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Introduction
Insider trading has rocked newsrooms lately. Some of the most famous incidences that had serious consequences on the companies that were involved include Martha Stewart, WorldCom and Enron scenarios. The illegal form of insider trading is the trading that takes place in a security market, following exchange of material information, which is not offered to the general public.
As a results of its undue and destructive nature this trading is outlawed by the US Securities Exchange Commission SEC this is particularly because it tends to devastate the investors confidence (Reh, 2012, p. 1). This paper seeks to analyze an article that features an insider trading in Tokyo, followed by a critical analysis of insider trading.
Summary of the article JPMorgan Implicated in Japans Insider Trading Probe
This CNBC article shows how JPMorgan was caught up in Japans Insider Trading Probe. In this drama, some insiders had conspired to help Nippon Sheet Glass get some shares in 2010. It was alleged that the material information was leaked to Asuka Asset Management Fund by a salesman from JPMorgan.
This insider trading has become the order of the day in the Tokyo securities market. Astonishingly, the penalty imposed by the Japanese stock market regulators is inconsequential and may not bar a repeat of the vice. As such, it was probable that JP Morgan would get away with it, as the penalty that could have been imposed is inconsequential.
One of Asukas fund managers was said to have been involved in the insider trading, and he was relieved from his duties, though it was not clear whether he was fired. Investigations revealed that Asuka had benefited from the leak, something that had not been investigated well by the bank. This left questions on whether the whole organization was involved, or it was only JP Morgan.
Daiwa distanced themselves from any blame by stating that there was no credible prove that they were involved in any illegal behavior. This incident and many others, which are similar to this have led to a criticism of the Japanese regulators crackdown, which is seen as grossly shoddy as it does not involve tough sanctions in major markets.
Critical analysis of insider trading
An insider is a party that is privy to critical information regarding an entity, which has an impact on the price of its stock, or which can have some impact on the investors decisions. In the case analyzed above, it was alleged that a JPMorgan sales man was responsible for leakage of materials information, which was not made available to the public. This JPMorgan salesman is the insider in this case, and the information he leaked was material, because it influenced the decision of the investors, ahead of a $505 million share offer.
It is obvious that the companys executives who are involved in such a deal, including share brokers have access to material information. The JPMorgan top sales executives, for example, knew the plans of the share offer. Furthermore, a clerical officer who prepares information to be published in the press, or the accountant who undertakes sales estimates analysis can as well be considered to be insiders.
To prevent illegal passing of material information, there should be a policy to regulate the number of people who can access material information due to its sensitivity. There are scores of reasons why this should be done. First, there is the obvious reason of limiting the possibility of some people disclosing information, which is material. The second reason is that the insiders should be limited on the time they can trade on the entitys stock which can be the middle of months.
As evidenced in the case of JPMorgan, the top sales people are also insiders who are privy to very critical information. Those who are engaged in public relations, for example, by preparing public declarations are insiders whose ability to leak material information should be controlled.
As an insider has been defined above, the people involved in R&D, during the introduction of a new product in the market are also insiders, who can leak material information. Lastly, other parties who are insiders includes bankers, legal representatives and other institutions that could be having access to some critical information of the company, during discharge of their duties.
This law has effectively netted even a person who is not a senior member of the management. For example, if the senior manager of an entity reveals, to an ordinary person, that its best expectation for a step forward product will not be approved by the regulatory body; then it means that that person is in all respects an insider, just like a senior manager as far as that information is concerned.
The essence here is that such a person should not be allowed to trade with courtesy of that information before the general public becomes privy to it. Consequently, such people are considered to be temporary insiders , and therefore, cannot get involved in trading to take advantage of such information, without being accused of breaking the law.
The Security Exchange Act of 1934, section 10(b) and 14(e) accord the SEC the powers to obtain a court order to force the accomplices to return the profits they have obtained from such a deal. Additionally, SEC can ask the court to force the company to pay a very heavy penalty, which is proportional to the amount of profits realized from the illegal trading. Alongside these financial fines are criminal fines.
Just like the Japanese regulators crackdown that has been discussed above which seems to be grossly ineffective, I think these fines are not adequate, and should be made significantly more severe. I strongly support a United States bill, which will make those who are accused of insider trading accountable for committing a felony that leads to incarceration for a period not less than 10 years.
Conclusion
In view of this discussion, it has been found that insider trading is a retrogressive activity that amounts to defrauding of shareholders, and which should be punishable by the toughest terms possible. The illegal form of insider trading is the trading that takes place in a security market, following exchange of material information, which is not offered to the general public.
The strong criticism of the Japanese regulators crackdown is a wakeup call. It shows that this issue is not taken with the seriousness it deserves, by the regulatory bodies, which are entrusted to curtail the insider business. It should be in the best interest of companies to avoid insider trading so they are not investigation by the regulatory bodies this is particularly because, even after being cleared of any wrong doing, such an investigation can have a lasting damage on the companys reputation.
Reference
Reh, F.J. (2012). Insider Trading. Retrieved from https://www.thebalancecareers.com/insider-trading-2275117
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