential
corporate developments;
Friends, business associates, family members, and other "tippees"
of such officers, directors, and employees, who traded the
securities after receiving such information;
Employees of law, banking, brokerage and printing firms who were
given such information to provide services to the corporation
whose securities they traded;
Government employees who learned of such information because
of their employment by the government; and
Other persons who misappropriated, and took advantage of,
confidential information from their employers.
Because insider trading undermines investor confidence in the fairness
and integrity of the securities markets, the SEC has treated the detection
and prosecution of insider trading violations as one of its enforcement
priorities.
Insider Trading
"Insider trading" is a term that most investors have heard and usually
associate with illegal conduct. But the term actually includes both legal
and illegal conduct. The legal version is when corporate insiders—officers,
directors, and employees—buy and sell stock in their own companies.
When corporate insiders trade in their own securities, they must report
their trades to the SEC. For more information about this type of insider
trading and the reports insiders must file, please read "Forms 3, 4, 5" in
our Fast Answers databank.
Illegal insider trading refers generally to buying or selling a security, in
breach of a fiduciary duty or other relationship of trust and confidence,
while in possession of material, nonpublic information about the security.
Insider trading violations may also include "tipping" such information,
securities trading by the person "tipped," and securities trading by those
who misappropriate such information.
Examples of insider trading cases that have been brought by the SEC are
cases against:
Corporate officers, directors, and employees who traded the
corporation's securities after learning of significant, confidential
corporate developments;
Friends, business associates, family members, and other "tippees"
of such officers, directors, and employees, who traded the
securities after receiving such information;
Employees of law, banking, brokerage and printing firms who were
given such information to provide services to the corporation
whose securities they traded;
Government employees who learned of such information because
of their employment by the government; and
Other persons who misappropriated, and took advantage of,
confidential information from their employers.
Because insider trading undermines investor confidence in the fairness
and integrity of the securities markets, the SEC has treated the detection
and prosecution of insider trading violations as one of its enforcement
priorities.
The SEC adopted new Rules 10b5-1 and 10b5-2 to resolve two insider
trading issues where the courts have disagreed. Rule 10b5-1 provides
that a person trades on the basis of material nonpublic information if a
trader is "aware" of the material nonpublic information when making the
purchase or sale. The rule also sets forth several affirmative defenses or
exceptions to liability. The rule permits persons to trade in certain
specified circumstances where it is clear that the information they are
aware of is not a factor in the decision to trade, such as pursuant to a
pre-existing plan, contract, or instruction that was made in good faith.
Rule 10b5-2 clarifies how the misappropriation theory applies to certain
non-business relationships. This rule provides that a person receiving
confidential information under circumstances specified in the rule would
owe a duty of trust or confidence and thus could be liable under the
misappropriation theory.
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trading issues where the courts have disagreed. Rule 10b5-1 provides
that a person trades on the basis of material nonpublic information if a
trader is "aware" of the material nonpublic information when making the
purchase or sale. The rule also sets forth several affirmative defenses or
exceptions to liability. The rule permits persons to trade in certain
specified circumstances where it is clear that the information they are
aware of is not a factor in the decision to trade, such as pursuant to a
pre-existing plan, contract, or instruction that was made in good faith.
Rule 10b5-2 clarifies how the misappropriation theory applies to certain
non-business relationships. This rule provides that a person receiving
confidential information under circumstances specified in the rule would
owe a duty of trust or confidence and thus could be liable under the
misappropriation theory.
TERMS OF USE & PRIVACY POLICY
Please read the following terms and conditions relating to
access of The Inside Trader website and related websites.
By accessing and using The Inside Trader website and
related websites and emails from these sites, the customer
acknowledges that he or she has read, understood and
agrees to be bound by the terms and conditions.
Financial Services Guide
You can download our Financial Services Guide here.
IMPORTANT: This information has been prepared for
distribution over the internet and without taking into account
the investment objectives, financial situation and particular
needs of any particular person. The Inside Trader makes no
recommendations as to the merits of any investment
opportunity referred to in its emails or its related websites.
Services provided
1. The Inside Trader is brought to you by Equilibrium
Enterprises Pty Ltd ABN 39 089 986 130 as an
authorised representative of Gryphon Learning Pty Ltd. ACN
098 597 427 Australian Financial Services License Number:
246606 ('The Inside Trader').
2. Various subscriptions are available for varying periods,
payable only in advance. The Inside Trader offers a 14 day
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buying and selling their own stocks and the Nielsen Supply
Demand Indicator and sometimes gives other commentary.
These services are provided for a subscription fee. A weekly
service called �Stock Pick of the Week� is also provided to
the public for free. From time to time, promotional emails for
third parties will be sent to you via email. Any of these services
do not in any way constitute investment advice. All our services
are designed as a tool to help locate stocks to investigate
further. We do not expect you to act on this information directly
without further research or advice.
4. By continued use of this service you will be bound by any
further or revised terms and conditions published from time to
time on the website.
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company. The Inside Trader has not independently verified this
information and simply acts as a publisher of information.
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information published on this website is accurate, complete or
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gathered by The Inside Trader from ASX announcements via
Aerius Indicium Pty Ltd t/a Phoenix AI. The Data should not
under any circumstances be considered as investment advice, a
securities recommendation or recommendation on a
superannuation interest. It has been prepared for general
information only and not having regard to any particular
persons investment objectives, financial situation or needs.
Before making any investment decision, any investor or
prospective investor should consider, with or without the
assistance of a securities adviser, whether any investment is
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17. You will not rely solely on information provided on the
website for any purpose, but must make your own
investigations regarding accuracy, reliability, suitability and
completeness.
18. You acknowledge that information provided by The Inside
Trader is provided for guidance only. You will not rely on it as
professional advice.
19. You will not reveal your user name or password to any
other person.
20. You will not reproduce, republish, broadcast or otherwise
distribute information from the website without the prior
written permission of The Inside Trader
Important disclaimer by The Inside Trader
21. To the extent permitted by law, The Inside Trader and its
officers, employees or agents:
(a) disclaim all liability for loss or damage caused as a result of
information provided to users of the website; and
(b) are not liable to compensate you or any other person for any
loss, damage, cost or expense sustained or incurred in
connection with any opinion, advice, recommendation,
representation or information expressly or impliedly published
in, or contained on this website, or in any disclosure document
to which you are provided access, or in connection with any
application you make through the website for securities in an
organisation, notwithstanding any error or omission including
negligence.
Jurisdiction
22. This agreement is governed by the laws of Queensland,
Australia. You submit to the jurisdiction of the Courts of QLD.
23. The clauses relating to the limits of liability, governing law
and legal jurisdiction shall survive the ending of this agreement.
24. You are an Australian resident, or if not an Australian
resident, you will not treat the information provided as an offer
or invitation to subscribe for or buy securities.
25. You will comply with the laws applicable in your place of
residence and in Australia.
Indemnity by you
26. You fully indemnify The Inside Trader and its officers,
employees and agents in respect of any loss, damage, cost or
expense which they may sustain or incur in connection with
other person.
20. You will not reproduce, republish, broadcast or otherwise
distribute information from the website without the prior
written permission of The Inside Trader
Important disclaimer by The Inside Trader
21. To the extent permitted by law, The Inside Trader and its
officers, employees or agents:
(a) disclaim all liability for loss or damage caused as a result of
information provided to users of the website; and
(b) are not liable to compensate you or any other person for any
loss, damage, cost or expense sustained or incurred in
connection with any opinion, advice, recommendation,
representation or information expressly or impliedly published
in, or contained on this website, or in any disclosure document
to which you are provided access, or in connection with any
application you make through the website for securities in an
organisation, notwithstanding any error or omission including
negligence.
Jurisdiction
22. This agreement is governed by the laws of Queensland,
Australia. You submit to the jurisdiction of the Courts of QLD.
23. The clauses relating to the limits of liability, governing law
and legal jurisdiction shall survive the ending of this agreement.
24. You are an Australian resident, or if not an Australian
resident, you will not treat the information provided as an offer
or invitation to subscribe for or buy securities.
25. You will comply with the laws applicable in your place of
residence and in Australia.
Indemnity by you
26. You fully indemnify The Inside Trader and its officers,
employees and agents in respect of any loss, damage, cost or
expense which they may sustain or incur in connection with
your use of information provided to you on the website.
IMPORTANT: This information has been prepared for
distribution over the internet and without taking into account
the investment objectives, financial situation and particular
needs of any particular person. The Inside Trader makes no
recommendations as to the merits of any investment
opportunity referred to in its emails or its related websites.
TRADING DISCLOSURE
The Inside Trader or it's officers, employees and agents may
hold shares or cfd's in any stock mentioned in our reports. You
can have a look at the current holdings of Equilibrium
Enterprises Pty Ltd here. The Inside Trader has a policy not to
purchase or sell stocks highlighted in our reports within 5
working days either side of the announcement.
PRIVACY STATEMENT FROM THE INSIDE TRADER
The Inside Trader is brought to you by Equilibrium Enterprises
Pty Ltd ACN 089 986 130 as an authorised representative of
Gryphon Learning Pty Ltd. ACN 098 597 427 Australian Financial
Services License Number: 246606('The Inside Trader').
The Inside Trader is committed to protecting your privacy.
Your details will not be sold to any third party for advertising
or marketing purposes.
What does the Privacy Act legislation mean to me?
Since 21 December 2001, laws have protected the privacy of
your personal information where held by certain private sector
organisations.
The Inside Trader is governed by these laws. From time to time
Equilibrium Enterprises Pty Ltd may need to provide your
personal information to Gryphon Learning Pty Ltd to enable
fulfillment of licensed dealer obligations and the provision of
other services to you.
The Inside Trader does not offer specific investment advice
therefore we will not require specific information on your
financial situation. We will require basic details of name,
address, email address and any other information directly
IMPORTANT: This information has been prepared for
distribution over the internet and without taking into account
the investment objectives, financial situation and particular
needs of any particular person. The Inside Trader makes no
recommendations as to the merits of any investment
opportunity referred to in its emails or its related websites.
TRADING DISCLOSURE
The Inside Trader or it's officers, employees and agents may
hold shares or cfd's in any stock mentioned in our reports. You
can have a look at the current holdings of Equilibrium
Enterprises Pty Ltd here. The Inside Trader has a policy not to
purchase or sell stocks highlighted in our reports within 5
working days either side of the announcement.
PRIVACY STATEMENT FROM THE INSIDE TRADER
The Inside Trader is brought to you by Equilibrium Enterprises
Pty Ltd ACN 089 986 130 as an authorised representative of
Gryphon Learning Pty Ltd. ACN 098 597 427 Australian Financial
Services License Number: 246606('The Inside Trader').
The Inside Trader is committed to protecting your privacy.
Your details will not be sold to any third party for advertising
or marketing purposes.
What does the Privacy Act legislation mean to me?
Since 21 December 2001, laws have protected the privacy of
your personal information where held by certain private sector
organisations.
The Inside Trader is governed by these laws. From time to time
Equilibrium Enterprises Pty Ltd may need to provide your
personal information to Gryphon Learning Pty Ltd to enable
fulfillment of licensed dealer obligations and the provision of
other services to you.
The Inside Trader does not offer specific investment advice
therefore we will not require specific information on your
financial situation. We will require basic details of name,
address, email address and any other information directly
required to deliver our services to you.
Who else will receive access to my personal information?
on a confidential basis to industry bodies, our agents,
contractors or third party service providers that provide
financial, administrative or other services for the
purposes of Equilibrium Enterprises Pty Ltd or Gryphon
Learning Pty Ltd's business.
where the law requires us to do so.
How do I access information you hold about me?
You are entitled at any time to request access to personal
information held by The Inside Trader about you, and ask us to
correct this information where you believe it is incorrect or out-
of-date.
Stock Market Manipulation
Insider trading is an example!
Stock market manipulation is any activity that attempts to interfere with the proper operation of the
stock market and create artificially distorted stock prices.
This type of activity is prohibited in the United States under Section 9(a)(2)[2] of the Securities
Exchange Act of 1934.
Who else will receive access to my personal information?
on a confidential basis to industry bodies, our agents,
contractors or third party service providers that provide
financial, administrative or other services for the
purposes of Equilibrium Enterprises Pty Ltd or Gryphon
Learning Pty Ltd's business.
where the law requires us to do so.
How do I access information you hold about me?
You are entitled at any time to request access to personal
information held by The Inside Trader about you, and ask us to
correct this information where you believe it is incorrect or out-
of-date.
Stock Market Manipulation
Insider trading is an example!
Stock market manipulation is any activity that attempts to interfere with the proper operation of the
stock market and create artificially distorted stock prices.
This type of activity is prohibited in the United States under Section 9(a)(2)[2] of the Securities
Exchange Act of 1934.
In Australia a similar prohibition is covered under Sections 1041A of the Corporations Act 2001.
Types of Market Manipulation
Market manipulation can occur in a variety of ways including ...
Churning - when a trader places both buy and sell orders at about the same price. The increase
in activity is intended to attract additional investors, and increase the price.
Rumoring - when a group of traders create activity or rumors in order to drive the price of a
stock up, sometimes referred to in the US as 'ramping' (the market up).
Wash trading - selling and re-purchasing the same or substantially the same security for the
purpose of generating activity and increasing the price, or creating a tax loss. Follow the link
Wash trading for further information.
Bear raiding - attempting to push the price of a stock down by heavy selling or short selling.
Insider Trading
Insider trading refers to the buying or selling of a stock by someone who has access to non-
public information of value about the stock.
Insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal
when the material information is still non-public.
Trading while having special knowledge is unfair to other investors who don't have access to
such knowledge.
Directors are not the only ones who have the potential to be convicted of insider trading. Brokers
and even family members can potentially be guilty.
Insider trading is legal once the information has been made public, at which time the insider has
no direct advantage over other investors.
The Securities and Exchange Commission (SEC), and regulatory bodies in many other countries
however, still require all insiders to report all their transactions.
To Conclude
Stock market manipulation is an activity which is out of the control of value investors. They are
reliant on the market regulators to enforce the law regarding this behavior.
Company insiders are required to report instances of insider trading to the regulator. Value
investors should look at these trading reports to see how insiders are legally trading their stock.
Types of Market Manipulation
Market manipulation can occur in a variety of ways including ...
Churning - when a trader places both buy and sell orders at about the same price. The increase
in activity is intended to attract additional investors, and increase the price.
Rumoring - when a group of traders create activity or rumors in order to drive the price of a
stock up, sometimes referred to in the US as 'ramping' (the market up).
Wash trading - selling and re-purchasing the same or substantially the same security for the
purpose of generating activity and increasing the price, or creating a tax loss. Follow the link
Wash trading for further information.
Bear raiding - attempting to push the price of a stock down by heavy selling or short selling.
Insider Trading
Insider trading refers to the buying or selling of a stock by someone who has access to non-
public information of value about the stock.
Insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal
when the material information is still non-public.
Trading while having special knowledge is unfair to other investors who don't have access to
such knowledge.
Directors are not the only ones who have the potential to be convicted of insider trading. Brokers
and even family members can potentially be guilty.
Insider trading is legal once the information has been made public, at which time the insider has
no direct advantage over other investors.
The Securities and Exchange Commission (SEC), and regulatory bodies in many other countries
however, still require all insiders to report all their transactions.
To Conclude
Stock market manipulation is an activity which is out of the control of value investors. They are
reliant on the market regulators to enforce the law regarding this behavior.
Company insiders are required to report instances of insider trading to the regulator. Value
investors should look at these trading reports to see how insiders are legally trading their stock.
The reason being that company insiders have the best insight into the workings of their company.
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