Insider trading is making trade of stock based on information that's not available to the general public. Most insider information is only 'material' if it would affect the company's stock price such as a pending merger, a positive earnings report, or the release of a new product. Insider trading is illegal because it gives the insider and unfair advantage in the market at the cost of others. It also allows them to artificially influence the value of a company's stock such that the price no longer reflects the actual value of the company.One famous case of insider trading was Ivan Boesky. Who, in 1975, launched his own arbitrage business called Ivan Boesky and Company. Arbitrage is the act of buying low and selling high as to exploit the gap between the producer and consumer. In his case, Ivan used the gap between public and private market values to raid corporate targets. He used connections and securities within various companies to guide his significant purchases just days before information was released to the public. Companies that were taken over would allow substantial returns on Boesky's information.
Although this practice was illegal, the SEC rarely enforced it, until Boesky that is. Once the SEC saw how much money Boesky was making by exploiting the information gap between corporate raids and the public, they started enforcing harsher laws on insider trading. In 1986 Boesky was found guilty of manipulating securities and received 3 and a half years of prison, a $100 million fine, and a permanent ban from working in the securities industry.
Boesky, and other insiders at the time exemplified the excess and greed on Wall Street during the 1980s. From this scandal many Americans started to question whether or not greed was good.
Sources:
https://www.thebalance.com/what-is-insider-trading-and-why-is-it-illegal-356337
https://www.hg.org/legal-articles/what-is-insider-trading-and-why-is-it-illegal-31598
https://www.businessinsider.com/meet-ivan-boesky-the-infamous-wall-streeter-who-inspired-gordon-gecko-2012-7#the-boeskys-moved-into-one-of-the-most-expensive-homes-in-westchester-5
https://www.britannica.com/biography/Ivan-Boesky
This post was very interesting and helped me understand the details behind insider trading. I decided to research more about how the SEC tracks insider trading and found, unsurprisingly, that it is very difficult to prove. The SEC tracks insider trading in multiple ways. The first, and most important, is by simply surveying market activities. Those who use material information often want to rake in as much as possible, so the SEC immediately flags the largest deals as suspicious. The SEC may also launch an investigation based on tips and complaints from unhappy investors or units in the SEC. But because evidence in an insider trading case is largely circumstantial, the best way for the SEC to prove someone guilty is to establish a chain of events in order to make sense of the pieces of evidence. Overall, it is an extremely difficult process.
ReplyDeleteSource: https://www.investopedia.com/articles/investing/021815/how-sec-tracks-insider-trading.asp
I thought it was interesting to read more about Boesky as the documentary talked about him a bit but not super in depth. I was interested to read that after he was caught, he cooperated with the SEC in order to get a reduced sentence. He let the SEC listen to recorded conversations which led to the implications of another famous trader, Micheal Milken. Milken and his bank, Drexel Burnham Lambert, were revealed to have participated in insider trading, stock manipulation, and fraud. I think the fact that Boesky was willing to sell out other people to save himself (and I'm sure it was not just Boesky who did this) shows the greed and selfishness of Wall Street even more.
ReplyDeletehttps://www.britannica.com/biography/Ivan-Boesky