Trading Insider Final

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INSIDER TRADING


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Introduction Anuj Chawla

Impact on market Bhawna Sharma

Theories and Concept Rama Mittal

Case on Enron Dipali Goyal

Regulations by SEBI Neha Aggarwal


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INSIDER TRADING

Insider trading is the trading of acorporation's stock or other

securities (e.g. bonds orstock options) by individuals withpotential access to non-publicinformation about the company. ]
http://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Stock_optionshttp://en.wikipedia.org/wiki/Insider_tradinghttp://en.wikipedia.org/wiki/Insider_tradinghttp://en.wikipedia.org/wiki/Stock_optionshttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Corporation


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However, the term is frequently used to refer to a practice inwhich an insider or a related party trades based

on material non-public information obtained during theperformance of the insider's duties at the corporation, or

otherwise in breach of a fiduciary dutyor

other relationship of trust and confidence or where the non-public information was misappropriated from the company.
http://en.wikipedia.org/wiki/Materiality_(law)http://en.wikipedia.org/wiki/Fiduciary_dutyhttp://en.wikipedia.org/wiki/Fiduciary_dutyhttp://en.wikipedia.org/wiki/Materiality_(law)


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Definition of "insider"

Corporate insiders are defined as a company's

officers, directors and any beneficial owners of

more than ten percent of a class of the company's

equity securities.

Trades made by these types of insiders in the

company's own stock, based on

material non-public information, are considered tobe fraudulent since the insiders are violating the

trust or the fiduciary duty that they owe to the

shareholders.
http://en.wikipedia.org/w/index.php?title=Material_non-public_information&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Material_non-public_information&action=edit&redlink=1


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Legal insider trading

if a corporate insider plans on retiring after aperiod of time and, as part of his or her retirement

planning, adopts a written, binding plan to sell a

specific amount of the company's stock every

month for the next two years,

during this period the insider comes into possession

of material nonpublic information about the

company, any subsequent trades based on theoriginal plan might not constitute prohibited insider

trading.


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Illegal insider trading refers generally to buying or

selling a security, in breach of a fiduciary duty or

other relationship of trust and confidence, while in

possession 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.

Illegal insider trading


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Illegal insider trading would occur if the chief

executive officerof Company A learned (priorto a public announcement) that Company A will

be taken over, and bought shares in Company A

knowing that the share price would likely rise.

Illegal insider trading is decreasing overall

economic growth.
http://en.wikipedia.org/wiki/Chief_executive_officerhttp://en.wikipedia.org/wiki/Chief_executive_officerhttp://en.wikipedia.org/wiki/Chief_executive_officerhttp://en.wikipedia.org/wiki/Chief_executive_officer


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Penalties

Civil Penalties: any profit made or loss avoided

and penalty of up to three times this amount.

Individuals face up to 25 years in prison forsecurities fraud and fines of up to $1 million.


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IMPACT ON MARKETS

One can also say that the biggest difficulty created by insider trading is a lack of faithin the exchange markets where these illegal trades take place.

When entire markets are widely perceived to be tainted by insider trading, averagepeople who are also potential investors will avoid markets altogether.


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INSIDER TRADING

Only a companys insiders or employees can

commit insider trading. Need to trade and be

caught in the act.


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TRUTHs

The law applies to anyone who knows materialnonpublic information at the time of the trade or

tip

Applies to trades of stock in customers, suppliers,

clients

Tipping, even without the tipper trading, is illegal

Most cases based on circumstantial evidence


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REASONS FOR REGULATING

INSIDER TRADING

Unfair practice to public investors

Prohibiting it ,promotes efficiency of markets

Property of material information belongs to the

corporation for business purposes.


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Misappropriation theory

It states that anyone who misappropriates (steals)

information from their employer and trades on that

information in any stock (not just the employer's

stock) is guilty of insider trading.


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Proving that someone has been responsible for a

trade can be difficult, because traders may try to hide

behind nominees, offshore companies, and other

proxies.

U.S. Securities and Exchange Commission

prosecutes over 50 cases each year, with many being

settled administratively out of court.The SEC and several stock exchangesactively

monitor trading, looking for suspicious activity.

Proof of responsibility
http://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission


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Trading on information ingeneral


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SEC regulation FD ("Full Disclosure") requiresthat if a company intentionally discloses material

non-public information to one person, it must

simultaneously disclose that information to the

public at large.

In the case of an unintentional disclosure of

material non-public information to one person,the company must make a public disclosure

"promptly."

SEC regulations


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Security analysts gather and compile

information, talk to corporate officers and

other insiders, and issue recommendations

to traders. Thus their activities may easilycross legal lines if they are not especially

careful.

Security analysis and

Insider trading
http://en.wikipedia.org/wiki/Security_analysishttp://en.wikipedia.org/wiki/Security_analysis


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The CFA Institute in its code of ethics

states that analysts should make every effort

to make all reports available to all the

broker's clients on a timely basis.Analysts should never report material

nonpublic information, except in an effort to

make that information available to the

general public.
http://en.wikipedia.org/wiki/CFA_Institutehttp://en.wikipedia.org/wiki/CFA_Institute


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CASE ON

ENRON

Corporation


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SEBI REGULATIONS ACT, 2002

Prohibition on dealing

3. No insider shall

(i) either on his own behalf or on behalf of any otheperson, deal in securities of a company listed on any

stock exchange any unpublished price sensitive

information; or

(ii) communicate counsel or procure directly or

indirectly any unpublished price sensitive

information to any person who while in


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possession of such unpublished

price sensitive information shall not deal in

securities

[3A. No company shall deal in the securities

of another company or associate of that

other company while in possession of anyunpublished price sensitive information.]


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Investigation

4A. (1) If the Board suspects that any person

has violated any provision of these

regulations, it may make inquiries with such

persons

(2) The Board may appoint one or more

officers to inspect the books and records ofinsider(s)


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Board right to

investigate.

5. (1) Where the Board, 26[is of prima

facie] opinion that it is necessary toinvestigate and inspect the books of

account, either records and documents

of an insider, it may appoint an

investigating authority for the saidpurpose.


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6. (1) Before undertaking any

investigation under regulation 5, the

Board shall give a reasonable notice toinsider for that purpose.

(2) where the Board is satisfied that in the

interest of investors or public no suchnotice should be given, it may by an

order in writing direct that the

investigation be taken up without such

notice.

Procedure for

investigation


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(3) On being empowered by the Board, the

investigating authority shall undertake theinvestigation and inspection of books of account

and the insider against whom an investigation is

being carried out.


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7. (1) It shall be the duty of every insider,

who is being investigated to produce to

the investigating authority such books,

accounts and other documents in his custody

or control and furnish the authority with the

statements and information relating to thetransactions in securities market within such

time as the said authority may require.

Obligations of insider on

investigation by the Board.


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2) The insider shall allow the investigating

authority to have reasonable access to thepremises occupied by such insider and also

extend reasonable facility for examining any

books, records, documents and computer data

in the possession of the stock-broker or anyother person and also provide copies of

documents or other materials which, in the

opinion of the investigating authority are

relevant.


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(3) The investigating authority, in the

course of investigation, shall be entitled toexamine or record statements of any

member, director, partner, proprietor and

employee of the insider

(4) It shall be the duty of every director,

proprietor, partner, officer and employee of

the insider to give to the investigating

authority all assistance in connection withthe investigation, which the insider may be

reasonably expected to give.


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Communications of findings

1.The Board shall, after consideration of the

investigation report communicate the findings

to the person suspected to be involved ininsider trading or violation of these regulations.

(2) The person to whom such findings has been

communicated shall reply to the same within 21days.


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3) On receipt of such a reply or

explanation, if any, from such person, theBoard may take such measures as it deems

fit to protect the interests of the investors

and in the interests of the securities market


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Trading Insider Final

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