MPA702 Financial Interpretation: Insider Trading Case Analysis

This case study provides an analysis of a situation involving insider trading at a pharmaceutical company, We Fix All Ltd. Jess, an accountant, divulged confidential information about a product investigation to her brother, leading her parents to sell their shares in the company. The analysis applies Section 1002G and Section 1013 of the Corporations Act 2001 to determine Jess's liability for insider trading and breach of ethical obligations. The conclusion finds Jess guilty of contravening the Act and her ethical duties, making her liable for civil penalties. Desklib offers a platform for students to access similar case studies and solved assignments.

Running head: INTERPRETING FINANCIAL INFORMATION
INTERPRETING FINANCIAL INFORMATION
Name of the Student
Name of the University
Author Note

1INTERPRETING FINANCIAL INFORMATION
Question 1
Part C
Issue
Jess an accountant at a pharmaceuticals company “We Fix All Ltd” discussed various
concerns regarding one of her company’s leading products during a dinner with her brother Cam.
These concerns were related to test results of the product. Jess stated that there would be a major
investigation regarding this and the news has not been officially released yet. This is bound to
effect share value and thus her parents considered selling all the shares they owned in her
company. The issue here is if this amounted to insider trading and the ethical and legal
ramifications of the same.
Law
Insider trading refers to the practice of disclosing a company’s inside information which
may have an effect on the company’s share prices. The Corporations Act, 2001 provides for
protection of inside information by prohibiting the divulgence of the same from a person
possessing it (Denis and Xu 2013). This is defined in Section 1002G. Section 1002G (1) (a)
defines insider information as information that would not be generally available to public but if
such information was made available to the public then it can be presumed have a substantial
effect on share prices (Dai, Parwada and Zhang 2015). Section 1002G (3) (a) puts a prohibition
of divulgence of such information to third parties who may deal in such securities (subscription,
purchase, sell, enter into agreements etc) (Thompson, 2013).

2INTERPRETING FINANCIAL INFORMATION
Section 1013 of the Corporations Act, 2001 provides for liability in case of insider
trading (Crimmins 2013). It states that in cases where the requisites of Section 1013 (1) (a) and
(b) have been met the body corporate may legally pursue the insider and/or any other person
involved in the process of insider trading under Section 1005 of the act (As per Section 1013 (2)
of the act) (Kim 2013).
Section 1005 of the act provides for civil liability in case of such a contravention of the
provisions of the act.
Employees of a company have an ethical responsibility to act in the best interests of the
company and in good faith (Skaife, Veenman and Wangerin 2013). Divulgence of insider
information can be majorly detrimental to the company and in such a case revealing such
information would be against confidentiality principles and the interests of the company.
Application
The information divulged by Jess divulged had an impact on her parents who owned
shares worth thousands of dollars in her company. Without availability of the information which
was provided to them by Jess it would not amount to a decision to sell the shares in question.
Thus, as can be seen from the above discussions the provisions of Section 1002G would apply
and Jess would be liable under the provisions of Section 1013.
Thus the information divulged by Jess would also lead to contraventions of her ethical
obligations as far as confidentiality and acting in the best interests of the company are concerned.
The information divulged would ideally have the opposite effect.

3INTERPRETING FINANCIAL INFORMATION
Conclusion
Jess is guilty of insider trading and thus is in contravention of the provisions of the act.
Jess would thus be liable to face civil liability as per the provisions of Section 1005 of the act.
Jess is also in contravention of her ethical duties as an employee of the company and has
partaken in activities that have detrimental effects on the company.

4INTERPRETING FINANCIAL INFORMATION
Reference list:
Crimmins, S.J., 2013. Insider trading: where is the line. Colum. Bus. L. Rev., p.330.
Dai, L., Parwada, J.T. and Zhang, B., 2015. The governance effect of the media's news
dissemination role: Evidence from insider trading. Journal of Accounting Research, 53(2),
pp.331-366.
Denis, D.J. and Xu, J., 2013. Insider trading restrictions and top executive
compensation. Journal of Accounting and Economics, 56(1), pp.91-112.
Kim, S.H., 2013. Insider Trading as Private Corruption. UCLA L. Rev., 61, p.928.
Skaife, H.A., Veenman, D. and Wangerin, D., 2013. Internal control over financial reporting and
managerial rent extraction: Evidence from the profitability of insider trading. Journal of
Accounting and Economics, 55(1), pp.91-110.
Thompson, J.H., 2013. A global comparison of insider trading regulations. International Journal
of Accounting and Financial Reporting, 3(1), p.1.