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Though stock markets are formed with the aim of providing fair trading environment for investors, cases have been reported where people use them to get rich by illegal means. People who have access to confidential information, usually take advantage of the same and engage in illegal activities thus gaining a lot of profits. Moreover, confidential information is sometimes leaked to third parties who trade on the same, thus making profits before others get the information. Insider trading, which is the act of trading on confidential information, has been illegalized though it is still taking place in many places.
A good example is the case in which the U. S. Securities and Exchange Commission sued Waldyr Da Silva Prado Neto for misusing material nonpublic information he possessed. It was alleged that between 1st and 17th September 2012, Neto used information from his customer about impending acquisition of Burger king by a private equity firm based in New York for insider trading (U.S. Securities and Exchange Commission [SEC], 2012). In the process Neto gained $175 000 in illegal profits. Additionally, Neto informed other people about the take over and these people traded on the information. It is noted that Neto had been warned by one of his friends, who is a manager in New York, not to trade on the information but he went ahead and engaged in insider trading (SEC, 2012). The acts of Neto were against sections 10(b) and 14(e) of the securities exchange act of 1934, and rules 10b-5 and 14e-3.
Given the experience of Neto in the stock market, he ought to have known that insider trading is illegal. Neto owed the duty of confidentiality to his customer. Consequently, Neto should not have given out information of the customer knowing that the information was entrusted to him with the expectation that he will keep it secret. Similarly, Neto was aware that information about impending acquisition of Burger king was material and nonpublic thus, he should not have released it to anyone. On the contrary, Neto informed third parties who used the information to make huge profits. Moreover, Neto violated the Securities law by purchasing the securities of Burger King yet he possessed the company’s material nonpublic information. Lastly, by giving material nonpublic information to his customers Neto expected to receive favors, which is against the law (SEC, 2012).
Another example is the Boston-based bank which was sued for informing close friends about impending mergers and acquisitions, and either directly or indirectly benefitted from the same. In this case, the duty of trust was breached and material nonpublic information of other clients was released to third parties. Employees of the bank in turn received personal benefits when information was released. People who received the material nonpublic information used it to gain illicit profits. In this regard, the act of insider trading took place which is a violation of the law (SEC, 2012).
If the stock markets are left to operate freely without any regulation, then a lot of people will suffer while some few individuals will enrich themselves (Preda, 2009). Every human being has the tendency of satisfying personal needs first before taking care of other people’s needs. In this regard, the possibility that stock brokers will swindle money if unregulated is very high. In addition, the system is not that perfect that it can efficiently operate without some form of control. Every person will work for his or her own selfish interest while that of ordinary shareholders will be left out.
As a result, regulation of securities market is crucial. Firstly, it is important to have a mechanism that will oversee the registration of new entrants into the securities market, and ensure that they meet the required regulations (Logue, 2011). On the same note, licensing is vital to ensure that all stock market participants are known and incase of any irregularity tracing of the offenders is easy. Additionally, since shareholders of various companies cannot be able to oversee the day-to-day activities of their directors and various employees, they need surety that their interests will be protected (Gaughan, 2009). Therefore, stock markets should be regulated to ensure that managers and other people do not use material nonpublic information for their advantage.
Human beings tend to avoid any activity leads to problems with the law. Consequently, to avoid fraud and insider trading, regulation is paramount to spell out the punishment of each violation (Preda, 2009). On the same note, regulation is important to ensure that each firm adheres strictly to the laid down rules thus enhancing fairness in security trading. Furthermore, it should be noted that traders are likely to turn the stock markets into jungles where the fittest take home as much as they could while the unlucky get leftovers. Therefore, it is paramount to highly regulate security markets in order to ensure that all participants have equal chances of gaining.
References
Gaughan, P. A. (2009). Measuring business Interruption Losses and Other Commercial Damages. Hoboken: John Wiley & Sons.
Logue, A. C. (2011). Day Trading For Dummies. Hoboken: John Wiley & Sons.
Preda, A. (2009). Framing Finance: The Boundaries of markets and Modern Capitalism. City: University of Chicago Press.
U.S. Securities and Exchange Commission. (2012). SEC Enforcement Actions: Insider Trade Cases. Washington: U. S. Securities and Exchange Commission. Web.
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