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Analysis of information gathering techniques on Wall Street and possible solutions to reduce the practice

Discuss About The Insider Trading The Galleon Group Company?

The development of the securities industry has come under possible great threat of insider trading by the stakeholders involved in the trading exercise as well as the nature of business conducted in the market characterized by high risks of potential loss and potential gains. However, the Securities and Exchange Commission has set forth different rules governing the trading of securities in different security markets. Globally this market has been considered as one of the greatest markets with many players investing in different sectors of the economy and helping in growth and development of the economic status of different nations. Our case study provides a detailed analysis of a case of insider trading within the Galleon Group of companies and the resultant effects to the culprits of the exercise. The company is privately owned and provides services and information about investment such as company stocks, bonds and other financial instruments (Sinkovics et al. 2014, p. 668). The company has been making money for itself as well as for others by picking stocks and managing portfolios and hedge funds for different investors. It affirms to the truth of the statement that information gathering techniques are still coned under or on the Wall Street. Much of these activities of business investment decisions are done by a team of experts who are trusted by the company to make decisions on behalf of the company in stock exchange market (Crane & Matten 2016, p. 2). However, in most cases, many individuals have been found engaging in illegal trading for their own personal gain motives and have cost other stakeholders involved in the trading and in the market. Using our case study provided then we shall get to understand different views and concepts in relation to information seeking behaviors which lead to insider trading and the possible solutions to be undertaken by business regulators, investors and executives to reduce the practice, the implications of illegal insider trading and effectiveness of secret investigations in prevention of sharing of non-public information

It is true to say that information seeking techniques like those of Rajaratnam are common on Wall Street today. Raj Rajaratnam is the head of Galleon had been accused and indicted of 14 counts of securities fraud and conspiracy by being sued by the Securities Exchange Commission for engaging in insider training. Globally, Rajaratnam was a smart person who was known for different achievements in business world despite having degree in engineering, he had received a number of awards and promotions due to his efforts in running business, his experience and skills in financial analysis and especially in the banking industry and a number of years of experience in the industry and was known to be very influential and engaged in dirty businesses to avoid taxation or engaged in illegal business actions as long as the benefits from the deals (Cheng et al. 2014, p. 18). Therefore no one had harbored any illusion that Galleon Raj Rajaratnam was going to beat the tap for insider trading until he was sentenced to 11 years by the court a ruling in which his lawyers and representatives termed to be centered on ensuring that the man spends her entire lifetime at the prison. Information seeking technique in this contest can be understood from the concept of inside trading in which the term is used to imply the buying and selling of a security by someone in a position or has access to material nonpublic information about the security (Nofsinger & Varma 2014, p. 187). It may also be defined as a practice whereby company securities are traded by individuals or someone who by any virtue of work have access to the non-public information which can be crucial in making an investment decision.

Implications of sharing confidential material information or insider trading

This practice is highly discouraged by the securities and exchange commissions with the aim of protecting fair trade in the market for the benefit of common investors who engage in trading without any information on the securities and are considered to be fair players in such a market. Insider trading can be illegal or legal at the same time (Lopatta et al. 2015, p. 476). Illegal insider trading as an information seeking technique involves tipping others when you have or are in a position of any sort of non-public information. On the other hand legal insider trading in most cases happen when business directors or executives of a company purchase or sell shares or other company securities but disclose the transactions legally. In context of our case study, information seeking techniques on Wall Street would imply the processes that are used to create and organize information in lower Manhattan originally known as the New York home of stock exchange and the historic headquarters of the largest US brokerage and investment banks (Augustin et al. 2015, p. 1). Therefore Wall Street can be assumed to have all the information related to the buying and selling of securities.

Rajaratnam and five others had been accused of using the non-public information from company insiders and consultants to make millions in personal profits in which these company insiders gave or sold relevant company information to Rajaratnam through agreed terms for their own benefit. The practice is thus found to be illegal as it gives certain groups of people an unfair advantage in the market and is also said to put the interests of the insider above those to whom he or she owes a fiduciary as well as encourages an insider to artificially influence the value of a company stock (Niessner, 2015, p. 1). The companies involved in securities exchange as well as the government through the regulating body, in this case, the Securities and Exchange Commission should always try to prevent insider trading in order to ensure the integrity of the markets and maintain their reputation. The commission as the regulator can, therefore, conduct constant monitoring of the trading activities of different companies especially through the company events such as acquisition and announcement of company securities which in one way or the other may vary the stock price significantly (Pevzner & Xin 2015, p. 203). This can help to establish whether the traders were legitimate or the trade was as a result of insider information being provided to those who instituted the trade just as it was in the case of Rajaratnam and five others who were convicted for insider trading.

The regulators, as well as the company directors and executives, can take into consideration the complaints raised by the traders who might have lost substantial sums on large trades and conduct investigations of insider trader as such malpractices may drive away the company  current and potential investors (Gao et al. 2014, p. 166). Such complaints help then analyze and identify the players in the market who are trading against the principles and ethics of the industry. They can also seek to obtain tips from company or firms whistleblowers that come forward with knowledge of the people trading such information in the company for an appropriate action to be taken. This information may prove to be very crucial in preventing future likelihood of losses due to insider information effect. The law provides compensation of 10 to 30 percent of any fines and charges of culprits in the courts to be given to whistleblowers (Grinblatt & Titman, 2016, p. 1). Lastly, the companies should ensure that all the company officers and directors involved in buying and selling of company securities clear all their transactions with the chief legal officer and in case of any illegality the company and the regulators can take appropriate legal measures to sue the culprits.

The implication of the sharing confidential information cuts across all the parties involved in the business and has been elaborated in our case study. It is therefore important for all the stakeholders in the market to ensure that the market is fair to all players. Companies whose shares are publicly traded are required by law to openly disclose their financial statements at the designated and scheduled dates to the stock exchange (Armour et al. 2017, p. 1435). When this happens the market is said to be trading on fairgrounds and on equal terms to interested parties. Markets should provide an equal trading ground for all the parties and it is important that ethical standards guiding the business operations are held high in the business world.

Using our case study analysis it is important to note that, Rajaratnam being an investment analyst at Needham and Co was able to develop a great networking of important trading officers from different companies (Asker et al. 2014, p. 355). This kind of networking enabled him or granted hi power to make precise security market predictions about company’s financial situations and therefore he was able to develop his own company the Galleon Raj. Since he was able to obtain information of other companies in the market such as the Goldman Sachs Group, Intel Corp and the Mckinsey and Co he was in a position to engage in fraudulent trading activities by committing fraud and conspiracy. It was possible for him to maintain an ethical state of mind and hired individual analysis to examine the company’s financial statements. By doing so this would not have led to any illegality and his company could have as well made profits and execute it in a professional and ethical manner (Anderson, 2014, p. 1). However his conspiracy and fraud actions led to the suffering of his business which was taxed a lot of money, it cost the other people who conspired together and pleaded guilty of charges and had to serve a jail sentence.

Insider trading is an unethical business practice and whenever a company insider shares confidential information with an investor gets an unfair advantage and interferes with the integrity of the market. It is therefore unfair to share any confidential material information. This is because insiders have access to information that is not given to the public. Unequal possession of information is an advantage that cannot be competed away because the advantage depends on a lawful privilege to which an outsider cannot acquire access. Confidentiality is a very important business ethics (Ventoruzzo 2015, p. 560). It is therefore important to maintain the confidentiality of the important company information to build the trust of investors and other stakeholders. Sharing of company information leads to lack of trust with the company and finally affects the growth of the business. One of the key issues in security markets that business or companies should take care is the market integrity.

The main reason why there are regulators such as the security exchange commission and the government through the central banks of different nations in the industry is to maintain the integrity of the market. Sharing of non-public information leads to distortion of market integrity and results to lack of investor’s confidence (Henning 2015, p.3).  For instance, in our case study, it is evident that after the sentence of Rajaratnam and the effects his conspiracy and fraud activities had to the securities market many investors got scared away as the market could not be trusted anymore for investment. Another implication of sharing non-public information to the public is the fact that it drives away investors or reduces their confidence with the companies. This is because there is always a certain group of investors who benefit from the securities due to their ability to access insider information and always have an advantage in the trading process. This will automatically affect my decision on trading in the security market as well as any other interested investor (Davidowitz 2014, p. 281). The knowledge of this information gives you the certainty that the market is unfair and unequal to all people or all players in the market. In a country that pursues justice, it will also not be right to engage in such business as this may have led to severe consequences from the side of the law just as it was to Rajaratnam and his associates in conspiracy and fraud.

By taking into consideration the case of Rajaratnam and the people he had in his network of committing conspiracy, fraud and insider trading, no one could have thought that the arm of the law would one day catch up with him. It was a shock to the nation and entire world that such crimes despite your business influence can have such implications and effects (Anderson 2015, p. 339).  Most business managers and investors in security markets always boast of their confidence in the market affairs because of the insider information they have and the networks they have created with different expert analysts on the same as well as consultants. I believe that this secret investigation just as it was a shock to the global business world had the same impact on other business managers and investors who have been practicing the same conspiracy and fraud. It must have shocked and scared them as well and I believe the punishment the culprits received from the court judgment scared the company insiders. I believe this acted as a lesson to be learned by these business leaders and managers and therefore my assumption is that they will trade with caution whenever dealing with security markets (Dolgopolov 2014, p. 3). The security exchange commission can as well remove those companies from being listed in the stock exchange markets completely for violating the market trading principles and business principles as well as ethical standards of trading in stock and security markets.

Conducting a secret investigation helps in identifying not only the key suspects or culprits in the trading process but also destroying all the networks which may have been created and could as well resulted to business cartels in the industry. It helps in identification of the loopholes in the industry and therefore it will be difficult for managers and other investors to exploit the same loopholes in conducting their conspiracy and fraud activities (Sinkovics et al. 2014, p. 701). The impact that the conspiracy and the insider trading had on Galleon Company, as well as the insider companies, served also as a great lesson to manager and investors and therefore they will always be in fear of collapsing their businesses by acting in an unethical manner whereas there is a possibility of doing the same business in within the required legal framework by employing credible and ethical business analysts who will promote the integrity of the markets as well as protect the image of their businesses and build a long-lasting client relationships in their businesses. The investigation, therefore, played a vital role to the redemption of the industry and it’s likely to bring about future success in the industry by creating a platform where investors can trade on equal grounds and having a fair competition in the sector which will contribute to increased growth.

Conclusion

Every business ought to be conducted in an in an ethical environment and it’s the responsibility of business managers to ensure that they are socially responsible for their business activities. The security market which is characterized with the trading of stocks, bonds, and other financial instruments is very important in the development of an economy and therefore the relevant regulatory frameworks should be developed in order to promote and protect the integrity of the markets. Insider trading has been one of the greatest challenges of trading in security markets and has had the industry grow at a slow pace as compared to trading in commodity markets (Hajli&Lin, 2016, p. 115). However with the implementation of the relevant protectionist and regulatory frameworks the market will always remain the biggest market in any economy. It is important that all the stakeholders involved in the market to collectively work together to maintain a healthy competition in the market by trading under the established trade guidelines, under the established ethical standards and the regulatory framework established by the security exchange commission. This case study, therefore, plays an important role in helping the business world understand the importance of business ethics and being socially responsible in business activities.

References List

Agrawal, A. and Cooper, T., Insider trading before accounting scandals. Journal of Corporate Finance, Vol 34, 2016, pp.169-190.

Anderson, J. ‘Greed, Envy, and the Criminalization of Insider Trading’, Utah L. Rev. 2014, p.1.

Anderson, J. ‘Anticipating a Sea Change for Insider Trading Law: From Trading Plan Crisis to Rational Reform’. Utah L. Rev, 2015, p.339.

Armour, J., Mayer, C. and Polo, A. ‘Regulatory sanctions and reputational damage in financial markets.Journal of Financial and Quantitative Analysis, Vol 52, no. 4, 2017, pp.1429-1448.

Asker, J, Farre-Mensa, J. and Ljungqvist, A, ‘Corporate investment and stock market listing: A puzzle?’, The Review of Financial Studies, Vol 28, no, 2, 2017, pp.342-390.

Augustin, P, Brenner, M. and Subrahmanyam, M., ‘Informed options trading prior to M&A announcements: Insider trading?. 2015, Press.

Cheng, B., Ioannou, I. and Serafeim, G. ‘Corporate social responsibility and access to finance’ Strategic Management Journal, Vol 35, no. 1, 2014, pp.1-23.

Crane, A. and Matten, D, ‘Business ethics: Managing corporate citizenship and sustainability in the age of globalization’ Oxford University Press, 2016.

Davidowitz, S, ‘Abandoning the Mosaic Theory: Why the Mosaic Theory of Securities Analysis Constitutes Illegal Insider Trading and What to Do about It. Wash. UJL &Pol'y, Vol 46, 2014, p.281.

Dolgopolov, S, ‘High-Frequency Trading, Order Types, and the Evolution of the Securities Market Structure: One Whistleblower's Consequences for Securities Regulation, 2014.

Gao, F, Lisic, L. and Zhang, I, ‘Commitment to social good and insider trading.Journal of Accounting and Economics, Vol 57, no 2, 2014, pp.149-175.

Grinblatt, M. and Titman, S., Financial markets & corporate strategy. 2016

Hajli, N. and Lin, X, ‘Exploring the security of information sharing on social networking sites: The role of perceived control of information’ Journal of Business Ethics, Vol 133, no. 1, 2016, pp.111-123.

Henning, J, ‘What's So Bad About Insider Trading Law?. Business Lawyer, Vol 70, no. 3, 2015.

Lopatta, K., Buchholz, F. and Kaspereit, T, ‘Asymmetric information and corporate social responsibility’ Business & Society, Vol 55, no. 3, 2016, pp.458-488.

Niessner, M., 2015.Strategic disclosure timing and insider trading.

Nofsinger, J. and Varma, A. ‘Socially responsible funds and market crises’ Journal of Banking & Finance, 48, 2014, pp.180-193.

Pevzner, M, Xie, F. and Xin, X, ‘When firms talk, do investors listen? The role of trust in stock market reactions to corporate earnings announcements. Journal of Financial Economics, Vol 117, no. 1, 2015, pp.190-223.

Sinkovics, N, Sinkovics, R. and Yamin, M, ‘The role of social value creation in business model formulation at the bottom of the pyramid–implications for MNEs?. International Business Review, Vol 23, no. 4, 2014, pp.692-707.

Ventoruzzo, M. ‘Comparing insider trading in the United States and in the European Union: History and recent developments’ European Company and Financial Law Review, Vol 11, no. 4, 2015pp.554-593.

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