Insider Trading And White Collar Crime: Implications And Prevention Strategies

Insider trading and its implications

Discuss about the Intraday Behavior of Stock Prices.

Over the past years, issues related to insider business have been witnessed in various countries. Insider is defined as the illegal practice of trading the stock exchange to one’s own benefits through accessing to confidential information (Geis, 2011). One of the good examples of this type of business activity is the one discussed in the case study where Rajaratnam liaised with individuals from other companies to expose an information which the involved parties had not decided to reveal. Secrets in companies plays a significant role in various activities including decision making and should always remain confidential among the parties.

Based on the fact that Insider trading is illegal, it has various implications to not only the company or individuals involved, but also to the country at large (Peterson, 2012). For this kind of business activities to come to an end, there are various individuals who should implement the required measures. Some of these people comprise of investors, executives and regulators. For these people to control these activities, they must use strategies which can make not only the offenders to learn a lesson, but also for those who might have plans to engage in similar frauds understand the reasons why they should only do what is ethical.

Are information gathering techniques like Rajaratnam’s common on Wall Street? If so, what could regulators, investors, and executives do to reduce the practice?

The information Gathering technique used in the case study are common on the wall street in the fact that people are in business to make irrespective of whether the process used is right or wrong. Although engaging in insider trading is not legal, some of the business people are so greedy and act with egoism (Larry, 2010). They think about the benefits they are going to attain and lose sight of what is right or wrong. Egoist have a strong believe that they should come up with decisions that will maximize their own self-interest. This means that insider trading and other related white collar crimes will continue to arise, with individuals thinking of coming up with more clever ways of getting away with it.

To protect insider trading and other related types of white collar crimes, regulators should set strict rules that requires all companies to have robust compliance, surveillance, supervisory and control measures to assist them in detecting possibility of illegal and unethical activities (Sheila & Ronald, 2013). They must always keep a close eye on companies that make a lot of money to determine if they make it using ethical strategies.

Preventing insider trading through regulation

Regulators must also ensure that proper disciplinary actions are taken upon those found guilty to have engaged in these type of crime. Providing light punishment like the case of Rajaratnam and his colleagues will not address the issue because people will always think more about the benefits of engaging in the activity than the punishment (Ruben, 2011). The legal action taken on the offenders should not only be aimed at helping them change, but also to act as a lesson for those who might be think to practice such crimes.

Taking action upon executives or companies where these kind of illegal and unethical activities occur can also play a role in reducing them from occurring. This is because when executives know they may face a legal action for being involved in such activities, they will be committed to ensure there is full conformity with rules in their organizations.

 One of the ways of providing proper disciplinary action is ensuring the fine requested is high enough and the jail term is long enough to make those found guilty learn the repercussions of engaging in unethical activities (Aragon, 2011). From the case study, Rajaratnman and his colleagues were not punished in a manner which could make them not repeat the crime. Before requesting the fine and thinking of the jail term, regulators were supposed to first consider the amount of money which they had received through the activity and make the punishment decision based on that.

Executives on the other hand should ensure all employees are scrutinized during recruitment process to determine the level of their integrity. Employing individuals who know the importance of being ethical in whichever thing they do is fundamental in ensuring such kind of crimes do not occur. Employees who adhere to work ethics always do what is right irrespective of whether they will attain personal benefits or not. One of the reasons that made Galleion to be a victim of insider trading was probably because the executives did not scrutinize Rajaratnman’s level of integrity while hiring him. Employees with high levels of integrity will report cases of illegal and unethical activities that are likely to occur in organizations.

Executives should also ensure employees who engage in such activities are punished. Some of the punishment measures can be through suspensions, being arrested, and firing among others. Ensuring all employees are taught about the serious ramifications of engaging in these kind of crime can also play a role in preventing such activities do not occur (Davis, 2017). Executives can attain this through organizing for training programs with organizations aimed at teaching employees about the implications of insider trading and the importance of upholding ethics in whatever thing they do.

Preventing insider trading through disciplinary action

Executives should also ensure they are careful when talking to outsiders. Before revealing any sensitive information, they should ensure they well know the motive of the outsider and how well they can keep secrets (Clark, 2010). This is because some outsiders may seek to engage in communication with the executives with the aim of attaining an information which they can use to harm the business activities of the organization.

Investors should also play a role in minimizing the chances of insider trading through making sure they only invest their funds with companies that they do not suspect their tract record in terms of integrity (Weng, 2014). Before making the decision to engage in long term investment with any company, they should always look at the fundamentals like for example how secure their funds are, the integrity level of employees, managers and executives, the control measures which the company has established to prevent such crimes from happening and so forth.

Establishing proper data analysis tools to identify illegal or unethical activities witnessed in the stock market can also assist investors to minimize insider trading in companies. In most instances, illegal or unethical activities in the stock market occurs with little awareness from the stakeholders (Gangopadhyay, 2015). Coming up with data analysis tools can play a significant role in spotting all illegal activities when or before they occur. Being able to identify insider trading before it occurs can assist executives, regulators and investors to take proper measures to prevent it from happening.

The other way of preventing these kind of illegal and unethical activities from happening in organizations is through ensuring executives, investors, and regulators working together. When coming up with measures of preventing these activities from occurring, they should consult each other to ensure the established measures are effective enough (Harasimowicz, 2016). They should also work together to ensure proper measures are used to help the society understand how engaging in insider trading can harm businesses and economy, and the kind of measures that can be taken on those who practice them.

What are the implications of sharing confidential material information? Is it something that would affect your decision about how to trade a stock if you knew about it?

Confidential material information is fundamental to an organization and should not be shared with untrusted people. Over the past years, various organizations have suffered various consequences which result from sharing confidential information with untrusted people (Leng, 2014). One of the examples of such organizations is galleon group.  Confidentiality in organizations embraces business related secrets and techniques, including common understanding through fostering pleasant self-belief among the shareholders.

Preventing insider trading through employee screening and ethics training

 One of the implications of sharing confidential material information is that it can make one waste a lot of time and resources that he/she would have used to undertake other important things. This is because Insider trading is illegal and unethical and requires one to serve a jail term and pay heavy penalties if found guilty. The time spend to serve jail term can be used to undertake other activities which can be beneficial to not only the individual but also to the country (Dolgopolov, 2010). The fine paid when found guilty can also be utilized for other personal developments. If for example, Rajaratnman and his colleagues and not served the jail term and paid the fine, they would have used that time and money to invest or do other things.

The other impact of insider tradition is that it makes a company to lose a lot of money which may make it to close down. For example from the case study, several companies had to close down after Rajaratnam and his colleagues undertook the activity. The fact that this activity involve losing money to other individuals through illegal means makes investors not to make the decision of investing their funds in firms which are prone to these activities (Green, 2011). This makes such companies to experience challenges because investors plays a significant role in enabling the companies to have resources that can make them to operate in the right manner.

Sharing confidential material information also limits the fair play, demand and supply in the stock market, which in turn impacts the proper functioning of the capital market. It also weakens the trust of investors in the stock markets, a situation which can harm the economy as a whole (Sabino, 2011). The reason for this is because lack of investors may make some firms to experience loses or lack finances that can assist them to perform as expected.

The other implication of Sharing confidential material information is that is makes investors and other shareholders to have an unfair advantage (Nagy, 2016). For example, firms whose stock are publicly traded on stock exchanges have to openly reveal their financial statements after every three months. When the information is publicly revealed, it forms a level playing ground for investors and other shareholders and may make the prises to increase or decrease based on the nature of information revealed.

Job loss may also be an implication of sharing confidential information with unintended people. Individuals found guilty to have engaged in this activity are fired even after being sentenced to jail time because no company wants to lose investors because of having negative tract records which arise from these kind of activities.

Preventing insider trading through investor due diligence and data analysis

Sharing confidential material information can impact the quality and success of decisions in an organization. If for example certain confidential information that was meant for decision making is leaked to the public, the content contained in that information may no longer serve its purpose (Pellicani, 2010). This is because for some decisions to succeed, the information used to make them should only remain confidential to the parties.

In the business world, competition is one of the challenges that impact the success of organizations. Confidential information plays a significant role in planning on how to challenge competitors and if it is shared to the unintended people, the competitor may use it to come up with strategies of challenging the other company (Chen, 2012). If for example a company has an information concerning how to challenge its rival and the information is leaked before the strategies are implemented, such information may no longer become effective because the rivals will have already established responding strategies.

There are adverse implications of sharing confidential material information with unintended people and therefore if I had an information concerning the issue I would choose not to make any decision of trading stock. Making a decision with this kind of information means one is ready to suffer the repercussions associated with this fraud (Todd, 2011). Insider trading can make an investor to lose money which he/she would have used to undertake other things which can be beneficial to only the investor but also to the country. To avoid making losses, it is always advisable for investors to trade stocks with firms that have strict measures to prevent such frauds from occurring.

Do you think the secret investigation and conviction of Rajaratnam and other people in the Galleion network will deter other fund managers and investors from sharing non-public information?

Based on the manner in which investigations and conviction of Rajaratnman and other people in the Galleion group were conducted, I do not think if it can deter other fund managers and investors from sharing non-public information. For people to learn that doing a particular thing is illegal and unethical, there should be proper ways of handling those found guilty (Nagy, 2016). For example, letting the public know how a particular case was investigated and the legal measures taken upon those found guilty can minimize the chances of similar crimes from occurring in the future.

Secret investigations and conviction will make managers and investors to think that they are smarter and able to hide. In the business world, the aim of every person is to make money, and therefore failing to use proper ways of assisting the people to know how particular crimes are handled will make them feel that engaging in crimes to earn more finances is not a big deal because the systems present to detect such crimes not effective.

Collaboration between investors, regulators, and executives

Secret investigations and conviction may make other managers and investors to think that the regulators are reluctant and motivate them to commit such frauds with the notion that they will not be caught. When investigating and convicting individuals who are found guilty to have committed a particular crime, it is advisable to undertake it in a manner that can make others learn a lesson (Strohmenger, 2010). The regulators in Rajaratnam’s case failed to handle the case in a manner that can assist other mangers and investors to see how serious the judicial system is in addressing matters to do with such frauds.

The manner in which investigations and conviction of Rajaratnman and his colleagues were conducted may not make other managers and investors not to commit such frauds because in most cases and especially where regulators seems not serious in dealing with some matters, people will always think much about the gains of a crime than its consequences (Jolly, 2013). Engaging in insider trading can make one attain a lot of money and therefore if one is sure that those in charge are not going to handle the case seriously, then they will end up committing the crime.

When conducting investigations, it is always advisable to let the public know the findings so that they can know why the offender may be convicted or not. It is also advisable to let them understand that committing such kind of crime can lead to a particular amount of fine or serve a jail time (Huang, 2010). This kind of information will allow other managers and investors who might thing about committing similar crimes to understand the reasons why they should change their plans. The manner in which investigations and conviction were undertake during Rajaratnam’s case may make people to view the crime as petty.

Based on the human greed and ingenuity, managers and other people will always come up with new ways to dodge the regulators and investigators because there are enormous benefits of engaging in such kind of frauds. This means the only way of making people not to engage in these type of unethical practices is by making them think more of the repercussions than the benefits (Davis, 2017). One of the ways of making them think so is through conducting investigations and convictions in a manner that can make them learn a lesson. Based on the crime committed, Rajaratnam and his colleagues were given light punishment which cannot make other people to think of the disadvantages of engaging in such kind of frauds.

Secret investigation and conviction of Rajaratnam and other individuals in Galleon network will not deter other fraud managers and investors from sharing non-public information because human beings will always have the notion of succeed in crimes that have financial benefits. This kind of notion will always make them to attempt doing illegal and unethical activities and when caught they feel it was by bad luck (Gangopadhyay, 2015). For example from the case study, Rajaratnam and his colleagues were aware of the repercussions of insider trading and chose to ignore because they valued the benefits than the consequences.

While insider trading has a negative impact to shareholders and should be banned, it can also reveal important information to investors and analysts (Inci, 2010). In some instance, investors have been designing investment strategies based on a legal insider trading, and analysts reviewing their forecasts based on insider information.

Conclusion

In conclusion, the information gathering techniques like Rajaratnam’s are common on Wall Street because people are in businesses to make money. The desire of getting rich will always make people to engage in some activities without considering whether they are right or wrong. In order to prevent the practices of insider trading from occurring, regulators must ensure all organizations fully complies with the laws. They must also ensure those who commit such crimes are punished in a manner that can make others to learn a lesson. Executives on the other hand should ensure they scrutinize employees during hiring process to determine their level of integrity. Finally, investors should come up with strong data analysis tools to spot such activities before or when they occur. They should also consider investing with companies whose integrity track record is well known

There are various implications of sharing confidential material information with unintended people. Some of these implications comprise of negative impact to economy, wasting a lot of time in serving jail term, paying huge fines, losing jobs, being banned from the industry among other. If I had an information concerning this issue, I would choose not to make any decision concerning trading a stock. This is because every person wants to invest wisely and in places where his finances are secure.

Secret investigations and conviction of Rajaratnam and other people in the Galleion network will not deter other fund managers and investors from sharing non-public information because people will always think that they can come up with new ways to outsmart the smart. When conducting investigations and conviction, it is always advisable in a manner that can make other people to learn the repercussion of engaging in some crime.

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