Inescapable Temptation Of Insider Trading
June 7, 2009 by Tisa Silver
Filed under Finance
Insider trading is illegal, but is it really that bad?
The line between informed trading and insider trading is drawn by examining the type of information which prompted a person to act. Someone who has material nonpublic information is an insider.
Photo by Consumerist, courtesy of flickr
For example, former Countrywide CEO Angelo Mozilo was recently accused of insider trading.
As a chief executive, he had easy access to inside information. In addition to running the company, he was a shareholder with a large ownership stake in the business.
Given his intimate knowledge of Countrywide’s business, is it reasonable to expect that he would ignore inside information that could impact his own wealth?
Insiders have an unfair advantage because they deal with information about their company on a daily basis.
Certain insiders may have to analyze the information, while other insiders may have to determine the validity and/or importance of the information.
A different insider may be assigned to put a spin on the news and pass it off to another insider who will then write the press release for yet another insider to read and another to post on the company’s investor relations web page.
Material nonpublic information makes several stops before its arrival to the general public. At what point does it become fair for an insider to act on it?
Insider trading will never go away because the world of publicly traded companies is full of insiders. Their advantage is palpable, while the penalties appear few and far between.
