Financial Answers "IN SIMPLE LANGUAGE"

This has often been cited as being a victimless crime, which we can argue back and forth forever.  But is it really?  What I am talking about is “insider trading”.  Insider trading takes place when someone has information about a company or companies that puts them in a position of advantage over everyone else, namely the general public. This information is about a company or companies selling or buying another company or companies or merging with another company. Insider trading causes the value of the stock of the company to change one way or another and gives the person with the insider information an advantage from which they can buy or sell stock and make money…usually a large amount of money. This is illegal under the SEC (Securities and Exchange Commission) regulations.

Let’s take the recent case of Raj Rajaratnam, founder, of the Galleon Group who was recently arrested on insider-trading charges.  This was a high profile case in all of the financial publications and it involved large amounts of money being made by Rajaratnam and his company because of their insider information.

Look at how pervasive insider trading has become over the last five years… the New York Stock Exchange has referred approximately 150 suspected cases to the SEC in 2008 alone.  This is 57% more than four years previously in 2004 when the latest corporate meager craze began.  The SEC brought 60+ cases to court in 2008 which was more than 30% higher than in 2007.  Do you think we have a problem here?

It’s Not Just the United States

All too often Americans only hear about what is going on in America.  It seems that this insider trading problem is in every country where stocks are traded.  If we look at Great Britain we see that the United Kingdom’s Financial Services Authority shows that 30% of the reported mergers in that country have shown unusual stock trading in the days before the deals are finally getting done.  Coincidence?  You tell me.  There are many more examples of this taking place all around the world.

As another example of insider trading in the United States look at the recent deal of Dell Inc. purchasing Perot Systems for $3.6 billion.  The SEC charged a Perot employee with insider trading.  Adobe Systems Inc.’s $1.8 billion acquisition of Omniture, a software company, resulted in Omniture’s stock rising almost 20% before the deal was even announced.  In March of 2009, the announced merger of Merck & Co. Inc. and Schering-Plough Corp., the two pharmaceutical giants, is being looked at by the SEC for insider trading.

And on and on the stories keep popping up.  Is there a problem with insider trading?  Based on my own personal experience in the financial services world for over 30+ years there is no doubt in my mind.  And as far as insider trading being a victimless crime I don’t buy it for a minute.  Insider trading is just another example of the select few who get to take advantage of you and I, the general public, by being able to buy stock at a lower price in quantity thusly driving up the price which causes us to have to pay more. Not only do we pay more but the insider’s can now make a fortune off the inflated price of the stock that you and I are forced to pay if we want the stock.  This additional cost to you and I is also reflected in the costs of the mutual funds that you and I have in our 401k, 403b, and 457 plans.

Insider trading is a crime and impacts the public’s trust and wallet adversely and should be enforced as stringently as any law.  What do you think?

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