Insider Trading: Legal, Economic, and Ethical Implications Report

This report provides an overview of insider trading, defining it as the illegal practice of buying or selling a company's stock based on non-public information. It explores the legal implications, detailing criminal and civil penalties imposed by the SEC, including prison sentences and substantial fines. The report examines the economic and social impacts, arguing that insider trading can affect market efficiency and shareholder value. Furthermore, it discusses the ethical implications, highlighting the potential for conflicts of interest and inequalities among investors. The conclusion emphasizes the illegality of insider trading and the severe consequences for those involved, reinforcing the importance of ethical conduct and adherence to financial regulations. References from relevant academic journals are also included.

INSIDER TRADING

INTRODUCTION
 The term insider trading is defined as the buying and selling of the publicly traded shares of the
company by the person who has the knowledge of some of the nonpublic related information.
This term is considered as the illegal activity if done for the personal profits.
 This is considered as illegal activity if it is used by the person for any material information that is
still not public and can impact the shareholders decision making process (Agrawal & Cooper,
2015).

LEGAL IMPLICATION INSIDER
TRADING
 The term insider trading is considered as illegal when the buying and selling of the security has
been done in case of breach of fiduciary duty or the director or the person has breached the
relationship of trust that has occurred between the shareholders (Ahern, 2017). The penalties that
are sanctioned by SEC are defined on two basis which includes criminal penalties and the civil
penalties. These are described as:
 Criminal penalties: The prison sentence of maximum 20 year. Criminal fine of $5,000,000 and
maximum fine of $25,000,000.
 Civil penalty: The person would be forced to disgorge the profits that he had gained and would be
liable to penalty for three time the profit earned by the person.

Economic-Social implication of
insider trading
 Insider trading is considered as the term that affects the economic condition of the company and it
is considered as the privileged information which helps in securing the financial advantage to the
user of the information. The economic argument of the insider trading is that it helps in providing
the efficient compensation to large holders of the stocks of the company.
 Hence these shareholders are not able to diversify their portfolio and hence due to this the bear a
disproportionate risk that is related to the price fluctuations (Collin‐Dufresne & Fos, 2016).
 The economic impact of these regulation is that it adversely affects the securities market and also
decrease the firms value in the market due to which other shareholders get effected very
suspiciously.

Ethical implication of insider
trading
 Insider trading is considered as the term which has earned a dreadful name in recent years. This is
seen that the people who engage themselves in the insider trading is considered as devoid to the
ethical values. This is also seen that insider trading is not always considered as always unethical
as this is sometimes used for the investment society.
 The best thing that is used to protect the investors from the insider is to detach those people who
engaged in the insider trading (Rogers, Skinner & Zechman, 2016).
 This is seen that insider trading which is present in the financial market presents various ethical
issues some of which includes the issues including the conflicting rights, cultural norms and the
inequalities across the investors.

Conclusion
 From the above presentation this is seen that insider trading is considered as illegal activity and
the person who is engaged in this type of activity is legally liable for paying the huge penalties
and sometime gets behind the prison. This is seen that in the present case person will be liable
under criminal prosecution or the civil prosecution for doing the insider trading against the
nonpublic information that he has for the merger of the company.

References
 Agrawal, A., & Cooper, T. (2015). Insider trading before accounting scandals. Journal of
Corporate Finance, 34, 169-190.
 Ahern, K. R. (2017). Information networks: Evidence from illegal insider trading tips. Journal of
Financial Economics, 125(1), 26-47.
 Collin‐Dufresne, P., & Fos, V. (2016). Insider trading, stochastic liquidity, and equilibrium
prices. Econometrica, 84(4), 1441-1475.
 Rogers, J. L., Skinner, D. J., & Zechman, S. L. (2016). The role of the media in disseminating
insider-trading news. Review of Accounting Studies, 21(3), 711-739