This is not a journal


Insider Trading
Insider trading is non-public information is used to tell someone to buy or sell based on the corporation’s markets. It may include the purchase or sale of shares prior to the disclosure of a corporate news release or the purchase or sale of shares on the basis of information that would never be disclosed to shareholders. There many cases that have go on because of insider trading and many people have gone to jail. Insider trading occurs in the corporation with those who are close to those with the information that should not be public but to try to save friend and family money. There are also arguments that insider trading should be aloud.
Insider trading accrues with people in high places in a corporation like Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments; Friends, business associates, family members, officers, directors, and employees, who traded the securities after receiving such information; Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded; Government employees who learned of such information because of their employment by the government, other persons who misappropriated, and took advantage of, confidential information from their employers.
Cases have arisen of the years and one of the resent cases is the Martha Stewart case. Martha received information from her friend Sam Waksal about the business that she had invested in since the cancer drug was rejected by the food and drug administration before the information became public. Martha had 4000 shares that she had her broker sell. Martha ended up being convicted of conspiracy to obstruct justice. She was sentenced up to six months of jail and the she was stuck under house arrest for a few years. Martha’s friend Sam got 5 years in jail not just for giving information but also conspiracy to obstruct justice.







Trading by "insiders" of a corporation
1. According to the U.S. SEC, corporate insiders are a company's officers, directors and any beneficial owners of more than ten percent of a class of the company's equity securities.
Since insiders are required to report their trades, others often track these traders, and there is a school of investing which follows the lead of insiders. This is of course subject to the risk that an insider is making a buy specifically to increase investor confidence, or making a sell for reasons unrelated to the health of the company (e.g. a desire to diversify or buy a house).
As of December 2005 companies are required by the FEA to announce times to their employees as to when they can safely trade without being accused of trading on inside information.
[edit]

Trading on material, non-public information
There are rules against this type of "insider trading" in most jurisdictions around the world, though the details and the efforts to enforce them vary considerably. In the United States, for example, there is no general federal law directly prohibiting insider trading. Authority to prosecute cases of insider trading came from the Supreme Court of the United States' interpretation of Section 10(b) of the Securities Exchange Act of 1934, and in particular of SEC Rule 10b-5, prohibiting fraud in connection with the purchase or sale of securities (see Securities & Exch. Comm'n v. Texas Gulf Sulphur Co., 258 F. Supp. 262 (S.D.N.Y. 1966)). Insider trading has been outlawed in the U.S. since the 1960's.
An example of illegal insider trading may be that you, as an assistant to the chief executive officer, learn that your company is going to be taken over before it is officially disclosed publicly. Knowing that such a move is likely to cause the price to rise, you buy shares in the company and subsequently profit from the transaction. A less dramatic (but still potentially lucrative) example would be trading on the quarterly earnings/losses shortly before they are announced.
In practice, prosecutions for insider trading tend to be rare and difficult to win for a variety of reasons. It can be difficult to prove what the accused actually knew at the time the trades were made -- and people may not even be told directly but merely advised to buy or sell with a nudge and wink. Proving that someone has been responsible for a trade can also be difficult, because a clever trader can hide behind a variety of nominees, companies, and proxies, perhaps located offshore in jurisdictions that do not cooperate with the local authorities. Insider trading is usually performed by the already wealthy, who can afford the best lawyers available and have the resources to drag a case out and cost the prosecutors millions along the way. Finally, the details of insider trading can be highly confusing to non-experts and convincing a randomly-selected jury, many with no experience of share trading, that a crime has been committed can be difficult. The complexity may be because the transactions are inherently complicated, because the transactions were made so to evade prosecution, or as Brian Doherty claims in Reason magazine, because the regulations are "designed, like most law, to be understood by trained professionals, not the citizens who have to live under it" [1].
[edit]

Arguments in favour of insider trading
Although insider trading is often illegal, there are arguments in its favour. Insider trading amounts to a consensual act between adults, i.e. a victimless act. A willing buyer and a willing seller agree to trade property which they rightfully own, with no prior contract having been made between the parties to refrain from trading if equal knowledge is not possessed. Hence, it is maintained that since traders willingly take the risk that the party on the others side of the trade is more knowledgeable, no one's rights are violated.
Many argue that insider trading is not "fair." However, those in favor of legalizing the practice hold that making money by having superior information is what trading is "all about": A trader does not sell his stock unless he believes he knows information that is more indicative of the future move of a stock than his buyer, and vice versa. In effect, the same thing is happening whether the knowledge is "inside information" or not: someone always has superior knowledge than someone else. Hence, the stock market by nature is not "fair" whether insider trading is legal or not.
Insider trading can make markets more efficient by increasing the amount of information that is known about the company, and can motivate outsiders such as analysts to increase their knowledge about the company. The costs of complying with anti-insider-trading laws are also thus avoided. Nobel prize-winning economist Milton Friedman says: "You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that." Friedman does not believe that the trader should be required to make his trade known to the public (to reveal his identity or the reason for his trade), but says that the buying or selling pressure itself is information for the market. A practical counter-argument to this, however, might be empirical research purporting to show that those markets with strongly enforced laws against insider trading tend to have lower costs of capital for security issuers. (See, for example, "The World Price of Insider Trading" by Utphal Bhattacharya and Hazem Daouk in the Journal of Finance, Vol. LVII, No. 1 (Feb. 2002). [2]) In other words, where certain individuals are permitted to buy and sell shares based on inside information, other investors will be more wary and demand a premium for their investment. This, in turn, raises the cost of capital for all issuers.
Some of those who favour regulations against insider trading assert that market liquidity comes from confidence that all participants have equal access to information. A counter-argument to this is that a significant motivation of trading is the belief on the part of a trader that he has better knowledge than others do in the market and that therefore a stock is improperly priced. If a stock was always accurately priced, there would no point in speculative trading, which would result in decreased liquidity in the market.
Advocates of legalisation sometimes also make free speech arguments. Punishment for telling someone else about a development pertinent to the next day's likely stock moves would seem, prima facie, to be one of prohibited speech, i.e. an act of censorship [3]. A counter-argument is that information being conveyed is akin to proprietary information and that a corporate insider, if he has contracted to not expose it, has no more of a free speech right to tell another individual about confidential information that insider acquired by ways of his or her position than to tell others about the company's new product designs, formulas, or bank account passwords. However, communicating inside information is illegal even if it's not by a corporate insider.
Also, there is the question of why what amounts to insider trading is legal in other markets, such as real estate, but not in the stock market. For example, if a geologist knows there is a high likelihood of the discovery of petroleum under Farmer Smith's land, he is entitled to make Smith an offer for the land, and buy it, without first telling Farmer Smith, or competing potential buyers, of the geological data and reasoning that justify his interest. If the value of the hidden oil can be acquired in such a manner in real estate transactions, some ask: why not unlock hidden values in the stock market through the same mechanism?
Also, although on one hand there are no laws against insider trading in the commodities markets, on the other many activities such as front running are illegal. For example, a commodity broker can be charged with fraud if he or she receives a large purchase order from a client (one likely to affect the price of that commodity) and then purchases that commodity before executing the client's order in order to benefit from the anticipated price increase. Likewise, an individual employed by the U.S. Agricultural Department, for example, could be charged with fraud if he or she were to receive a draft of the Department's crop report before it is released to the public and then buy or sell commodities or futures contracts based on this non-public information. (This situation was implicit in the Eddie Murphy movie Trading Places.)
[edit]

Legal differences among jurisdictions
The US and the UK vary in the way the law is interpreted and applied with regard to insider trading.
In the UK, the relevant laws are the Financial Services Act 1986 and the Financial Services and Markets Act 2000, which defines an offence of Market Abuse.
It is not illegal to fail to trade based on inside information (whereas without the inside information the trade would have taken place), since from a practical point of view this is too difficult to enforce.
It is often legal to deal ahead of a takeover bid, where a party deliberately buys shares in a company in the knowledge that it will be launching a takeover bid.
Japan enacted its first law against insider trading in 1988. Roderick Seeman says: "Even today many Japanese do not understand why this is illegal. Indeed, previously it was regarded as common sense to make a profit from your knowledge." [4] Insider trading was made illegal in England in 1985
INSIDER TRADING
1. INTRODUCTION AND BACKGROUND
Insider trading has been described as the purchase and sale of securities of a corporation by a person with access to confidential information about the corporation that can materially affect the value of its securities and that is not known by other shareholders or the general public.
Trading by insiders per se is not illegal; most laws governing the issue allow insiders to trade in the securities of corporations with which they have a connection, provided they do not possess material confidential information about the corporation. Insider trading is proscribed, however, when the insider possesses material confidential information or uses such information for his or her benefit when trading in the securities of the corporation.
There are a number of reasons why improper insider trading is regulated. Without regulation, insiders could use important inside information to their own advantage and to the disadvantage of outside investors. This could damage the corporation’s reputation and, more important, reduce confidence in the securities market in general.
This note discusses the insider trading provisions of the Canada Business Corporations Act (CBCA).
JURISDICTION TO ENACT LAWS RELATING TO INSIDER TRADING
Both the federal and provincial governments have jurisdiction to enact laws relating to insider trading. Provincial jurisdiction is based on the authority to enact laws relating to property and civil rights, while federal jurisdiction is based on the authority of the federal Parliament to create and regulate federal corporations.
At the provincial level, insider trading is regulated under provincial corporations laws and securities statutes. Companies incorporated federally under the Canada Business Corporations Act (CBCA) are also subject to the insider trading provisions found in that statute. The result is a certain amount of overlap and duplication.
The overlap and duplication of the federal and Ontario insider trading requirements were the subject of a Supreme Court of Canada decision in the early 1980s. In Multiple Access Ltd. v. McCutcheon,(1) the provisions of the Ontario Securities Act allowing compensation for loss suffered as a result of insider trading were held to apply to a federally incorporated corporation, even though the corporation was subject to similar insider trading requirements under federal law. The majority of the Court held that the insider trading provisions of both the Canada Corporations Act(2) and the Ontario Securities Act were valid. Writing for the majority, Dickson, J. concluded that the impugned provisions of the Canada Corporations Act had a general corporate purpose and a rational, functional connection with company law.
Providing safeguards against the malfeasance of the managers is strictly within what might properly be called the constitution of the company. The proper relationship between a company and its insiders is central to the law of companies and, from the inception of companies, has been regulated by the legislation sanctioning the company’s incorporation.... [T]he impugned provisions of the Canada Corporations Act are directed at preserving the integrity of federal companies and protecting the shareholders of such companies; they aim at practices, injurious to a company or to shareholders at large of a company, by persons who, because they hold positions of trust or otherwise are privy to information not available to all shareholders.(3)
The majority of the Court went on to find that the relevant sections of the Ontario Securities Act were also a valid exercise of provincial jurisdiction over property and civil rights and that these provisions did not "sterilize the functions and activities of a federal company nor ... impair its status or essential powers."(4)
Thus, the majority found that insider trading provisions have both corporate law and securities law aspects. Because they considered these aspects to be of roughly equal importance, the majority felt that one did not have to prevail over the other.
The minority of the Court (three judges) took a different view, however. They concluded that the provisions of the Ontario Securities Act were constitutionally valid, being directed to regulating the holding and trading of securities in Ontario. The central concern of securities legislation, they observed, was not the constitution of the corporation but rather the regulation of trading in the corporation’s securities.(5) On the other hand, they held that the federal insider trading provisions were not essential to the constitution of a federal corporation, or to its functional aspects and were therefore invalid.(6)
INSIDER TRADING – CANADA BUSINESS CORPORATIONS ACT
Insider trading provisions were first introduced at the federal level in 1970 as part of the Canada Corporations Act and subsequently carried over into the CBCA in 1975.
Found in Part XI of the Act, the insider trading provision of the CBCA, for the most part, deal with insiders of "distributing corporations." A "distributing corporation" is defined as a corporation whose shares have been part of a distribution to the public, remain outstanding, and are held by more than one person.
Under section 126(1), an "insider" is defined as a director or officer of a distributing corporation, a distributing corporation that purchases or otherwise acquires its own shares (except a redemption of redeemable shares) or shares issued by an affiliate, or a person who beneficially owns more than 10% of the shares of a distributing corporation or who exercises control or direction over more than 10% of the votes attached to shares of such a corporation.
There are three main components of the provisions: requirement for insider reporting, speculative trading prohibitions, and civil liability.
A. Requirement to File Reports
A person is required to send a report to the Director under the CBCA within 10 days after the end of the month in which he or she becomes an insider of a distributing corporation. Additional insider reports are required within 10 days following the end of the month in which there is any change in the person’s interest in the securities of a distributing corporation.
A person who, without reasonable cause, fails to file an insider trading report is subject to a maximum fine of $5,000 and/or to imprisonment for a term of up to six months (section 127).
B. Prohibition against Speculative Trading
The CBCA prohibits insiders from selling shares that they do not own or have a right to own (short selling) and from buying or selling a call option or put option in respect of a share of a distributing corporation of which they are insiders (section 130). Insiders can sell shares they do not own, however, provided they own other shares that are convertible into the shares sold, or they own an option or right to acquire the shares sold.
C. Civil Liability
Under subsection 131(4) of the CBCA, insiders (as defined in section 131(1)) who make use of specific confidential information for their own benefit in connection with a transaction in the securities of a corporation (whether distributing or non-distributing) are liable to compensate anyone who suffers a direct loss as a result. They are also accountable to the corporation for any direct benefit or advantage they receive.
INSIDER TRADING DISCUSSION PAPER
In February 1996, Industry Canada released a Discussion Paper on insider trading.(7) The paper looked at whether the CBCA insider trading provisions were still needed and, if so, what changes could be made. It outlined the three following approaches:
eliminating the CBCA insider trading requirements in their entirety and leaving the regulation of insider trading to the provinces;
eliminating only the insider reporting provision of the CBCA and leaving the collection of such information to provincial securities statutes;
maintaining the CBCA insider trading requirements while harmonizing them with provincial requirements.(8)
At the outset, the Discussion Paper considered the argument that, because of the similarity between provincial securities laws and the CBCA insider trading provisions, the latter impose an unnecessary regulatory burden and should therefore be repealed.
Proponents of maintaining the CBCA provisions argue that these uphold a base level of regulation for CBCA corporations and that their repeal would eliminate only a small amount of duplication.
Recommending that the CBCA provisions be continued, the Discussion Paper went on to examine their three principal elements.
A. Filing Reports
The first element consists of the reporting provisions. While making no recommendation as to whether these provisions should be maintained, the Discussion Paper noted that duplicative filings could be eliminated if the Director under the CBCA were to exempt those who reported trades under provincial laws from having to file under the CBCA.
The Paper also examined a number of ways in which the reporting requirements could be changed, such as decreasing the time within which insiders must report trades or declare that they have become insiders and increasing the penalties for violating the insider trading provisions.
As mentioned earlier, the CBCA reporting provisions require that insider reports be filed within 10 days of the end of the month in which the person becomes an insider or makes a trade. Some provinces provide for disclosure to take place earlier, within 10 days of the persons’s becoming an insider or making a trade. The Discussion Paper recommended that, if the CBCA insider reporting requirements were to be maintained, the time allowed for insiders to report trades or declare that they had become insiders should be decreased to within 10 days of the person’s becoming an insider or making the trade.(9)
B. Speculative Trading
The Discussion Paper also examined the speculative trading provisions that prohibit insiders from short selling (selling shares that they do not own or have a right to own), buying and selling certain call options, and buying and selling a call option or a put option in respect of a share of the corporation or any of its affiliates. Violations of these prohibitions are subject to a summary conviction offence with a maximum fine of $5,000 and/or imprisonment for up to six months.
The Discussion Paper recommended that these provisions be maintained and amended.
C. Civil Liability
The civil liability provision makes liable those who, in connection with a transaction in a security of a corporation, and for their own benefit or advantage, make use of confidential information that, if generally known, might reasonably be expected to affect materially the value of the securities. This provision applies to both public and private corporations. Two categories of persons can assert a claim against an insider: any person who has suffered a direct loss and the corporation itself.
Insider trading liability provisions are also found in provincial securities legislation. While it can be argued that having civil liability provisions in both the CBCA and provincial securities legislation may be duplicative, the Discussion Paper pointed out the jurisdictional advantage of the CBCA (investors across Canada can challenge the actions of an insider of any CBCA corporation) and the statute’s potential for a broader class of plaintiffs. The Discussion Paper recommended that the civil liability provision be maintained and amended where necessary.
D. Penal Liability
Finally, the Discussion Paper examined whether the CBCA should contain a penal liability provision for improper insider trading. Noting that provincial securities legislation does contain such a provision, the paper pointed out that its absence from the CBCA makes the trading provision of that law more difficult to enforce. Moreover, it is argued that a penal provision would, in the event of a successful prosecution, assist those undertaking a civil action.
The Discussion Paper recommended the addition to the CBCA of a penal liability provision prohibiting improper insider trading and wrongful communication of material confidential information. The provision would be limited to securities of distributing corporations. The maximum penalty would be two years in jail and/or $1,000,000 or three times the profit made, whichever was greater.(10)
RECOMMENDATIONS OF THE STANDING SENATE COMMITTEE
ON BANKING, TRADE AND COMMERCE
The Standing Senate Committee on Banking, Trade and Commerce examined the CBCA insider trading provisions in its 1996 report Corporate Governance.(11)
The Committee did not see a need to repeal these provisions but noted that, where duplication and overlap existed, the Director under the CBCA should use individual and blanket exemptions to reduce the burden of duplicate filings.
Of the Discussion Paper’s proposals for modernizing the insider trading provisions, the one most widely discussed before the Committee was that dealing with the time for filing insider trading reports. A number of witnesses argued for earlier disclosure of insider trading, some even suggesting that reports should be filed on the day a transaction was completed. Although favouring more timely disclosure, others suggested that it might be difficult for some institutions to report trades on a same-day basis.
The Committee supported earlier disclosure of insider activities and recommended that the time given for insiders to report trades or declare that they had become insiders should be decreased to within 10 days of the person’s becoming an insider or making a trade.(12) The Committee also recommended that this time period be prescribed by regulation rather than in the CBCA itself. This would allow for more timely updating of the provisions and make it easier to harmonize time frames with provincial requirements.(13)


Lessons of Martha Stewart Case
by Gene Healy

Gene Healy, senior editor at the Cato Institute, is editor of the forthcoming book, Go Directly to Jail: The Criminalization of Almost Everything.

After over two years of struggle, Martha Stewart's legal odyssey is about to end. Today, she is expected to get 10 to 16 months in prison for charges arising out of her sale of nearly 4,000 shares of ImClone stock in December 2001.

Whatever one thinks of the doyenne of domesticity, her case holds important lessons. Not about the arrogance of the rich or the dangers of being a powerful woman in America. Instead, the Stewart case is a cautionary tale about the ever-expanding power of federal prosecutors.

James Comey, the federal prosecutor behind the Stewart case, says he went after Stewart "not because of who she is but because of what she did." But that's hard to believe given the audacious legal theory Comey used to pursue her.

Comey didn't charge Stewart with insider trading. Instead, he claimed that Stewart's public protestations of innocence were designed to prop up the stock price of her own company, Martha Stewart Living Omnimedia, and thus constituted securities fraud. Stewart was also charged with making false statements to federal officials investigating the insider trading charge -- a charge they never pursued. In essence, Stewart was prosecuted for "having misled people by denying having committed a crime with which she was not charged," as Cato Institute Senior Fellow Alan Reynolds put it.

Nor was this the first time Comey contemplated taking down a high-profile defendant with a novel legal theory. In mid-2003, Comey considered prosecuting fabulist Jayson Blair for the hitherto unknown crime of making stuff up in the New York Times. Blair, the Times reporter who faked stories and quotes, became the subject of scandal in early 2003 when the Times unearthed his deception. In May of that year Comey's office sought information from the Times as a prelude to prosecution, possibly for mail fraud.

But Comey -- who has since been promoted to the number two slot in the Justice Department -- is hardly alone in his willingness to make a federal case out of almost anything. The problem is systemic, driven by legislators who are all too willing to turn every social problem into a matter for the criminal law.

In a famous speech in 1940, Attorney General Robert Jackson (later Justice Jackson) warned federal prosecutors: "With the law books filled with a great assortment of crimes, a prosecutor stands a fair chance of finding at least a technical violation of some act on the part of almost anyone." The great danger, said Jackson, is that "he will pick people that he thinks he should get, rather than pick cases that need to be prosecuted."

Since Jackson gave that speech, that "great assortment of crimes" has expanded radically. Today, there are over 4,000 federal crimes spread throughout tens of thousands of pages of the U.S. Code, an increase of one-third since 1980. And the law sweeps far more broadly than it did in Jackson's day. Today it's possible to send a person to jail without showing criminal intent or even a culpable act -- as Edward Hanousek discovered when the Supreme Court denied his appeal in 2000. A federal district judge sentenced Hanousek, a roadmaster for a railroad company in Alaska, to six months in prison after a backhoe operator working under Hanousek accidentally ruptured an oil pipeline, spraying a harmful quantity of oil into the Skagway River. Though he was off duty and away from the site when the accident occurred, Hanousek was convicted of unlawful discharge under the Clean Water Act by reason of negligent failure to supervise. In dissenting from the Court's refusal to hear the case, Justices Thomas and O'Connor warned of exposing "countless numbers of construction workers and contractors to heightened criminal liability for using ordinary devices to engage in normal industrial operations."

Martha Stewart is hardly the only American to feel the full weight of the federal government come down on her for an offense that merits a civil penalty at worst. For years, as Harvard Law Professor William Stuntz warns, we've been constructing "a world in which the law on the books makes everyone a felon, and in which prosecutors and police both define the law on the street and decide who has violated it." In that world, the ordinary citizen can fall as easily as can the rich and famous.