Insider trading denotes to the trading of stock of a public company or securities of the company by people with privy to information of the company that is not yet made public. In some cases, the practice is unfair as it puts investors without access to such information at a disadvantage given that an investor privy to such information stands a better chance of making a profit than an ordinary investor. Insider trading by directors, corporate officers, and employees often aim at maximizing profits or avoiding losses. Insiders, in this case, involve any beneficial trade with a substantial amount of a company’s stock or securities. Additionally, insiders include directors, employees within the company who have the fiduciary duty to shareholders within the company. Insiders may also include persons who use non-public information to trade in shares as it falls under the violation of the contractual obligation of trust. Illegal insider trading is a situation whereby an insider who has privy information not yet public undertakes buying and selling. On the other hand, legal insider trading is whereby a director or employee engages in buying and selling of stock or bonds, but abides by the rules and regulations of the SEC, for instance, an insider buying stock with the expectation of good performance of the company over a long period.
The classical and misappropriation theory offers a theoretical foundation upon which criminality of insider trading may be determined. According to classical theory, a violation occurs when an insider is involved in trading using material and information that is not within the public domain. In this case, corporate insiders who have the fiduciary obligation to the company’s shareholders may be guilty of insider trading. The theory also applies to temporary insiders such as lawyers, consultants, underwriters or anyone who temporarily have an access to such inside information. In this case, the temporary insiders are barred from using the inside information to engage in trading as they remain and have fiduciaries of the company.
The misappropriation theory entails stealing classified information from a company and using the information to engage in trading. The theory further expands to persons who may also use the information to trade for their own benefit of profit within the company.
The facts presented and available about the NEWTECH and OLDTECH securities transactions present different scenarios of insider trading in which the individuals involved breached the rules and regulations governing trading in companies’ stocks and securities. Jim Greedy, as a public relations officer at NEWTECH, has access to information on the merger between NEWTECH and OLDTECH, an information that is t yet made public. As an insider, Jim Greedy has the moral obligation and fiduciary duty to the company’s shareholders on the trading of bonds and securities within the company. He is therefore barred by SEC laws from taking advantage of the inside information to purchase any of the company’s shares to his advantage for profit gain. Additionally, by failing to report his trades with and to the SEC, Jim Greedy is thus involved in an illegal insider trading within the company that has bestowed trust and the moral duty to safeguard such information. His action thus, is a breach of trust, confidence, and fiduciary obligation to the non-public information. By selling his newly acquired shares immediately after the announcement, Jim Greedy confirms that he has taken advantage of the inside information for personal gain, violating the responsibility of duty bestowed upon him by the company and the shareholders. From his initial purchase of 100,000 shares, Jim Greedy makes a profit of $500,000.
Jill Avarie, is heavily involved in the negotiations for the merger of OLDTECH and NEWTECH. She, therefore, has access to the company’s information, which she decides to use for to her advantage. By calling her friend Mary Glutton to “Go for the gold; just don’t let on that I told you. Remember, you did not hear this from me”, Jill goes against the rules and regulations governing insider trading. She steals information from the company and tips her friend to make gold from the trade. According to the misappropriation theory, Jill steals privy information not yet made public to enable her friend Mary Glutton engages in trading. Jill violates the fiduciary duty to the company and to the company’s shareholders by trading on inside information with her friend. On the other hand, her friend, Mary Glutton, is consciously aware that the information given to her by Jill is a vital factor in the trades of the company and that the information given is not provided to her in good faith. By going along with Jill’s request not to disclose the source of the information, she is engaging in misappropriation of vital information of the company.
According to the rules and regulations of the SEC, trading in such a circumstance may only be legal when the information was given or accessed is not and may not form a factor in the company’s trade, plans, or contract and that the information provided is made in good faith. Jill Avarie and Mary Glutton are thus in violation of the rules and regulations on trading according to the SEC according to the misappropriation theory. They are therefore involved in an illegal insider trading. According to the misappropriation theory, Mary Glutton owes a duty of obligation to the company and to the shareholders and therefore is liable in accordance with the premise. Mary Glutton immediately sells her shares and makes a profit of &250,000, a clear indication that she used privy information for personal gain.
Joe Lawyer has full-classified information on the merger details between OLDTECH and NEWTECH. He acknowledges the upcoming sale of shares of the merger and goes ahead to purchase 200,000 shares. He convinces himself that he has no duty to both the company and the shareholder, a conviction that urges him to go ahead with the trade. When the information is made public in June 2016, he sells his 200,000 NEWTECH shares and makes a profit of $1 million. Even though Joe Lawyer has no relationship or duty with the company or the shareholders, he is a temporary insider with access to classified and privy information not yet made public, according to the classical theory. He, therefore, owes the company and the shareholders fiduciary duty, to safeguard any information he accesses within or while undertaking his duties between the two merging companies. He is thus involved in fraudulent insider trading by taking advantage of his position to benefit himself. He owes the company and the shareholders, the moral obligation to safeguard any information obtained while working within the merger of the two companies and trades illegally for personal gain when he goes ahead with the purchase of the shares.
The four individuals are thus in violation of the rules and regulations on insider trading. By taking advantage of their positions and alignment with the two companies on the verge of merging, they go against the fiduciary duty to both the company and the shareholders to safeguard any privy information not yet out in the public domain. However, they use the opportunity and information for their own benefit in order to make profit.