martha
...tirely possible for some traders to be better informed or more insightful, or brighter or richer or even more successful, without there being any violation of equality of opportunity. Equality of opportunity specifically does not require that all potential traders have equal information or even equal access to information. Lacking insiders' information, outsiders' transactions will probably be less successful than insiders' are. But outsiders' access to the market is nevertheless unimpeded: the fact of insiders' having privileged information imposes no legal or coercive or arbitrary barriers to stop the outsiders from trading. Nor indeed are there any legal or coercive obstacles to prevent outsiders from becoming insiders: equality of opportunity exists both with respect to trading and to acquiring positions that potentially have access to unpublished price-sensitive information. A trader who wants to benefit from insider knowledge can simply do what is necessary to become an insider--a corporate executive or a corporate cleaner, a professional adviser or a financial printer. Achieving such positions may well require considerable time and effort, but so may acquiring the capital with which to trade. So long as there are no coercive barriers to competing, however, the difficulties of achieving success are irrelevant to the existence of equality of opportunity. Does anything in the securities markets violate equality of opportunity? Certainly. Equality of opportunity is, for example, clearly violated when there is a legal ban preventing an individual from trading simply because of the relationship he bears to a company. But this is exactly what happens when insider trading is officially prohibited. It is therefore regulation against insider trading, not insider trading itself, that violates equality of opportunity in trading securities. Level Playing Fields and Handicapping Perhaps, then, what is unfair about insider trading is instead that it precludes a 'level playing field' between insiders and outsiders? Once again, however, the suggestion is misguided. The sporting metaphor does not mean what its advocates in finance often seem to believe. A level playing field is no guarantee that the teams will be of equal ability, or have equal resources or stamina, or equal chances of winning. It does not even mean that the field of play will be either smooth or horizontal. All that provision of a level playing field normally means is that some--not all--of the more obvious physical obstacles facing one side will also be faced by the other. If the field is steeply inclined, the obstacle to scoring that the slope represents will normally be reduced--not by getting out the bulldozer, but by making competitors change sides midway. Even so, however, the sun may still shine unequally into the eyes of the players. In the field of securities trading, players regularly change roles. Just as sellers in one transaction will be buyers in others and vice versa, traders who are insiders in one transaction will be outsiders in others. Similarly, investors are sometimes existing shareholders and at other times are not. To the extent that the metaphor of the level playing field is relevant, therefore, the conditions implied by it seem to be compatible with insider trading. It is therefore not the absence of a level playing field that makes insider trading unfair or immoral. It is interesting to note that although providing a level playing field does nothing to reduce participants' inequalities, there is a sporting operation that does: handicapping. Whether the objective is to encourage weaker players, or to create more exciting contests, handicapping serves precisely to prevent those with obvious natural advantages, or a record of greater success, from winning as easily as they might--and it does so specifically by denying them the benefits of their advantages. Thus favored race-horses carry heavier weights, and skilled golfers start with higher scores. It is therefore handicapping, not providing a level playing field, that much British securities regulation seems designed to achieve. In order to encourage wider share ownership, the UK government has sought to make investing in equities more attractive to individual investors. One of its main methods has been to try and convince retail investors that they are not irretrievably disadvantaged vis-a-vis professional, institutional investors. Accordingly, regulation has been introduced to limit institutions' ability to benefit from their size and comparative sophistication. Since one of the chief institutional advantages is direct access to company information, many traditional practices by which institutions gained that advantage, such as information meetings with companies, have been attacked by UK insider trading laws. But though the objective of equalizing investors' chances may make such handicapping intelligible, it does not address what is really wrong with insider trading. Teleopathy and Misappropriation And some, though by no means all, forms of insider trading are genuinely unethical. But they are not unethical because everyone is entitled to corporate information, and outsiders are unfairly disadvantaged compared with insiders: no such general entitlement exists. The only people who are morally entitled to possess information about a business are its owners, and even their rights to information are limited when they are shareholders. But it is only when the owners¡Xthe current shareholders [9]--are being deprived of their entitlements that insider trading is unfair. The immorality of insider trading is that information which belongs to the corporation (and thus ultimately to the shareholders), and which should in a business corporation be used to promote owner value, is instead misappropriated for the insiders' own interests. Those who possess inside information directly are ordinarily those who have been entrusted with the information in their capacity as corporate employees, advisers or agents. When, therefore, they use the information for anything that hinders or undermines the corporate purposes, as insider trading often does, they violate their fiduciary responsibilities to the corporation. They violate those responsibilities regardless of whether they themselves deal on that information in ways that harm corporate ends, or whether they transmit the information to third parties who do so. It is equally irrelevant whether the third party is the classic 'tippee' in a dealing ring, or the in-house market maker in an integrated investment bank. But not all unethical insider trading results from violations of fiduciary responsibility. If instead of being given the information by the corporation or its representatives, the insider dealers have simply taken the information, then what is involved is outright theft. And it is theft even though the information may remain to be used by its proper owners for other purposes after it has been used by the insiders: what is stolen is the chance to use that information first in a securities' transaction. In efficient markets, timing is critical: it matters when information is acted upon. If the benefit of being first goes to the errant insider rather than to the corporation or its shareholders, then they have been robbed of a significant asset. Ethical insider trading Understanding that it is misappropriation that makes insider trading unethical has several important implications. First, it makes it clear that not all insider trading is unethical: the manner of acquiring the inside information makes a difference to whether the insider trading is immoral or not. Trading on information obtained by virtue of conscientious observation and analysis, or assiduous investigation, must be distinguished from trading on information acquired through a breach of confidence or theft. The trader's relationship to the source of the information and to the subject of the information are therefore essential to determining the ethical status of any particular case of insider trading. If the information has been acquired incidentally or accidentally, trading on it may not be unethical. Consider an example. A mathematics professor knows that his best Ph.D. student, who is capable of great things, is about to go to work for a computing company. The professor thus has unpublished, price-sensitive information that he has acquired as the result of his profession. If he then buys shares in the company, he is guilty of insider trading. But there is nothing immoral about his action. He has not misappropriated the information: he has no fiduciary responsibility to the company. And no information has been stolen, from the student or from the university. The professor is simply in a position to learn and appreciate the significance or a piece of information that might give rise to a trading advantage. Equally, insider trading that is performed with the full knowledge and consent of the shareholders is not unethical. Shareholders who voluntarily surrender the benefits of the information they own, and who choose to allocate it instead to their functionaries, have made a legitimate decision about the disposition of their property. It may be a foolish decision, insofar as it creates a potential conflict of interest: employees who can profitably trade on information concerning their company's misfortunes may have less incentive to prevent them. But authorized insider trading cannot be teleopathic: the corporation's ends are just those determined by its shareholders. By agreeing that corporate insiders may trade for their own account using inside information, the shareholders have redefined their representatives' fiduciary responsibilities concerning their securities' trading activities. Since the insiders have been expressly allowed to employ the information for the purposes of their own trading, they will neither have misused nor misappropriated it in doing so. Consequently, insider trading to which the shareholders consent is not unethical. Not a 'Victimless Crime' Nonetheless, unethical insider trading is not a 'victimless crime'. Understanding that it is misappropriation that renders insider trading wrong makes it very clear who the victims of unethical insider trading are: they are the shareholders whose corporate information has been misappropriated. Shareholders normally suffer when their corporate property is stolen, whether what is purloined is a trade secret, a company car or material price-sensitive trading information. The damage to owners that results from insider trading may be most obvious when the inside information is that of an impending takeover. But it can result as well from less dramatic news, from the company's entering a new market or selling a loss-making subsidiary. Trading by corporate insiders automatically harms owner value when it causes the company's share price to fall. But insider trading can hurt owners even when it causes prices to rise: if insider trading raises a target company's share price, it makes a takeover more expensive. Although the primary victims of unethical insider trading are the shareholders of the company which is the subject of the inside information, they are not the only ones to suffer. If the insider trader is employed not by the subject company, but by a firm which was providing services to it, then that other firm and its shareholders will suffer as well. Because of the employee's fiduciary irresponsibility or theft, that organization's reputation as a reliable adviser or agent, and consequently its ability to attract future custom, can be impaired. Finally, immoral insider trading harms the market itself. It is not just the traders who are on the opposite side of the insiders' transactions [10] who lose; the overall reputation and viability of the securities exchange may well be diminished. When an exchange permits insider traders to rob shareholders of what is rightfully theirs, investors will be disinclined to trade on that exchange, and will be less willing to buy securities issued on it. Not only, therefore, will market liquidity be potentially reduced, but less capital will be available for corporate development. [11] Indirectly, at least, the entire economy is a victim of unethical insider trading. In summary, then, insider trading is unethical when, but only when, the inside information has been misappropriated, when it has been acquired through violation of fiduciary responsibility or through theft. It is therefore not insider trading as such but misappropriation that should be recognized as the criminal offence. What is unfair about immoral insider trading is that in it, information that is owned by the corporation and that should be employed to promote the interests of its owners, is diverted instead to the private purposes of corporate agents or outright thieves. When, therefore, owners authorize insiders to use corporate information for their private purposes, the consequent inside trading is not unethical. When they do not, however, they are the clearest and most direct victims of unethical insider trading. White-Collar Crimes ¡§Insider Trading¡¨ The corporate crime that I will be discussing is ¡§Insider Trading¡¨. It is a term I have heard of, but did not fully understand. I chose it because of the stock scandal involving Martha Stewart, an icon in her right. In thinking about this topic, one would think about why would a reputable person put them selves in a vulnerable position as this. I started to think about economics and power. Martha Stewart has both, in my opinion. So, why did she do it? Maybe she wanted to acquire more power and wealth. Maybe she did not think she would get caught. Did she think she was above the law? After all she is among the rich and famous. According to Sutherland, ¡§White-collar crimes are offenses by people that are respected and have high social status, usually committed in the course of their occupations¡¨. Some people suggest that these are not real crimes. Couldn¡¦t the authorities just let Martha slide this one time? Who is it hurting? Is this a way to get back women? For, heaven sakes she is 62 years old. She will be retiring soon. I will show that there is a problem growing in corporate America. The rich are getting richer and becoming more powerful and in some cases untouchable. Is it fair that some professions are able to commit crimes that are hard to detect and no one wants to put forth the effort to stop, so they just allow or turn their heads to it. After all, it becomes very expensive and it would require more than law enforcement official at the local level. ¡§Insider Trading¡¨ is a term that is very common to those who work with investments. Sometimes it is associated with illegal conduct. The term actually can include legal and illegal conduct. The legal aspect is when corporate insiders buy & sell stocks in their own companies. When they trade in their own securities, they must report their trades to the Securities and Exchange Commission (SEC). The illegal aspect is when you don¡¦t report to the SEC. It is when in possession of material, nonpublic information about the security. It also includes ¡§ tipping¡¨ such information, securities trading by the person ¡§tipped¡¨, and securities trading by those who misappropriate such information (www.sec.gov/answers/insiders.htm). Some examples of this could be, but not limited to ƒæ Corporate insiders trading securities after learning of confidential developments. ƒæ Family & friends of corporate insiders who trade securities after receiving such information. ƒæ Other person who misappropriated, and took advantage of, confidential information from their employers. A question was raised why not just let Martha Stewart slide? There are tens of thousands of American who invest in the stock market today; they have more money invested in stocks than in bank and credit unions. This possibly means that Americans have a certain level of trust in the market. If you allow corporate insiders to do, as they will that trust will deteriorate and will become corrupt across the board. As a result the economic strength of this country will also decrease. There needs to be trust, fairness and integrity in the American stock market, so that this country will remain strong and continue to have economic growth. The Insider Trading Scandal - What did Martha Do? Martha Stewart has been in the news for several months because the U.S. Securities and Exchange Commission believes that Martha Stewart was told by her friend Sam Waksal that his company ImClone¡¦s cancer drug had been rejected by the Food and Drug Administration before this information was made public. This rejection was a huge blow to his company and the price of its stock went down dramatically. However, Martha Stewart wasn¡¦t financially hurt because she had her broker sell her 4000 shares before this news was made public. If this is true, and it should be noted it hasn¡¦t been proven yet, then Martha Stewart is guilty of insider trading. What Is Insider Trading? When most people hear the term ¡§insider trading¡¨ they think of the illegal version. However, the term ¡§insider trading¡¨ can also mean the perfectly legal buying and selling of stock by a company¡¦s corporate insiders. Insider trading is legal when these corporate insiders trade stock of their own company and report these trades to the U.S. Securities and Exchange Commission (SEC). That way the insider trading is not kept a secret and anyone can find out a corporate insider¡¦s opinion of his or her company. Insider trading is only illegal when a person bases their trade of stocks in a public company on information that the public does not know. It is illegal to trade your own stock in a company based on this information but it is also illegal to give someone that information, a tip, so they can trade their stock. Insider trading is a complicated crime that involves the trading of financial assets. The value of a financial instrument such as stocks and bonds depends on information. For example when the news reported that Microsoft had been found guilty of antitrust violations the price of stock in Microsoft fell dramatically. The judge knew of this and could have profited if he owned shares of Microsoft (he didn¡¦t). Watch the movie Trading Places with Eddie Murphy and Dan Akroid for an example of inside information in the market for orange juice futures. This is the crime Martha Stewart is alleged to have committed. She learned that a pharmaceutical company was not going to receive FDA approval for a new cancer medicine (so the company¡¦s stock value would plummet when the public found out) and she sold her shares in the company just before the information was released to the public. Why Is Insider Trading Illegal? The SEC¡¦s job is to make sure that all investors are making decisions based on the same information. Insider trading can be illegal because it destroys this level playing field. Punishments and Rewards Associated With Insider Trading According to the SEC website there are almost 500 civil enforcement actions each year against individuals and companies that break securities laws. Insider trading is one of the most common laws broken. The punishment for illegal insider trading depends on the situation. The person can be fined, banned from sitting on the executive or board of directors of a public company and even jailed. The Securities Exchange Act of 1934 in the United States allows the Securities and Exchange Commission to give a person a reward ¡§a bounty¡¨ to someone who gives the Commission information that results in a fine of insider trading. Insider trading can occur when a person who possesses material non-public information trades securities or communicates such information to others who trade. The person who trades or ¡§tips information violates the law if he was trusted not to use this information for personal gain. to owe a duty either not to trade the securities of their own company or not to disclose any material non-public information they possess. The typical offenders usually involve corporate officers and directors; The phrase "white-collar crime" was coined in 1939 during a speech given by Edwin Sutherland to the American Sociological Society. Sutherland defined the term as "crime committed by a person of respectability and high social status in the course of his occupation." Who are the victims of this white-collar crime? One in three American households is now the victims of white-collar crime according to research conducted by the National White Collar Crime Center. Victims are not just little old ladies who trust nice young men to manage their life savings. Victims are not overwhelmingly wealthy either. Many middle class and poor people are the victims of white-collar crimes. Anyone who takes vitamin supplements was a victim of price fixing ¡V a form of antitrust violation. However, only 22% of victims report to law enforcement, with an additional 22% reporting to better business bureaus, chambers of commerce, or consumer affairs administrations. The low reporting rate is due to several factors. Engaging in high-risk behavior increases the chance of becoming a victim so many victims don¡¦t come forth because they fear their own prosecution. Since by definitions white-collar crimes are deceitful, many victims don¡¦t even know they are victims. Finally, many victims are embarrassed; they don¡¦t want to admit they were duped. This problem is enhanced by the fact that white-collar criminals are less likely to be convicted when compared with violent criminals. Many victims do not see a point to prosecution. Some victims try to recover their stolen money but often the perpetrators have spent the money and no recovery is possible. Because these crimes are nonviolent they tend not to receive harsh prison sentences. Who are the perpetrators of this white-collar crime? Anyone. They don¡¦t exclusively where ties and white-collar shirts. Greed and drugs are often seen as the most common reasons for committing theft in the workplace and this could be holding on to extra cash as a clerk at the local store to a banker who launders money for the Mafia. For some reason violations of public trust are often seen as more serious that private crimes. So when public employees are caught embezzling funds, they typically are slapped with the harshest penalties. The harm that it causes The extent of problems Number of offenses reported and number committed Who is typically arrested and convicted. INSIDER TRADING By Elaine Sternberg Reprinted from Just Business: Business Ethics in Action, Oxford:Oxford University Press, 2000. Insider trading is a subject that has suffered from much public misunderstanding, and much confusion. A Most of thee problem is that the term 'insider trading' is used very loosely, particularly by the media and politicians. Sometimes it is used describe all forms of securities-related illegal or immoral activity. Such usage has been encouraged by the term's having no single, generally accepted meaning. Insider trading is thus a prime example of the need to distinguish between the ethical and the legal: it is important to identify exactly what is wrong, so that appropriate action can be taken properly judged. The behavior referred to as insider trading and the ways in which they are treated vary a great deal, even in complicated markets. In some major jurisdictions insider trading is no crime. Traditionally, it has been an expected, and perfectly acceptable, perquisite of certain sorts of employment: brokers get inside information, the way that bankers get subsidized mortgages and airline staff gets cheap flights. Until quite recently, this was the attitude to insider trading even in the US and the UK. Since the late 1960s, however, insider trading has attracted stern displeasure and strict firm control in both America and England (Steinberg, 2000, p. 38). Though meaning very different things in the two jurisdictions, insider trading was criminalized in both during the 1980s, and was blamed for many of the major financial scandals of the 1980s and 1990s. Besides being illegal in some jurisdictions, what is wrong about insider trading is understood in this way? In ones opinion, it seems only right for the more hard-working, interested, logical investor--or broker--to be able to achieve better investments. And who better, after all, to 'counsel' the purchase or sale of shares than those closest to and presumably best informed about, a company's plans and prospects? Yet insider trading is now regularly denounced as immoral. Why is this so? Equality of Opportunity Most people view insider trading as being unfair, usually because it is thought somehow to violate equality of opportunity. Equality of opportunity is not infringed by insiders' having advantages not enjoyed by outsiders: equality of opportunity does not require that all potential competitors have the same natural abilities or positional advantages (Steinberg, 2000. p. 57) . To suppose that it does, is to confuse equality of chance with equality of outcomes. The soul of equality of opportunity is simply that all those seeking a good be allowed to compete for it equally on their merits. It does not require that the candidates or the outcomes be equal; it does not even require that it be equally easy for all to satisfy the entry requirements and participate in the competition ( Steinberg,2000. p. 49) How does this analysis of equality of opportunity apply to trading in securities? The good in question consists of trading profits, or a reduction of trading losses; the rules for allocating them are the laws of supply and demand operating in the market. [6] For equality of opportunity to exist, all that is required is that access to the market be unimpeded, and that the rules apply equally to all. No prospective trader should be excluded from dealing on the basis of his identity, or the size of the mooted transaction, or the source of funds used, [7] and orders should be processed on a strictly 'first come, first served' basis. [8] It is thus entirely possible for some t...