When a company is traded in the Stock Exchange it is known as a “public company” meaning everything and everyone (a.k.a. the public) has access to its information. If they make a statement about the company, they have to make a “public statement”. Of course the company’s executives and directors know where the company is headed in the near future and the deals it will make (such as takeovers). With this knowledge comes responsibility; however we all know that power corrupts and when this non-public information leaks to individual investors, there are harsh penalties.
Today, more Americans are investing in the stock market than ever before. This reflects Americans’ trust and confidence in the stock markets and that trust stems from a belief that our government relentlessly pursues its mandate to maintain the fair and integrity of the stock markets. American markets are a success because they enjoy the world’s highest level of confidence.
To maintain the world’s highest level of confidence Congress enacted The Securities Exchange Act of 1934 making insider trading illegal after the stock market crash of 1929. Insider trading mainly takes place when those privileged with confidential information about important events use the special advantage of that knowledge to reap profits or avoid losses on the stock market. It is a detriment of the source of the information and to the typical investors who buy or sell their stock without the advantage of “inside” information.
Insider trading is a no-brainer, if you have information about a company, you will make A LOT OF MONEY. Each country has a law against insider trading however in the UK, it is far harder to actually prove that there has been insider trading due to privacy laws. In fact, if you’re looking for the place to commit insider trading, Britain is your best choice because they rarely get anything more than a fine. In the United States we are very serious about it and that’s the way it should be.
Here are some fines that the Securities and Exchange Commission (SEC) has fined individuals and companies for insider trading:
- Level Global: Agreed to pay $21.5 Million to put an end to the lawsuit in which the co-founder and an analyst had carried out insider trading.
- SAC Capital Advisors: agreed to pay $602 Million in March 2013 for insider trading. They illegally traded stocks for DELL and many other pharmaceutical companies. Their advisor Stephen A. Cohen was named “Hedge Fund King” in 2007
- Martha Stewart: She was sent to prison for 5 months in March 2005 for insider trading, and was fined $30,000.
- Raj Rajaratnam: He is the “King” of insider trading. In 2009, a total of 29 people from the Galleon Group ended up being charged with illicit gains from insider trading and he was sentenced to 11 years in prison and fined $92.8 Million. All of the others were charged a total of $156 Million in fines.
The SEC was falling in love with the fines they were issuing however recently, they started to crack down harder. Today, July 25th SAC Capital was charged with insider trading by the SEC, however the investigators are coalescing around a more unusual plan: to indict SAC itself. Criminal charges might devastate SAC because the banks that trade with the hedge fund and finance its operations could abandon it but the SEC doesn’t care. They care about justice, and maybe this will put the fear of god in other companies that are involved with cheating, I mean, insider trading.