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Business Practices in Stock Market

Question:

Discuss About The Practice In The Business In Stock Market?

The purpose of this report is to shed light on the activities like inside treading and various types of techniques for gathering non-public information of various organizations. Using the information some officials take advantage and make huge profits by investing in the stocks of those organizations (Nunan and Yenicioglu 2013). It is seen that some organizations has earned up to 100,000 million dollars overnight by investing money based on the non-public information they have gathered. These practices need to be stopped immediately and the governmental authority needs to amend some rules and regulations to prevent these types of activities. The report further highlights the factors like how people gather this non-public information, what is insider trading and whether punishment of several individuals would stop this type of malpractices or not.

Gathering information and various techniques related to gathering information is a common practice in Wall Street. Business personnel at Wall Street are actually in business with intent to make money (Allan et al. 2012). The investors can fetch non-public information from the chief financial officers of various organizations and that would be something illegal. Else, the investor can develop his own prediction by piecing together small parts of information from the suppliers of the organization and from the former workers of the companies and from various other sources. It is seen that the prosecution of Rajaratnam and some others gave a pause to the hedge funds regarding their techniques to gather information.  It can be said that insider trading is illegal, but in some cases, business personnel gets greedy and they does take steps due to their egoism (Jayaraman 2012). In some cases, these people lose control on their thinking capability and cannot decide what is right and what is wrong. The egoists think that they should take decisions that would maximize their interests and undoubtedly, the insider trading and other organized crime would continue to grow and people would think and invent more clever paths to get away with those criminal acts (Allan et al. 2012). To stop and reduce this kind of practices, the government needs to implement strict asking the organizations to have robust compliance, supervisory, surveillance and control measures in place to identify illegal insider trading.

Insider trading can be referred to as a trading of public organization’s stock or other bonds by people those have access to non-public information about those organizations. In many nations around the world, kinds of trading based on insider information is illegal and punishable offence, as they see it as an unfair act towards other individuals or investors who does not have those kinds of information (Beneish, Press and Vargus 2012). On the other hand, the investor, who has the insider information, can potentially make huge profits using that information. It is a matter of fact that, insider trading increases the cost of capital for the issuers of securities, and that decreases the economic growth (Allan et al. 2012). It is seen that, some economists want that insider marketing should be legalized for the benefits of the society. It is a matter of fact that, trading by some insiders, or employees is widely accepted as long as does not rely on the material information not in the public domain. Various jurisdictions require that such trading should be reported for the monitoring of the transactions. In the land of United States and in many other nations trading conducted by corporate organizations, key employees or stockholders must be reported to the regulator or should be publicly disclosed within some day’s interval. In this type of cases, it is generally seen that, the insiders need to file Form 4  under United States Security and Exchange Commission while purchasing or selling stocks of their own organizations. The rules and regulations governing insider trading are complicated and significantly vary from country to country. Under one jurisdiction the definition of insider trading might be broad and may not cover not only the insiders but also any individuals related to those insiders, for an example the brokers, various associates and in some cases even family members. An individual who gathers the non-public information and trades based on that information might get charged as guilty (Augustin, Brenner and Subrahmanyam 2015).

Insider Trading and Its Effects


In United States of America and some other nations amended rules stating the insider traders criminals. In United States, Sections 16B and 10B of the Securities Exchange Act of 1934 is directly related to insider training. The congress of United States enacted this law after the crash of stock market in the year of 1929. In United States, for optional reporting purposes the corporate insiders are mostly defined as the company’s officers, beneficial owners and directors in more than 10% of a class of the organization’s equity securities. The trades made by these types of insiders within the organization’s own stock, based on the non-public information, in most cases considered as fraudulent, as the insiders are violating the judiciary duty that they owe to the stockholders (Allan et al. 2012).  The corporate insider, by accepting employment has to undertake a legal obligation to the stockholders to put the shareholder’s interests before their own, in some cases related to the corporation. Whenever the insiders buy and sell based on the organization’s owned information, then they are violating the obligations they have towards the stockholders. For n example, it can be said that, illegal insider trading can occur if the chief executive officer of  a company learns that the organization would be taken over  and then buys shares of that organization, knowing that the prices of those shares would rise (Frey, Stemle and Glaznieks 2014). In America, insiders are not only limited to corporate officials and major stockholders, where the illegal insider trading is concerned but can involve any person who trades stocks based on material non-public information violating duty of trust. For an example, it can be said that in various jurisdiction, where a corporate insider give tips to a friend about non-public information, are most likely to have an effect on the share price of the organization. The duty that the corporate insiders owe towards the organizations is now imputed to the friend, and the friend violates a duty to the organization if he trades based on the information he got.

In United States, not all the trading based on non-public information can be said is illegal insider trading. As if a person in a public place overhears a conversation of a CEO of a company about their recent profits, and the person invests money in the shares of that organization, it would not be counted as an illegal act (Dierkes et al. 2013). It is a matter of fact that punishment for insider training is dependent on various factors. There are three main factors and those are, scope, evidence and gain. How many persons the wrongdoing is affecting is the scope. How much profit did the insider make by the transaction can be said as a gain (Frey, Stemle and Glaznieks 2014). Finally, anyone who is charged of insider trading is innocent until the individual is proven guilty. In United States of America, in addition to the civil penalties, the inside trader might also be a subject to criminal prosecution for fraudulent activities where the SEC regulations are violated, the US Department of Justice might call to conduct an independent investigation in parallel. Then if the department of justice finds something to be concerned of, they might file criminal charges.

Illegal Insider Trading - Laws and Regulations

United State’s insider trading prohibitions are generally based on English and American common law prohibitions against fraudulent activities. On the year of 1909, before the passing of Securities Exchange Act, United State’s supreme court stated that a corporate leader who bought any organization’s shares knowing that the prices would increase can be accounted as fraudulent act as he did not disclose his inside information (Dierkes et al. 2013). The section 15 of the Securities Act of 1933 contains prohibitions of fraud in the sale of securities, which were strengthened by Securities Exchange Act 1934. Again section 16B of the Securities Exchange Act of 1934 forbids short swing profits made by the directors of corporate of organizations, officers or any stockholders who owns more than 10% of the shares of an organization (Frey, Stemle and Glaznieks 2014).

Thus, it can be said that insider trading is in general illegal but in some cases it can be seen as legal dealings, although in most cases it is seen that various types of illegal activities are done under the light of insider trading.

From profound and decisive analysis of the case study, it can be stated that the investigation and conviction of Rajaratnam would not deter the fund managers from sharing non -public information. The strong reason that can be cited in this regard is that there have been multiple numbers of trade frauds within the organizations that were not disclosed properly due to lack of proper investigation. However, there has been proper understanding of the cases where the trade frauds were addressed with proper business license. In fact, the number of insider trade fraud has been rising in a rapid pace thus creating a hole within the conviction process where the organizations are observed to have been losing the criteria of being trusted in the international market. Moreover, there has been a continuous threat for the organizations where they were highly threatened by continuous fraudulent activities in front of the vigilance.  As a matter of fact, this has been taken into consideration that in most of the cases the basic idea remained persistent in terms of addressing to the frauds with proper measure. Else, the investor can develop his own prediction by piecing together small parts of information from the suppliers of the organization and from the former workers of the companies and from various other sources. It is seen that the prosecution of Rajaratnam and some others gave a pause to the hedge funds regarding their techniques to gather information.  It can be said that insider trading is illegal, but in some cases, business personnel gets greedy and they does take steps due to their egoism (Jayaraman 2012). In some cases, these people lose control on their thinking capability and cannot decide what is right and what is wrong

Factors Influencing Punishment for Illegal Insider Trading

As a corrective measure, the insiders who are associated with accounting process would try to investigate- within the organization; and shortlist the other frauds- major or minor who have been turbulent in the money laundering process.  Since there has been a proper understanding of the process pertaining to the effective understanding that was highly in the formation of the case would focus on the basic understanding of the huge concept within the society and the business market. In this case, the further investigation process would be focusing on the actuality or genuineness of workers who are closely associated with the accounts department. Two possible chances would create many opportunities for the fund managers to look into the matter. First, the managers would create a trusted circle of the employees. As a matter of fact, this would focus on the clear understanding of the process pertaining to the effective consideration of the trusted circle. With the effective measure this would focus on the actuality of how the trusted circle is addressed during post-trauma period. Undoubted more stringent vigilance would be placed upon the entire case pertaining to the effective measures to restrict further fraudulent activities. Since this has been taken in to certain consideration that more stringent action is needed for the vigilance of the accounts and the fund, the fund managers, according to my own view, would look forward to recruiting fresh candidates. In order to influence upon the structure of infraction policies of the organization the managers would focus on various angles. The multidimensional approach to find out the basic understanding of the cases would be taken into certain consideration. Infringement of law or the organizational agreement would purpose to the service of transparent activity of the national law. The organizational policy would definitely focus on the adherence to the national law without a single diversion. In this case, it can be taken into certain consideration pertaining to the effective understanding of the policies pertaining to the effective chance where in most of the cases, the law would be focused through the eyes of organizational transparency. I do not think that it would not have the possibility to deter any sort of infraction from being taken place. Since this would focus on the actual understanding of the process pertaining to the effective chance where the law and the organizational policies would create a stronger base for restricting and challenging further fraudulent activities in relation with money, behaviour or other ethical activities, the fund managers would incur more stringent policies, in association with, the newly formed body. In this case, this would undoubtedly provide the organization with a clear scope to fight the frauds who still exist without being recognized. Provision of corporate insider training would focus on the effective understanding of the organizational policies where this would be focusing on the actuality of the forces within the frame that is constructed in adherence to US organizational law framework. However, the nature in the form of infraction would be addressed since there is a sheer need to maintain a close observation and attention of the surroundings. As a matter of fact, this would be targeting the basic understanding of the policies with the effective nature where this would somehow address the greater number of the law firms.

Conclusion:

From the discussion cited above it can be stated that the organizational law is always structured with the basic understanding of the policies in adherence to the national framework.  In this context, it has been taken into certain consideration pertaining to the effective nature of the cases where the law is highly addressed by the stringent policies. With the effective nature of the law, there has been a thorough understanding pertaining to the effective nature of the organization pertaining to the methods to fight the frauds. 

References

Agrawal, A. and Cooper, T., 2015. Insider trading before accounting scandals. Journal of Corporate Finance, 34, pp.169-190.

Allan, J., Croft, B., Moffat, A. and Sanderson, M., 2012, May. Frontiers, challenges, and opportunities for information retrieval: Report from SWIRL 2012 the second strategic workshop on information retrieval in Lorne. In ACM SIGIR Forum (Vol. 46, No. 1, pp. 2-32). ACM.

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

Beneish, M.D., Press, E. and Vargus, M.E., 2012. Insider trading and earnings management in distressed firms. Contemporary Accounting Research, 29(1), pp.191-220.

Beneish, M.D., Press, E. and Vargus, M.E., 2012. Insider trading and earnings management in distressed firms. Contemporary Accounting Research, 29(1), pp.191-220.

Dierkes, M., Erner, C., Langer, T. and Norden, L., 2013. Business credit information sharing and default risk of private firms. Journal of Banking & Finance, 37(8), pp.2867-2878.

Frey, J.C., Stemle, E.W. and Glaznieks, A., 2014. Collecting language data of non-public social media profiles. In Workshop Proceedings of the 12th Edition of the KONVENS Conference (pp. 11-15).

Jayaraman, S., 2012. The effect of enforcement on timely loss recognition: Evidence from insider trading laws. Journal of Accounting and Economics, 53(1), pp.77-97.

Kim, S.H., 2012. The Last Temptation of Congress: Legislator Insider Trading and the Fiduciary Norm Against Corruption. Cornell L. Rev., 98, p.845.

Nunan, D. and Yenicioglu, B., 2013. Informed, uninformed and participative consent in social media research. International Journal of Market Research, 55(6), pp.791-808.

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