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Overview of the Case of Galleon Group

Question:

Discuss about the Influence of the Case of insider trading with the galleon group on the stock trading scenario.

Trading in the stock market is one of the most prominent and leading source of amount of money provided that the trading is being done properly. Majority of the stock trading are being done in the developed countries. This is due to the reason that, developed countries are having more effective and favorable infrastructure for the stock trading along with having more number of industries (Chen, Choi and Hong 2013). More industries are required for the enhancement of the stock market due to the fact that stock trading is being done with the share of large and medium business organizations. With the emergence of more number of business organizations in the stock market along with increased number of traders, the competition is increasing in this sector. Various trading firms are entering in this market to help the investors in gaining more profit from the stock market.

However, in the recent time, various cases related to fraud and money laundering are being emerged from the trading practices in the stock market. Various regulatory bodies such as government and stock market authority are initiating various legislations and regulations to curb these issues in the stock market. Punishments are also being stated, which will be given to the accused in case of the proven case (Kim and Sohn 2012). One of the most prominent and infamous case that was being emerged in the recent time in relation to the fraud in the stock trading is the case of Rajaratnam of Galleon group. This case changed the existing scenario of the stock market trading in the stock market of the United States as well as the stock market of other major nations.

The case of Rajaratanam of the Galleon group will be discussed in this report along with its implications in the stock market. This report will also discuss about the implications of using various illegal and unethical information-gathering techniques by the trading firms. It will also be discussed about the reasons behind the continuation of the unethical information-techniques being used by the trading firms even after the accusations of the galleon group. In addition, the implications of sharing confidential data for all the related stakeholders in the stock trading will also be discussed. Moreover, the influence of the case and accusation of the Galleon group in the information sharing policy of other trading organizations and the investors will also be discussed.

Reasons Behind Unethical Information-Gathering Techniques

Raj Rajaratnam is the billionaire businessman and former CEO and founder of Galleon group. It is hedge fund group being based on New York. His previous experience in working with various notable trading firms helped him in gaining good money from the market. Moreover, his firm Galleon group also gathered huge popularity in less time due to their favorable success rate with their investors. However, the first accusation was being emerged in 2009 when FBI arrested him for indulging in insider trading. Insider trading is the process of sharing and having the access of the confidential data of various business organizations for gaining advantage in trading with the shares of these organizations. He was accused of indulging in having the access of confidential data of various organizations, which helped him in having unethical and unlawful advantages in the stock market (Chen, Choi and Hong 2013). He was sentenced for 11 years of imprisonment along with penalty of $150 million. However, though the case of Rajaratnam is being closed but the aftermath of this case is long lasting for the existing stakeholders of the stock market.

The information gathering techniques being used by the trading firms in the stock market consists of various et5hical and unethical measures. Thus, the techniques of insider trading being used by the Galleon group are quite common in the Wall Street. There are various reasons behind the use of the unethical means of information gathering by the trading firms. One of the key reasons is the gaining of competitive advantages from the market. The competitive advantages of the trading firm are being originated from the information that they have the access for their investors. Thus, the more effective and distinctive information they will have for their investors, the more will be the return from the market and more investors will opt for them (Bauwens and Giot 2013). Thus, due to the market force, the trading firms will get indulged in the practice of using unethical measures of gathering confidential information. Moreover, it can be expected that, though Galleon group is being accused in the practice of insider trading but still the practice of having the access of confidential data will not get reduced in the existing business scenario in the stock market.

Due to the rapid emergence of insider trading by the trading firms in the recent years, more accusations and lawsuits are originating, which in turn reduces the trustworthiness of the stock market. Thus, this trend will lead to the reduction of the number of investors in the stock market in the following years. There are various stakeholders being involved in the stock trading and it is the individual responsibility of them to initiate various measures in order to reduce the implications of the insider trading. The following sections will discuss about the measures that can be taken by the stakeholders in curbing the implications.

  • Business organizations have to play an important role in preventing the sharing and publication of their confidential data in the stock market. One of the key measures for them will be preventing their employees from buying and trading their own shares from the stock market during the year ending announcements and any types of activities, which will have impact on the value of their shares (Beneish, Press and Vargus 2012). Thus, prevention of the employees in having the access of the confidential data will help the organization in protecting their confidential data from being publicized (Fisher 2015).
  • Whistleblower policy should be effectively maintained by the business organizations to aware the employees about the consequences of sharing any confidential data of the organizations. The employees should be given proper training about the rules and regulations of the organization in relation to the sharing of their confidential data along with the consequences for sharing. This will made the employees aware about the sharing of confidential data and it will help the organization to refrain them from sharing the data in the market or to the trading firms.
  • Initiation of the blackout process will also be helpful for the business organizations. Blackout process is the concept of preventing the employees from having the access of buying the shares of their employer. According to this policy, the employees will not have the permission to trade in the stocks of the shares of their own organization. This policy is being initiated by several business organizations to prevent their employees from trading due to the fact that the employees will have the access of some sort of confidential data of the organization.
  • In preventing the issue of sharing and publicizing the confidential data of the organizations, another key measure to prevent is having a specific department to look after the legal aspects of the organization (Jehanzeb and Bashir 2013). On the other hand, this will help the employees in having the idea about the various legislations regarding the legal formalities of the insider trading. Moreover, having the legal experts will help the organizations in managing any issues that can be emerged regarding the fraudulent activities in the trading of the shares.
  • Investors are the key stakeholder in the whole process of stock trading. The money that are being involved in the process of stock trading is being invested by them and thus they are having an important role in preventing the origination of the fraud in the trading practices. One of the key effective measures will be to adhere with the regulations and legislations related to the stock trading (Cox, Hillman and Langevoort 2016. It is being expected from the investors that, they will have clear idea about the various rules and regulations in trading in the stock market. This will help them in identifying any fraud in the process of trading along with preventing any unintentional indulgence in the unethical trading process. This will in turn prevent them to face any regulatory investigations and other legal issues in future.
  • The information being gathered by them from their trading firm should be double-checked in order to make sure that he data being received are not the confidential data and they are available in any public forum. This process will help the investors in identifying any forms of fraud in the process of the trading.
  • The investors by themselves should be strict about being ethical in the process of stock trading. This is due to the reason that if the investors are interested in having the confidential data then the trading firm will get more motivated in sharing the data with them and this will indulge them in the fraudulent activities (Coffee 2013). Thus, at first, the investors should be strict about not being indulged in any unethical process.
  • Investors may also have some sort of confidential data with them, which are being gathered from their past employers (Ogiela and Ogiela 2012). Thus, in using these data, they should be more careful. This is due to the reason that, using of the confidential data being gathered from their past employers will also attract legal issues and it will also considered as the insider trading. Thus, any types of issues that the investors have with them should be used carefully.

Implications of Insider Trading for the Stakeholders

  • Regulatory bodies are responsible to effectively regulate and control the process of stock trading. In addition, they are also responsible to figure out the various complaints being made by various stakeholders regarding any unlawful activities (Kim 2012). Thus, these regulatory bodies are having large sources of complaints, which they can use in identifying fraud in the market. The more effective and sound they will be in regulating in the market, the less will be the chance of origination of the unethical activities.
  • It is being earlier discussed that the whistleblower policy should be promoted by the business organizations in refraining the employees from sharing any confident data (Miceli, Near and Dworkin 2013). However, on the other hand, these whistleblowers are one of the key sources of gathering information for the regulatory bodies. Whistleblowers are having various confidential information about the trading practices being involved by their employers. Thus, data received by the regulatory bodies from the whistleblowers will be more effective and accurate. Due to this reason, various incentives are being offered by the regulatory bodies to promote the emergence of this information regarding the fraudulent activities.

In sharing and publicizing the confidential data to gain advantage in the stock market will have various positive as well as negative implications for all the related stakeholders. However, the positive implications will be for the short-term basis and on the other hand, in the long term, all the stakeholders will face negative impacts only. The following sections will discuss about the various implications that will be faced by investors, trading firms and the business organizations due to indulging in the insider trading.

  • The key positive impact that will be gained by the investors due to the reason of insider trading will be the extra financial return that they will garner from the insider trading. This is due to the reason that, initiation of the insider trading will help the investors in having the confidential data that are not available in the public domain and accordingly they can trade in the market. Thus, the proportion of profit for them will be more when compared to other investors (Bhattacharya 2014). The financial benefit will more for them in the case of the insider trading.
  • However, the rate and variance of the negative impact will be more for the investors compared to the positive impact. One of the key implications that they will face is the legal issues such as attracting lawsuits from various bodies (Beatty, Liao and Yu 2013). This is due to the reason that, if this is being the case that the investors are unintentionally indulged in the insider trading and they have no idea about it then also they will face the legal action because, it is the responsibility of them to keep track of their activities by the trading firm. Thus, they will face legal action (Pillai, Kar and Shah 2014).
  • Due to the emergence of the legal actions against the investors, they will also face social risk. Facing the legal action means that the investor will be prosecuted and will be trialed in court. Thus, it will have negative impact on the social reputation of the investors (Johnson and Covello 2012).
  • Black listing will also happen with the investors being accused in unfair trading activities. The regulatory authorities or the association of the stock traders may do this. This will create obstacles for the investors in further investing in the stock market (Bewaji 2012). Thus, apart from the social risk, they will also face financial risk also.
  • Employees will also face negative consequences in sharing the confidential data for the stock trading. The most prominent and inevitable implication that they will face will be their termination from the organizations (Hannah and Robertson 2015). This will having much probability due to the fact that in the case of sharing the confidential data of the organization, the business value and competitiveness of the particular organization will get lowered. Thus, they will first terminate the employee from their organization.
  • The employee accused of sharing and leaking the confidential data will face legal charges against him. The legal charges will be initiated by the organization (Morrow 2012). This is due to the reason that, the business value of the organization got affected due to the leakage of the confidential data. Thus, criminal cases may be lodged by the organization against them, which may cause imprisonment for the employees (Acemoglu and Akcigit 2012).
  • If the leakage of the confidential data by the employees caused any financial fraud in the stock market, then the employees will not faces lawsuits from their organization but from the regulatory bodies (Abbasi et al. 2012). The case will get magnified and it will cause huge implication of the accused employee.
  • The trading firms will also face consequences due to the sharing of confidential data to gain advantages in the stock trading. The most probable and prominent implication will be the black listing of the trading firm. In case of the proven accusation of the insider trading by any trading firm, the regulatory authorities will black list them, which will refrain them from any future trading activities (Wagner III and Hollenbeck 2014). Thus, it will cause dissolution of the trading organization.
  • The trading firm being accused for the insider trading in the past will face the issue of trustworthiness in the stock market (Ahmad, Bosua and Scheepers 2014). They will face difficulty in targeting new investors due to the fact that no new investors will take the risk of investing with them. in this case also, their business potentiality will get decreased.

The case of the insider trading will have impact or influence in the decision making process of mine in the trading of the stock. Prior to the investing in a particular stock or before trading with a trading partner, it is to be seen by me that of information being provided by the trading firm to me is confidential or not. If it is being found that the received information is confidential and it is not being available in the public domain, then it will surely affect my decision making process. In this case, I will prefer the long-term benefits to the short-term benefits. This is due to the fact that, in the short-term, I will gain from the process but in the long-term, it will have negative implication as discussed earlier in this report.

The case of Rajaratnam will have some sort of immediate impact on the existing trading practices in the stock market but it is highly unlikely that it will have long-term and permanent impact on the trading practices. This is due to the reason that, as discussed earlier, the insider trading being initiated by the trading firms is to gain competitiveness in the market and to stay ahead in the competition (Tavakoli, McMillan and McKnight 2012). Moreover, it is earlier discussed that the case with the Galleon group is not new and uncommon in the existing trading practices and various trading firms are involved in it. However, it is true that due to the case and accusation of the Galleon for insider trading, the growing rate of accessing the confidential information will get reduced but it will not stop. This is due to the reason that it is being earlier discussed that, the marketing force is behind the motivation of the trading firm to initiate the insider trading.

Thus, after a certain point of time, the effect or impact of the galleon group will get reduced and the trading practices will be same as existing business scenario. Investors will also act as the motivating factor for the trading firm to initiate insider trading due to the fact that more investors will trade with the trading firm with having more confidential data. According to them, the instant profit that they are gaining from having the confidential data will be more attractive compared to the long-term benefits.

Short-term and Long-term Implications of Insider Trading

Conclusion

Thus, from the above report it can be concluded that, though the case of the Galleon group will have implication on the existing business practices in the stock market trading but it will only for the short-term basis. Various reasons behind this phenomenon are also being discussed in this report. Moreover, the implications of initiating the insider trading for the stakeholders such as investors, trading firm and business organizations are also being discussed in this report. It is being seen that the stakeholders will have majority of the negative implications compared to the positive implication form initiating the insider trading.

References

Abbasi, A., Albrecht, C., Vance, A. and Hansen, J., 2012. Metafraud: a meta-learning framework for detecting financial fraud. Mis Quarterly, 36(4).

Acemoglu, D. and Akcigit, U., 2012. Intellectual property rights policy, competition and innovation. Journal of the European Economic Association, 10(1), pp.1-42.

Ahmad, A., Bosua, R. and Scheepers, R., 2014. Protecting organizational competitive advantage: A knowledge leakage perspective. Computers & Security, 42, pp.27-39.

Bauwens, L. and Giot, P., 2013. Econometric modelling of stock market intraday activity (Vol. 38). Springer Science & Business Media.

Beatty, A., Liao, S. and Yu, J.J., 2013. The spillover effect of fraudulent financial reporting on peer firms' investments. Journal of Accounting and Economics, 55(2), pp.183-205.

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.

Bewaji, W., 2012. Insider Trading in Developing Jurisdictions: Achieving an Effective Regulatory Regime.

Bhattacharya, U., 2014. Insider trading controversies: A literature review. Annu. Rev. Financ. Econ., 6(1), pp.385-403.

Chen, H., Choi, P.M.S. and Hong, Y., 2013. How smooth is price discovery? Evidence from cross-listed stock trading. Journal of International Money and Finance, 32, pp.668-699.

Coffee, J.C., 2013. Mapping the Future of Insider Trading Law: Of Boundaries, Gaps, and Strategies.

Cox, J.D., Hillman, R.W. and Langevoort, D.C., 2016. Securities regulation: cases and materials. Wolters Kluwer Law & Business.

Fisher, P.A., 2015. Common stocks and uncommon profits and other writings(Vol. 44). John Wiley & Sons.

Hannah, D.R. and Robertson, K., 2015. Why and how do employees break and bend confidential information protection rules?. Journal of Management Studies, 52(3), pp.381-413.

Jehanzeb, K. and Bashir, N.A., 2013. Training and development program and its benefits to employee and organization: A conceptual study. European Journal of business and management, 5(2).

Johnson, B.B. and Covello, V.T. eds., 2012. The social and cultural construction of risk: Essays on risk selection and perception (Vol. 3). Springer Science & Business Media.

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

Kim, Y. and Sohn, S.Y., 2012. Stock fraud detection using peer group analysis. Expert Systems with Applications, 39(10), pp.8986-8992.

Miceli, M.P., Near, J.P. and Dworkin, T.M., 2013. Whistle-blowing in organizations. Psychology Press.

Morrow, B., 2012. BYOD security challenges: control and protect your most sensitive data. Network Security, 2012(12), pp.5-8.

Ogiela, M.R. and Ogiela, U., 2012. Linguistic protocols for secure information management and sharing. Computers & Mathematics with Applications, 63(2), pp.564-572.

Pillai, D., Kar, S. and Shah, R., 2014. Impact of Insider Trading on Investment Decision by Investors. International Journal, 2(4).

Raghavan, A., 2013. The billionaire’s apprentice: The rise of the Indian-American elite and the fall of the Galleon hedge fund. Hachette UK.

Tavakoli, M., McMillan, D. and McKnight, P.J., 2012. Insider trading and stock prices. International Review of Economics & Finance, 22(1), pp.254-266.

Wagner III, J.A. and Hollenbeck, J.R., 2014. Organizational behavior: Securing competitive advantage.

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