What is Insider Trading
Insider Trading can be seen as trading stock to one’s own advantage through having access to confidential information. This may usually occur where a director, employee or other insider (or any external person who gets information from the insider) buys or sells the company’s shares based on confidential information which would have an impact on the price of the shares once the information becomes public.
The prohibition against insider trading prevents market manipulations and tries to ensure a level playing field by prohibiting.
Under the European Law and Market Abuse Regulations.
“llegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information”.
Insider Trading is also prohibited in Nigeria by Section 111 of the Investment and Securities Act prohibits insider trading by providing as follows;
“(1) Subject to Section 104 of this Act, a person who is an insider of a company shall not buy or sell, or otherwise deal in the securities of the company which are offered to the public for sale or subscription if he has information which he knows is unpublished price sensitive information in relation to those securities”.
Why should it be avoided?
The price at which shares are traded on the market are determined basically by the forces of demand and supply. Insider trading disrupts the scale and should be avoided because:
- It causes loss to the Shareholders due to the profits appropriated from dealing with financial information.
- It harms the Company as its valuation will be affected.
- It harms the Stock Market by creating unusual gaps in buy and sell positions – leaving those without insider information at a disadvantage.
- It undermines investor confidence.
Was Martha Stewart engaged in Insider Trading, and was her action or decision intelligent?
Martha Stewart was engaged in insider trading because she sold $230,000 worth of her stock based on information made available to her by an insider Bacanovic a day before the information became public. (The information here bothers on the CEO’s intention to sell his shares pursuant to the FDA’s decision disapproving ImClone’s drug approval application).
Her action was not intelligent because she ought to be aware that she is legally restricted from taking such action. Ethics is about doing the right thing. The facts of the case reveals that she is an experienced stock broker and has also consolidated her businesses into Martha Stewart Living Omnimedia Inc. (MSLO) which was also a public company. She is well aware of securities rules. The result of this failure to intelligently do the right thing led to the following consequences:
- Her vacation and daily schedule was disrupted by various interviews where she had to constantly tell further lies to augment her denial of insider trading.
- MSLO’s shares plunged further.
- Although Stewart defended her innocence, she was indicted for making false statements, obstruction of justice, securities fraud and conspiracy
- She had to resign as CEO of MSLO.
- The Shares of MSLO has to plunge further.
