Insider Trading: Law and Ethics

This assignment delves into the complex world of insider trading, examining its legal framework and ethical considerations. Students are tasked with analyzing various case studies involving insider trading, understanding the relevant laws and regulations, and evaluating the ethical dilemmas associated with this practice. The assignment aims to provide a comprehensive understanding of insider trading's impact on financial markets and the importance of maintaining ethical conduct in business.

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Comparative Business Ethics and Social Responsibility
Student Name
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University Name

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Executive Summary
The Wall Street is where destinies are made. People associated with the business
world and with the Wall Street often use unethical practices to gather sensitive
non- public information about competition firms. A common example can be any
financial investor before investing in any corporation would like to make
significant forecasts about the future performance or revenue generation capacity
of the organization. For this the investor needs to gather various non-public
information. Often the sources of this information are illegal. To make one’s own
conclusion by joining smack bits of information together takes a long time. The
following paper is a case study of such one business personnel who has made huge
gains financial in nature by using illegitimate sources of information gathering.
Introduction
The Wall Street indeed showcases many different ways in which information are
gathered. Rajaratnam actually was a financial tutor or guru who was the legal
owner of the hedge based fund firm, Galleon Group. The individual with a strong

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analytical sense made this firm a successful one under his ownership. However he
was also engaged in many illegitimate activities in relation to trading. Rajaratnam
had a huge network and sources in place. His network helped him gather crucial
sensitive financial information based on which he tool many business decisions.
He gathered information about some of the big names in business like Intel,
Google, IBM, Goldman Sachs and McKinsey (Colesanti, 2011). Such unethical
practices helped gain huge financial gains as well. This paper discusses all these in
further details.
Q1 - Are information gathering techniques like Rajaratnam’s common on
Wall Street? If so, what could regulators, investors and executives do to
reduce the practice?
Rajaratnam case study a common example in Wall Street
It is as per me very common information gathering process in the Wall Street.
Rajaratnam was an analyst associated with the investment banking organist ion
named Needham % Co. It was year 1985. The financial analyst was highly
intelligent in creating a very hostile natured network and knew note taking
methodology of research. With this highly significant know how the individual had
outstanding abilities to make predictions and forecast financial outcomes of
organizations around him. A series of forecasts helped Rajaratnam invest in the
most profitable ventures. This also helped him form his own organization known
as Galleon. Rajaratnam was networking with various organizations such as the
IBM, Intel Corp, Goldman Sachs, Applied Materials Inc and McKinsey & Co.
Illegally with the help of the various sources and contacts Rajaratnam used to

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churn out insider financial information. This was unethical and illegitimate trading
practices being performed consistently. This also comprised of wire fraud and
securities which was over $63.8 millions (Ferrell and Fraedrich, 2014). All such
gains were made just by using insider tips and information. Soon the individual
was under the courts investigation. Over 26 people who were associated were
found guilty by the court.
This was an excerpt from one single case in the history of unethical trade practices.
There occur many such stories in real life. Such techniques to collect insider
information are hence a common scenario in the Wall Street (TheEconomist,
2017). Using various techniques such as phone calls, text tops and meetings such
information can be received in a simple manner. This is a usual practice in the
Wall Street because this is perhaps the most simple and cost effective way to gain
more financial profits. Accusations was made to Galleon that the firm was
engaged in insider trading. Soon the government intervened to what Rajaratnam
was being practicing (Kaplan, 2012).
The main reason why such data collection processes are common in the Wall Street
is because investors, players and brokers get huge returns by such unethical acts.
Just by knowing some insider valuable piece of information before even it is out in
the world for the public to know huge bucks are earned. Every stock market
located in the entire world is struck by such trading activities (Verrilli, 2016).
Sometimes some of the senior most executives in various business organizations
are the one who are associated with such practices.
Ways to reduce the practice by regulators, investors & executives

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The various regulators, investors as well as executives however can take steps to
make such practices reduced. This is firstly by keeping a close and strict tracking
about their own information which is getting distributed. These executives must
also have a close watch on the various financial transactions they make on a daily
basis. If there is even a very small amount of suspicion that, in any form then one
must instantly take actions. Regular monitoring on business associates and
processes will help understand whether someone is using he information in an
illegal manner. They can make different measures to stop such illegitimate
methods of trading (Bondi and Lofchie, 2012). It cannot be denied that corrupt
people will still find new ways to continue unethical business practices. In a
nutshell there is no single rule or step following which illegal information
collection methodologies can be lowered.
Regulators have to learn to watch every business action closely and carefully.
Especially before any major event which an enterprise will be undergoing the
watch must be stricter in nature. Such major business events can be mergers,
acquisitions, upcoming product or service launches, investments, new contacts or
associations, changes in company regulations or policies. All these events must be
observed way before it takes place (Seyedin, 2016). For this analysts must observe
and analyze analytical tools and information collected. Spotting a suspicious
activity is a challenging task. As soon as one detects the person who is actively
passing sensitive business information they must be handed over the law.
There are many people who invest regularly into corporations who are performing
well and are predicted to bring better outcomes in the near future. However it is a
daunting task. One must make the right decision to avoid financial losses. Investors
must avoid firms having a negative track record. For making such a decision the
investors must look at the entire event in a fundamental manner. They can look

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into the past performances of the firm and check about the integrity of the
organization (Frederick, 2016). Any investment which is short term can turn out to
be a risky affair owing to the amount of volatility associated with it. These
investments are sensitive and hence care must be taken before making them.
However, under no circumstances investors must encourage doing unethical trade
practices to gather information.
In case of the various executives associated with different organizations the sense
of loyalty must always be encouraged and adopted. Loyalty is the basic parameter
of a good employee. There are many business organizations which can make
employees sign up NDAs or Non Disclosure Agreements when recruited. These
are legal agreements where when recruitment is made employees agree that they
will never disclose any information about the company to the outsiders (Afonso,
2017). For example executives when they speak to any outsider must take special
carefulness and awareness about what they are talking. If regulators find out that
any employee is participating in selling out insider sensitive information then there
can be punishments associated with it. Such potential outcomes and the
embarrassments and future loss of employment opportunities must deter any
employee from undergoing any unethical practices.
Q2- What are the implications of sharing confidential material information?
Is it something that would affect your decision and how to trade a stock if you
knew about it?
Implications of sharing confidential insider information

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Sharing the confidential material information has two major implications and these
are unethical practices and risky moves. Moreover such behaviors will increase the
chances of getting into major legal troubles. To share confidential business
information is in itself an illegitimate task. Information if it reaches the public
before it is supposed to can cause huge financial losses to brands and business
enterprises. If the people who are engaged in such activities are caught then they
are to be prosecuted and brought to the Court and found guilty on investigation.
Any employee giving out insider information of the organization they are
associated with is an illegal act (Oatts, 2014). Sometimes employees while
speaking with outsiders speak out insider information unknowingly as well. People
who are not having good intentions pick up such information and use them to their
self interests and benefits. This further implies that there exist people who can do
any activity just for the sake of money.
Legal implications
Termination- Termination is the first implication of breaches made by people
associated with a business organization. If an employee is under a contract with the
organization and makes a wrong use of business information then it leads to the
employment contract breach as well as along with the breach of information and
confidentiality. Hence it is the legal rights of the organization to fire the respective
employee who participated in the wrongful action.
Lawsuits- The employer of an organization if finds out that there is breach of
information and confidentiality can even sue the employee. If these trials are
successful then employers can fetch financial fine and charges from employee.
Hence, in such cases employees have to pay a fine to the employer. Such lawsuits

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occur in circumstances where financial damages are made by the employee. For an
instance if any sensitive business data is shared to competitors then the business
can undergo a financial loss (WallStreet, 2017). So if found out guilty such
employees are forced to pay the damages.
Criminal Charges- If the case of confidentiality breach more serious then the
legal implications are much higher. There can be criminal charges which the
organization can bring against the respective person. Such a confidentiality breach
signifies a theft has been made in relation to the intellectual and proprietary
information of the organization. Hence such a crime is a serious one and can lead
to imprisonment or fine. The government in such cases will also support the
organization.
Reputation- To think about such acts in the long term this highly affects the
reputation of the employees. Any person who belongs to an organization or is an
investor who is gathering insider information and affecting their decision making
in the long run looses their goodwill in the industry (Poster, 2013). This is a huge
damage as without goodwill not investor will be welcomes by companies. Not
even start ups that are in need of funds will rely on such investors who use insider
information and are found guilty.
Effect of the information on stock trading method
Knowing the case study of Rajaratnam and all the above implications my own
decision making in relation to trading is changed. Trading stock in the unethical
manner is not just a wrong act but as per the jurisdiction and legislation it is a

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crime and it is punishable under law. So, although I will have many insider
information about any stock I will definitely not use it in relation to the stock. I
would be alert and aware and make conscious decisions not to react on it. My
decision will never be using illegal methods to bring any kind of a financial gain.
However the very fact that I am having insider information can cause m a lot of
trouble if the time comes for a legal interrogation (Mohanty, 2011). Hence, it can
be concluded that when I am ware from the insider arena that a particular stock in
future times is going to diminish in value it becomes highly challenging for me to
decide to invest into it. So, when one has insider confidential information which
they are not supposed to have it becomes difficult to how one undergoes trading.
It is not right for confidential information to get released without the engaged
parties permitting or having the knowledge about it.
Confidentiality is an influencing fact in itself. Business partners have a common
understanding in them which is based on their own beliefs and trusts which make
them share confidential information (Fowler, 2016). Such business information is
of great worth. There is much important information in business which if gets
exposed to outsiders can cause serious harm to the people who are involved with it.
Moreover this exposed confidential information can cause financial issues and
concerns as well. It can lead to loss of finances, loss of employment and wastage of
time and efforts. Business employees violating rules can be subjected to penalties.

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Q3- Do you think the secret investigation and conviction of Rajaratnam and
other people in the Galleon network will deter other fund managers and
investors from sharing non-public information?
Opinion on the case and whether it will stop fraudulent activities in future?
The entire financial industry has today become observant and well regulated so
that it can deter the occurrence of corruptions and frauds. However the increased
number of lawsuits n relation to insider information sharing frauds showcases a
different picture. The co founder of the Galleon group Raj- Rajaratnam was
accused for conspiracy and fraud and was found guilty by law. The firm was
involved in fetching insider trading. Many were charged as guilty and many made
pleas. The primary figure involved in the case was Rajaratnam. He has done a
varied series of insider trading all his life. It is a crime which first began small soon
became a habit and means of earning better financials.
In my opinion the entire Rajaratnam case investigating as well as conviction will
not deter managers, executives and investors who undergo fraudulent activities like
sharing confidential non-public information. This is because people are intelligent
and they will continue to find new ways of doing such activities to satisfy their self
interests and for attaining financial gains using fewer efforts. For such kinds of
people, there are nothing called ethics in business. Their main aim always is to
earn money no matter what the path is (Anonymous, 2016).
Business professionals are always studying the fact how small unethical steps
made by people can enter into a snowball effect and over time create large scale
implications and loss. With time unethical behavior can unfold to be huge
disasters. Scholars and business analysts have experimented and researched on

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this subject since long. Generally, small actions which are unethical in nature are
ignored and neglected by people. Even people justify such small unethical actions
in trading. They often are of the opinion that with such small steps like using an
employee of an organization to get little insider information will not harm anyone.
Rather in place of that it will cause one a little profits. Hence many people engage
in such small bits of acts (Packer, 2011). They feel positive about it as the nature
of the act is often small. But they consistently practice it everytime thinking that it
is a small act and will not cause damage to anyone.
Since they are using a rationalization process it signifies there is a disengagement
of the moral self. Many times such unethical trade practices become a behavioral
pattern. And in no time they become efficient practitioners in these. Problems such
as less money, bad time, need are not enough to justify the reasons why people
undergo such acts. Simply putting it one can consider that it starts really small and
then with continued practice undergoes the snowball effect and becomes a large
scenario.
Things learnt from the case study
Carefulness while conversing-No one knows what people do with the information
they gather about others. The case of Rajaratnam is a real life scenario. Here in this
case the defense has argued that the accused was just doing his daily job
requirements. The defense legal also claimed that the information in question are
always in the knowledge of the public and is no longer a secret. Many people who
are associated in the case also pleaded for guilty. They wanted to support the
authorities. They have disclosed to the country that they have provided secret
insider information to Rajaratnam (Scannell, 2011). There also exists a question
whether these people knew that the information they are providing is of

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confidential nature. Hence, the learning from this case is that people in service or
business must be really careful when they are conversing with outsiders.
Understanding the implications of greed
People in trading must be far from greed. People must aim in making a living by
making hard work. If there is a larger need for money then people must work
harder to achieve it. Greed is a disastrous feeling and one must understand it. As
per the case whether or not Rajaratnam is found guilty or not found his goodwill is
lost forever (Newkirka, 2008). The greed of one person in gathering insider non
public information has caused harm to many lives surrounding him. A huge
amount of profits was made using this information. As a result organizations have
gone through huge losses as well.
Understanding new ways for legal actions
The legislations are becoming stronger and stricter day by day. The courts are
finding new ways to find out people no matter how resourcefully they are. If any
person is caught in sharing non public information using unethical trading practices
the law will spend no time in taking strict actions against the person. It is a matter
of debate whether such steps will be able to stop frauds being committed forever.
However people who are having the habit of earning money by selling information
must become aware and alert that their ways will be detected soon. No matter how
new their ways is the law has longer reach than one can even expect.

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At a rapid rate in Wall Street insider trade related fraud is being practiced. The
case of Rajaratnam is a living proof and there is also huge number of real life
examples which further strengthens the fat that such acts will never cease.
Organizations will definitely try by reading these studies remove any person whom
is suspicious to them (Bandow, 2011). They will also monitor their business
surroundings in a more serious manner. But this alone cannot deter any future such
acts being executed.
Conclusions
The main gist of the above case study is that it is not legal to find insider trading
information and actions. People do fall in the trap of greed and do such actions.
They lose the sense of making the right decisions. Hence self interest becomes the
biggest factor which needs to be satisfied rather than caring that business methods
cannot be unethical. Such actions will continue to exist. However government and
law must make compliances robust, surveillances stronger and have better control
measures (Cohan, 2011). Trading insider information today leads to legal
consequences. The analysis of the above case helps find out such negative results.
Trying to make such acts as legitimate acts will just improve the inefficiencies of
the system. The Rajaratnam case does conclude that his acts were unlawful and
they do not stand upright when scrutinized.

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