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8/14/2019 Trading Insider Final
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INSIDER TRADING
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Introduction Anuj Chawla
Impact on market Bhawna Sharma
Theories and Concept Rama Mittal
Case on Enron Dipali Goyal
Regulations by SEBI Neha Aggarwal
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INSIDER TRADING
Insider trading is the trading of acorporation's stock or other
securities (e.g. bonds orstock options) by individuals withpotential access to non-publicinformation about the company. ]
http://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Stock_optionshttp://en.wikipedia.org/wiki/Insider_tradinghttp://en.wikipedia.org/wiki/Insider_tradinghttp://en.wikipedia.org/wiki/Stock_optionshttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Corporation8/14/2019 Trading Insider Final
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However, the term is frequently used to refer to a practice inwhich an insider or a related party trades based
on material non-public information obtained during theperformance of the insider's duties at the corporation, or
otherwise in breach of a fiduciary dutyor
other relationship of trust and confidence or where the non-public information was misappropriated from the company.
http://en.wikipedia.org/wiki/Materiality_(law)http://en.wikipedia.org/wiki/Fiduciary_dutyhttp://en.wikipedia.org/wiki/Fiduciary_dutyhttp://en.wikipedia.org/wiki/Materiality_(law)8/14/2019 Trading Insider Final
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Definition of "insider"
Corporate insiders are defined as a company's
officers, directors and any beneficial owners of
more than ten percent of a class of the company's
equity securities.
Trades made by these types of insiders in the
company's own stock, based on
material non-public information, are considered tobe fraudulent since the insiders are violating the
trust or the fiduciary duty that they owe to the
shareholders.
http://en.wikipedia.org/w/index.php?title=Material_non-public_information&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Material_non-public_information&action=edit&redlink=18/14/2019 Trading Insider Final
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Legal insider trading
if a corporate insider plans on retiring after aperiod of time and, as part of his or her retirement
planning, adopts a written, binding plan to sell a
specific amount of the company's stock every
month for the next two years,
during this period the insider comes into possession
of material nonpublic information about the
company, any subsequent trades based on theoriginal plan might not constitute prohibited insider
trading.
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Illegal insider trading refers generally to buying or
selling a security, in breach of a fiduciary duty or
other relationship of trust and confidence, while in
possession of material, nonpublic information about
the security.
Insider trading violations may also include
"tipping" such information, securities trading by the
person "tipped," and securities trading by those who
misappropriate such information.
Illegal insider trading
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Illegal insider trading would occur if the chief
executive officerof Company A learned (priorto a public announcement) that Company A will
be taken over, and bought shares in Company A
knowing that the share price would likely rise.
Illegal insider trading is decreasing overall
economic growth.
http://en.wikipedia.org/wiki/Chief_executive_officerhttp://en.wikipedia.org/wiki/Chief_executive_officerhttp://en.wikipedia.org/wiki/Chief_executive_officerhttp://en.wikipedia.org/wiki/Chief_executive_officer8/14/2019 Trading Insider Final
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Penalties
Civil Penalties: any profit made or loss avoided
and penalty of up to three times this amount.
Individuals face up to 25 years in prison forsecurities fraud and fines of up to $1 million.
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IMPACT ON MARKETS
One can also say that the biggest difficulty created by insider trading is a lack of faithin the exchange markets where these illegal trades take place.
When entire markets are widely perceived to be tainted by insider trading, averagepeople who are also potential investors will avoid markets altogether.
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INSIDER TRADING
Only a companys insiders or employees can
commit insider trading. Need to trade and be
caught in the act.
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TRUTHs
The law applies to anyone who knows materialnonpublic information at the time of the trade or
tip
Applies to trades of stock in customers, suppliers,
clients
Tipping, even without the tipper trading, is illegal
Most cases based on circumstantial evidence
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13
REASONS FOR REGULATING
INSIDER TRADING
Unfair practice to public investors
Prohibiting it ,promotes efficiency of markets
Property of material information belongs to the
corporation for business purposes.
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Misappropriation theory
It states that anyone who misappropriates (steals)
information from their employer and trades on that
information in any stock (not just the employer's
stock) is guilty of insider trading.
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Proving that someone has been responsible for a
trade can be difficult, because traders may try to hide
behind nominees, offshore companies, and other
proxies.
U.S. Securities and Exchange Commission
prosecutes over 50 cases each year, with many being
settled administratively out of court.The SEC and several stock exchangesactively
monitor trading, looking for suspicious activity.
Proof of responsibility
http://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission8/14/2019 Trading Insider Final
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Trading on information ingeneral
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SEC regulation FD ("Full Disclosure") requiresthat if a company intentionally discloses material
non-public information to one person, it must
simultaneously disclose that information to the
public at large.
In the case of an unintentional disclosure of
material non-public information to one person,the company must make a public disclosure
"promptly."
SEC regulations
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Security analysts gather and compile
information, talk to corporate officers and
other insiders, and issue recommendations
to traders. Thus their activities may easilycross legal lines if they are not especially
careful.
Security analysis and
Insider trading
http://en.wikipedia.org/wiki/Security_analysishttp://en.wikipedia.org/wiki/Security_analysis8/14/2019 Trading Insider Final
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The CFA Institute in its code of ethics
states that analysts should make every effort
to make all reports available to all the
broker's clients on a timely basis.Analysts should never report material
nonpublic information, except in an effort to
make that information available to the
general public.
http://en.wikipedia.org/wiki/CFA_Institutehttp://en.wikipedia.org/wiki/CFA_Institute8/14/2019 Trading Insider Final
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CASE ON
ENRON
Corporation
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SEBI REGULATIONS ACT, 2002
Prohibition on dealing
3. No insider shall
(i) either on his own behalf or on behalf of any otheperson, deal in securities of a company listed on any
stock exchange any unpublished price sensitive
information; or
(ii) communicate counsel or procure directly or
indirectly any unpublished price sensitive
information to any person who while in
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possession of such unpublished
price sensitive information shall not deal in
securities
[3A. No company shall deal in the securities
of another company or associate of that
other company while in possession of anyunpublished price sensitive information.]
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Investigation
4A. (1) If the Board suspects that any person
has violated any provision of these
regulations, it may make inquiries with such
persons
(2) The Board may appoint one or more
officers to inspect the books and records ofinsider(s)
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Board right to
investigate.
5. (1) Where the Board, 26[is of prima
facie] opinion that it is necessary toinvestigate and inspect the books of
account, either records and documents
of an insider, it may appoint an
investigating authority for the saidpurpose.
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6. (1) Before undertaking any
investigation under regulation 5, the
Board shall give a reasonable notice toinsider for that purpose.
(2) where the Board is satisfied that in the
interest of investors or public no suchnotice should be given, it may by an
order in writing direct that the
investigation be taken up without such
notice.
Procedure for
investigation
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(3) On being empowered by the Board, the
investigating authority shall undertake theinvestigation and inspection of books of account
and the insider against whom an investigation is
being carried out.
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7. (1) It shall be the duty of every insider,
who is being investigated to produce to
the investigating authority such books,
accounts and other documents in his custody
or control and furnish the authority with the
statements and information relating to thetransactions in securities market within such
time as the said authority may require.
Obligations of insider on
investigation by the Board.
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2) The insider shall allow the investigating
authority to have reasonable access to thepremises occupied by such insider and also
extend reasonable facility for examining any
books, records, documents and computer data
in the possession of the stock-broker or anyother person and also provide copies of
documents or other materials which, in the
opinion of the investigating authority are
relevant.
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(3) The investigating authority, in the
course of investigation, shall be entitled toexamine or record statements of any
member, director, partner, proprietor and
employee of the insider
(4) It shall be the duty of every director,
proprietor, partner, officer and employee of
the insider to give to the investigating
authority all assistance in connection withthe investigation, which the insider may be
reasonably expected to give.
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Communications of findings
1.The Board shall, after consideration of the
investigation report communicate the findings
to the person suspected to be involved ininsider trading or violation of these regulations.
(2) The person to whom such findings has been
communicated shall reply to the same within 21days.
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3) On receipt of such a reply or
explanation, if any, from such person, theBoard may take such measures as it deems
fit to protect the interests of the investors
and in the interests of the securities market
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