Insider Trading and its Regulation

This assignment delves into the intricate world of insider trading within developing economies. It requires students to critically examine existing regulatory regimes aimed at curbing this practice and assess their efficacy. The analysis should encompass legal frameworks, enforcement mechanisms, and the challenges faced in achieving an effective regulatory landscape for insider trading in these jurisdictions.

Running head: BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Business ethics and social responsibility
Name of the student
Name of the university
Author note

1BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Executive summary
The aim of this report is to discuss about the influence of the case of insider trading with the
galleon group on the stock trading scenario. In addition, it is also been discussed about the
reasons behind the continuation of the unethical information-techniques being used by the
trading firms even after the accusations of the galleon group. Moreover, the implications of
sharing confidential data for all the related stakeholders in the stock trading had also been
discussed. This report concludes that, though the case of the Galleon group will have implication
on the existing business practices in the stock market trading but it will only for the short-term
basis. It is being seen that the stakeholders will have majority of the negative implications
compared to the positive implication form initiating the insider trading.

2BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Table of Contents
Introduction......................................................................................................................................3
Case history.....................................................................................................................................4
Information gathering process of the trading firms.........................................................................4
Steps to reduce the impact of insider trading...................................................................................5
Steps to be taken by the business organizations..........................................................................5
Steps to be taken by the investors................................................................................................7
Steps to be taken by the regulatory authorities............................................................................8
Implications of sharing confidential data........................................................................................9
Implications for the investors......................................................................................................9
Implications for the employees..................................................................................................10
For the trading firms..................................................................................................................11
Influence in the decision making process......................................................................................11
Influence of the Galleon case on existing trading practices..........................................................12
Conclusion.....................................................................................................................................12
Reference.......................................................................................................................................14

3BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Introduction
Trading in the stock market is one of the most prominent and leading source of amount of
money provided that the trading is being done properly. Majority of the stock trading are being
done in the developed countries. This is due to the reason that, developed countries are having
more effective and favorable infrastructure for the stock trading along with having more number
of industries (Chen, Choi and Hong 2013). More industries are required for the enhancement of
the stock market due to the fact that stock trading is being done with the share of large and
medium business organizations. With the emergence of more number of business organizations
in the stock market along with increased number of traders, the competition is increasing in this
sector. Various trading firms are entering in this market to help the investors in gaining more
profit from the stock market.
However, in the recent time, various cases related to fraud and money laundering are
being emerged from the trading practices in the stock market. Various regulatory bodies such as
government and stock market authority are initiating various legislations and regulations to curb
these issues in the stock market. Punishments are also being stated, which will be given to the
accused in case of the proven case (Kim and Sohn 2012). One of the most prominent and
infamous case that was being emerged in the recent time in relation to the fraud in the stock
trading is the case of Rajaratnam of Galleon group. This case changed the existing scenario of
the stock market trading in the stock market of the United States as well as the stock market of
other major nations.
The case of Rajaratanam of the Galleon group will be discussed in this report along with
its implications in the stock market. This report will also discuss about the implications of using

4BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
various illegal and unethical information-gathering techniques by the trading firms. It will also
be discussed about the reasons behind the continuation of the unethical information-techniques
being used by the trading firms even after the accusations of the galleon group. In addition, the
implications of sharing confidential data for all the related stakeholders in the stock trading will
also be discussed. Moreover, the influence of the case and accusation of the Galleon group in the
information sharing policy of other trading organizations and the investors will also be discussed.
Case history
Raj Rajaratnam is the billionaire businessman and former CEO and founder of Galleon
group. It is hedge fund group being based on New York. His previous experience in working
with various notable trading firms helped him in gaining good money from the market.
Moreover, his firm Galleon group also gathered huge popularity in less time due to their
favorable success rate with their investors. However, the first accusation was being emerged in
2009 when FBI arrested him for indulging in insider trading. Insider trading is the process of
sharing and having the access of the confidential data of various business organizations for
gaining advantage in trading with the shares of these organizations. He was accused of indulging
in having the access of confidential data of various organizations, which helped him in having
unethical and unlawful advantages in the stock market (Chen, Choi and Hong 2013). He was
sentenced for 11 years of imprisonment along with penalty of $150 million. However, though the
case of Rajaratnam is being closed but the aftermath of this case is long lasting for the existing
stakeholders of the stock market.

5BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Information gathering process of the trading firms
The information gathering techniques being used by the trading firms in the stock market
consists of various et5hical and unethical measures. Thus, the techniques of insider trading being
used by the Galleon group are quite common in the Wall Street. There are various reasons
behind the use of the unethical means of information gathering by the trading firms. One of the
key reasons is the gaining of competitive advantages from the market. The competitive
advantages of the trading firm are being originated from the information that they have the
access for their investors. Thus, the more effective and distinctive information they will have for
their investors, the more will be the return from the market and more investors will opt for them
(Bauwens and Giot 2013). Thus, due to the market force, the trading firms will get indulged in
the practice of using unethical measures of gathering confidential information. Moreover, it can
be expected that, though Galleon group is being accused in the practice of insider trading but still
the practice of having the access of confidential data will not get reduced in the existing business
scenario in the stock market.
Steps to reduce the impact of insider trading
Due to the rapid emergence of insider trading by the trading firms in the recent years,
more accusations and lawsuits are originating, which in turn reduces the trustworthiness of the
stock market. Thus, this trend will lead to the reduction of the number of investors in the stock
market in the following years. There are various stakeholders being involved in the stock trading
and it is the individual responsibility of them to initiate various measures in order to reduce the
implications of the insider trading. The following sections will discuss about the measures that
can be taken by the stakeholders in curbing the implications.

6BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Steps to be taken by the business organizations
 Business organizations have to play an important role in preventing the sharing and
publication of their confidential data in the stock market. One of the key measures for
them will be preventing their employees from buying and trading their own shares from
the stock market during the year ending announcements and any types of activities, which
will have impact on the value of their shares (Beneish, Press and Vargus 2012). Thus,
prevention of the employees in having the access of the confidential data will help the
organization in protecting their confidential data from being publicized (Fisher 2015).
 Whistleblower policy should be effectively maintained by the business organizations to
aware the employees about the consequences of sharing any confidential data of the
organizations. The employees should be given proper training about the rules and
regulations of the organization in relation to the sharing of their confidential data along
with the consequences for sharing. This will made the employees aware about the sharing
of confidential data and it will help the organization to refrain them from sharing the data
in the market or to the trading firms.
 Initiation of the blackout process will also be helpful for the business organizations.
Blackout process is the concept of preventing the employees from having the access of
buying the shares of their employer. According to this policy, the employees will not
have the permission to trade in the stocks of the shares of their own organization. This
policy is being initiated by several business organizations to prevent their employees
from trading due to the fact that the employees will have the access of some sort of
confidential data of the organization.

7BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
 In preventing the issue of sharing and publicizing the confidential data of the
organizations, another key measure to prevent is having a specific department to look
after the legal aspects of the organization (Jehanzeb and Bashir 2013). On the other hand,
this will help the employees in having the idea about the various legislations regarding
the legal formalities of the insider trading. Moreover, having the legal experts will help
the organizations in managing any issues that can be emerged regarding the fraudulent
activities in the trading of the shares.
Steps to be taken by the investors
 Investors are the key stakeholder in the whole process of stock trading. The money that
are being involved in the process of stock trading is being invested by them and thus they
are having an important role in preventing the origination of the fraud in the trading
practices. One of the key effective measures will be to adhere with the regulations and
legislations related to the stock trading (Cox, Hillman and Langevoort 2016. It is being
expected from the investors that, they will have clear idea about the various rules and
regulations in trading in the stock market. This will help them in identifying any fraud in
the process of trading along with preventing any unintentional indulgence in the unethical
trading process. This will in turn prevent them to face any regulatory investigations and
other legal issues in future.
 The information being gathered by them from their trading firm should be double-
checked in order to make sure that he data being received are not the confidential data
and they are available in any public forum. This process will help the investors in
identifying any forms of fraud in the process of the trading.

8BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
 The investors by themselves should be strict about being ethical in the process of stock
trading. This is due to the reason that if the investors are interested in having the
confidential data then the trading firm will get more motivated in sharing the data with
them and this will indulge them in the fraudulent activities (Coffee 2013). Thus, at first,
the investors should be strict about not being indulged in any unethical process.
 Investors may also have some sort of confidential data with them, which are being
gathered from their past employers (Ogiela and Ogiela 2012). Thus, in using these data,
they should be more careful. This is due to the reason that, using of the confidential data
being gathered from their past employers will also attract legal issues and it will also
considered as the insider trading. Thus, any types of issues that the investors have with
them should be used carefully.
Steps to be taken by the regulatory authorities
 Regulatory bodies are responsible to effectively regulate and control the process of stock
trading. In addition, they are also responsible to figure out the various complaints being
made by various stakeholders regarding any unlawful activities (Kim 2012). Thus, these
regulatory bodies are having large sources of complaints, which they can use in
identifying fraud in the market. The more effective and sound they will be in regulating
in the market, the less will be the chance of origination of the unethical activities.
 It is being earlier discussed that the whistleblower policy should be promoted by the
business organizations in refraining the employees from sharing any confident data
(Miceli, Near and Dworkin 2013). However, on the other hand, these whistleblowers are
one of the key sources of gathering information for the regulatory bodies. Whistleblowers
are having various confidential information about the trading practices being involved by

9BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
their employers. Thus, data received by the regulatory bodies from the whistleblowers
will be more effective and accurate. Due to this reason, various incentives are being
offered by the regulatory bodies to promote the emergence of this information regarding
the fraudulent activities.
Implications of sharing confidential data
In sharing and publicizing the confidential data to gain advantage in the stock market will
have various positive as well as negative implications for all the related stakeholders. However,
the positive implications will be for the short-term basis and on the other hand, in the long term,
all the stakeholders will face negative impacts only. The following sections will discuss about
the various implications that will be faced by investors, trading firms and the business
organizations due to indulging in the insider trading.
Implications for the investors
 The key positive impact that will be gained by the investors due to the reason of insider
trading will be the extra financial return that they will garner from the insider trading.
This is due to the reason that, initiation of the insider trading will help the investors in
having the confidential data that are not available in the public domain and accordingly
they can trade in the market. Thus, the proportion of profit for them will be more when
compared to other investors (Bhattacharya 2014). The financial benefit will more for
them in the case of the insider trading.
 However, the rate and variance of the negative impact will be more for the investors
compared to the positive impact. One of the key implications that they will face is the
legal issues such as attracting lawsuits from various bodies (Beatty, Liao and Yu 2013).

10BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
This is due to the reason that, if this is being the case that the investors are unintentionally
indulged in the insider trading and they have no idea about it then also they will face the
legal action because, it is the responsibility of them to keep track of their activities by the
trading firm. Thus, they will face legal action (Pillai, Kar and Shah 2014).
 Due to the emergence of the legal actions against the investors, they will also face social
risk. Facing the legal action means that the investor will be prosecuted and will be trialed
in court. Thus, it will have negative impact on the social reputation of the investors
(Johnson and Covello 2012).
 Black listing will also happen with the investors being accused in unfair trading activities.
The regulatory authorities or the association of the stock traders may do this. This will
create obstacles for the investors in further investing in the stock market (Bewaji 2012).
Thus, apart from the social risk, they will also face financial risk also.
Implications for the employees
 Employees will also face negative consequences in sharing the confidential data for the
stock trading. The most prominent and inevitable implication that they will face will be
their termination from the organizations (Hannah and Robertson 2015). This will having
much probability due to the fact that in the case of sharing the confidential data of the
organization, the business value and competitiveness of the particular organization will
get lowered. Thus, they will first terminate the employee from their organization.
 The employee accused of sharing and leaking the confidential data will face legal charges
against him. The legal charges will be initiated by the organization (Morrow 2012). This
is due to the reason that, the business value of the organization got affected due to the
leakage of the confidential data. Thus, criminal cases may be lodged by the organization

11BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
against them, which may cause imprisonment for the employees (Acemoglu and Akcigit
2012).
 If the leakage of the confidential data by the employees caused any financial fraud in the
stock market, then the employees will not faces lawsuits from their organization but from
the regulatory bodies (Abbasi et al. 2012). The case will get magnified and it will cause
huge implication of the accused employee.
For the trading firms
 The trading firms will also face consequences due to the sharing of confidential data to
gain advantages in the stock trading. The most probable and prominent implication will
be the black listing of the trading firm. In case of the proven accusation of the insider
trading by any trading firm, the regulatory authorities will black list them, which will
refrain them from any future trading activities (Wagner III and Hollenbeck 2014). Thus,
it will cause dissolution of the trading organization.
 The trading firm being accused for the insider trading in the past will face the issue of
trustworthiness in the stock market (Ahmad, Bosua and Scheepers 2014). They will face
difficulty in targeting new investors due to the fact that no new investors will take the risk
of investing with them. in this case also, their business potentiality will get decreased.
Influence in the decision making process
The case of the insider trading will have impact or influence in the decision making
process of mine in the trading of the stock. Prior to the investing in a particular stock or before
trading with a trading partner, it is to be seen by me that of information being provided by the
trading firm to me is confidential or not. If it is being found that the received information is

12BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
confidential and it is not being available in the public domain, then it will surely affect my
decision making process. In this case, I will prefer the long-term benefits to the short-term
benefits. This is due to the fact that, in the short-term, I will gain from the process but in the
long-term, it will have negative implication as discussed earlier in this report.
Influence of the Galleon case on existing trading practices
The case of Rajaratnam will have some sort of immediate impact on the existing trading
practices in the stock market but it is highly unlikely that it will have long-term and permanent
impact on the trading practices. This is due to the reason that, as discussed earlier, the insider
trading being initiated by the trading firms is to gain competitiveness in the market and to stay
ahead in the competition (Tavakoli, McMillan and McKnight 2012). Moreover, it is earlier
discussed that the case with the Galleon group is not new and uncommon in the existing trading
practices and various trading firms are involved in it. However, it is true that due to the case and
accusation of the Galleon for insider trading, the growing rate of accessing the confidential
information will get reduced but it will not stop. This is due to the reason that it is being earlier
discussed that, the marketing force is behind the motivation of the trading firm to initiate the
insider trading.
Thus, after a certain point of time, the effect or impact of the galleon group will get
reduced and the trading practices will be same as existing business scenario. Investors will also
act as the motivating factor for the trading firm to initiate insider trading due to the fact that more
investors will trade with the trading firm with having more confidential data. According to them,
the instant profit that they are gaining from having the confidential data will be more attractive
compared to the long-term benefits.

13BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Conclusion
Thus, from the above report it can be concluded that, though the case of the Galleon
group will have implication on the existing business practices in the stock market trading but it
will only for the short-term basis. Various reasons behind this phenomenon are also being
discussed in this report. Moreover, the implications of initiating the insider trading for the
stakeholders such as investors, trading firm and business organizations are also being discussed
in this report. It is being seen that the stakeholders will have majority of the negative
implications compared to the positive implication form initiating the insider trading.

14BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Reference
Abbasi, A., Albrecht, C., Vance, A. and Hansen, J., 2012. Metafraud: a meta-learning framework
for detecting financial fraud. Mis Quarterly, 36(4).
Acemoglu, D. and Akcigit, U., 2012. Intellectual property rights policy, competition and
innovation. Journal of the European Economic Association, 10(1), pp.1-42.
Ahmad, A., Bosua, R. and Scheepers, R., 2014. Protecting organizational competitive advantage:
A knowledge leakage perspective. Computers & Security, 42, pp.27-39.
Bauwens, L. and Giot, P., 2013. Econometric modelling of stock market intraday activity (Vol.
38). Springer Science & Business Media.
Beatty, A., Liao, S. and Yu, J.J., 2013. The spillover effect of fraudulent financial reporting on
peer firms' investments. Journal of Accounting and Economics, 55(2), pp.183-205.
Beneish, M.D., Press, E. and Vargus, M.E., 2012. Insider trading and earnings management in
distressed firms. Contemporary Accounting Research, 29(1), pp.191-220.
Bewaji, W., 2012. Insider Trading in Developing Jurisdictions: Achieving an Effective
Regulatory Regime.
Bhattacharya, U., 2014. Insider trading controversies: A literature review. Annu. Rev. Financ.
Econ., 6(1), pp.385-403.
Chen, H., Choi, P.M.S. and Hong, Y., 2013. How smooth is price discovery? Evidence from
cross-listed stock trading. Journal of International Money and Finance, 32, pp.668-699.

15BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Coffee, J.C., 2013. Mapping the Future of Insider Trading Law: Of Boundaries, Gaps, and
Strategies.
Cox, J.D., Hillman, R.W. and Langevoort, D.C., 2016. Securities regulation: cases and materials.
Wolters Kluwer Law & Business.
Fisher, P.A., 2015. Common stocks and uncommon profits and other writings(Vol. 44). John
Wiley & Sons.
Hannah, D.R. and Robertson, K., 2015. Why and how do employees break and bend confidential
information protection rules?. Journal of Management Studies, 52(3), pp.381-413.
Jehanzeb, K. and Bashir, N.A., 2013. Training and development program and its benefits to
employee and organization: A conceptual study. European Journal of business and
management, 5(2).
Johnson, B.B. and Covello, V.T. eds., 2012. The social and cultural construction of risk: Essays
on risk selection and perception (Vol. 3). Springer Science & Business Media.
Kim, S.H., 2012. The Last Temptation of Congress: Legislator Insider Trading and the Fiduciary
Norm Against Corruption. Cornell L. Rev., 98, p.845.
Kim, Y. and Sohn, S.Y., 2012. Stock fraud detection using peer group analysis. Expert Systems
with Applications, 39(10), pp.8986-8992.
Miceli, M.P., Near, J.P. and Dworkin, T.M., 2013. Whistle-blowing in organizations. Psychology
Press.

16BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Morrow, B., 2012. BYOD security challenges: control and protect your most sensitive
data. Network Security, 2012(12), pp.5-8.
Ogiela, M.R. and Ogiela, U., 2012. Linguistic protocols for secure information management and
sharing. Computers & Mathematics with Applications, 63(2), pp.564-572.
Pillai, D., Kar, S. and Shah, R., 2014. Impact of Insider Trading on Investment Decision by
Investors. International Journal, 2(4).
Raghavan, A., 2013. The billionaire’s apprentice: The rise of the Indian-American elite and the
fall of the Galleon hedge fund. Hachette UK.
Tavakoli, M., McMillan, D. and McKnight, P.J., 2012. Insider trading and stock
prices. International Review of Economics & Finance, 22(1), pp.254-266.
Wagner III, J.A. and Hollenbeck, J.R., 2014. Organizational behavior: Securing competitive
advantage.