Bottom Line Ethics

So what’s wrong with insider trading?

It is impossible to read the business press in recent weeks without being impressed by the extent to which insider trading dominates the headlines. Last week Berkshire Hathaway executive David Sokol resigned after revealing that he had taken a large stake in Lubrizol prior to pushing for Berkshire Hathaway to acquire the company, a transaction that increased the value of his stake by $3 million. He invested only after Citigroup had identified them as a good acquisition target for Berkshire Hathaway.

The Wall Street Journal’s Holman Jenkins opined that “…Berkshire's shareholders aren't out a dime unless Mr. Sokol has somehow put out word that Lubrizol was in play, thus driving up the price—which he didn't.” Even if you believe that a previously uninterested party taking a $10 million stake in a company sends no signal and has no effect on the price of the stock, you would also have to assume that Mr. Sokol had no influence on the price offered for Lubrizol, which may be true. To be fair, even Mr. Jenkins saw a whiff of insider trading, a conflict “[t]o the normal business eye.” And this is a lot for Mr. Jenkins, who rarely objects to any behavior that makes the market more efficient. He largely assumes away any mixed motives in Mr. Sokol, and the editorial’s title clearly states his opinion that it did not bother Berkshire Hathaway CEO Warren Buffett: “St. Warren Casts Not the First Stone.”

But it bothers a lot of other people. It is true that insider trading increases the efficiency of the market by speeding up the incorporation of information into the share price. But what drives insider trading laws, and what bothers most people about it, is the issue of fairness. Trading on insider information is not a victimless crime. There is another party on the other side of that transaction, since the number of shares in the market is fixed. What are that person’s (or investment fund’s) rights?

My guess is that Sokol’s situation is not something that will result in any kind of criminal charge, though it may result in SEC sanctions. Raj Rajaratnam, on the other hand, is fighting for his future in a courtroom. If courtroom testimony and the confessions of others who have pled guilty are to be believed, Mr. Rajaratnam never hesitated to mine information for his Galleon Group by whatever means possible. The vortex surrounding his trades has sucked in people within his firm, traders with other firms, an IBM executive, even his own brother. As detailed in a recent Fortune article, the story is a real page turner.

The FDA is holding its collective breath after charges were filed last week against an employee accused of making millions trading on information to which he was privy. He allegedly used seven accounts in other people’s names. He had access to the system that tracks the approval process for drugs, trading against denials and buying shares ahead of approvals. Not that long ago, it was inside information about an FDA action that led Martha Stewart to dump ImClone shares to avoid a loss, and the subsequent investigation led to charges of lying to investigators, and a federal prison sentence.

Once Mr. Rajaratnam’s trial is over, we are likely to see one or more high profile trials aimed at ferreting out networks of “experts” that may be enabling insider trading on a massive scale. Firms hire “experts” as consultants who are then interviewed by hedge funds and other traders. These experts are often insiders at public companies. If they do not reveal private information, but just opine on industry conditions, this is generally not a problem. But there appears to be significant evidence that a number of these experts have stepped over the line.

So what is fair? If there is bad news, shareholders will be impacted eventually when it is revealed. This is just accelerated by the insider trade. However, the insider trader avoids the loss by trading out of it. It reminds people of what happened at Enron when management changed pension plan providers, preventing employees from selling their Enron stock while management was dumping its stock in large quantities. It helped adjust the stock price rapidly and efficiently. But was it fair?

When an insider buys shares on inside information, the insider is taking those shares from someone at a discounted price from their true value, which is unknown to the seller. I am guessing that David Sokol will hear from one or two of those folks who traded out of Lubrizol when he was buying in.

I am a believer in market efficiency, both as a description of what is generally true and something that is largely good, and to be preferred. But that does not make it the ultimate value that ought to control markets.

There is a moral problem in insider trading that is rooted in fairness. Immature markets are dominated by insider trading. But in mature markets, as long as there are people who care about fairness, you can expect to see insider trading prohibitions enforced.

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  1. I agree. Insider trading is wrong, because it is unfair. The people privvy to insider information have a duty to the shareholders to do what is in their best interest.

  2. Insider trading is basically robbery and I agree that it is wrongly used against unknowing shareholders. My thought is that there must be some way to use inside information to enrich the market without taking advantage of others. In the case some phenomenon happens and the entire market adopts a utilitarian viewpoint, there may be a slight chance of someone forfeiting valuable information for the greater good of the economy. Unfortunately, that’s a pretty far stretch and its better if the government inflicts repercussions for those participating in insider trading.

  3. The problem with insider trading and the fairness doctrine is that it is a consequential viewpoint. In order to truly correct the problem we have to adjust people’s duties. Ideally it would work like this, an employee has a duty to better the company for the benefit of his coworkers, himself, and the individuals who have decided to invest in the company. If he sells information for his own immediate benefit that puts the company at risk then he is violating his duty, likewise if he is not putting forth his best effort for the company he is also not fulfilling his obligation. Our problem is cultural, too often we see people putting others at risk for their own benefit and we become envious of their position. We’ve all heard the phrase the grass is greener on the other side, well the difference in ethics comes in how we decide to improve our yard.

  4. I always enjoy reading these blog posts….

    It is obvious that it is unethical to use insider knowledge to make personal gains…. but it is definitively immoral to do so at the expense of the shareholders of whom you represent as an officer. I am not an expert in the case, but how can we know that Mr. Sokol did not purchase Lubrizol because it was a great addition to his portfolio based on his personal investment strategies? It is reasonable to assume that as a fund manager, he would draw similar conclusions for the fund. However, had Mr. Sokol used his position to influence the investment decision, this again would be unethical. I just think this unlikely, as decisions of that caliber (and for that fund especially) are not unilateral. Ultimately, seems unethical as the personal investment was disclosed to Mr. Buffett and appears to be held for the long term.

    To the expense of employees (and shareholders) it is obvious, and not just in the case of Enron (for this purpose, can not be counted as ‘insider trading’ is it is an all out fraud) that it seems morally objectionable to dump your own company’s stock in anticipation of a loss in value. However, I can not think of any multi-millionaire tycoon that would be willing to lay down and take the loss knowing it is just around the corner. Could you hold on to your company stock (with it being the majority of your assets) knowing that it is about to tank??

    Long are the days where the Captain goes down with the ship… not out of external pressures, but out of a strong moral compass.

  5. Insider trading is never fair, and usually the people get hurt are those without millions in the bank. Those that usually profit from pulling their stocks out before the crash happens or buying large amounts before public knows of good events are usually top executives, and losing isn’t as much of an issue to them as it would be to the average Joe, who could have retirement in the value of the company’s stocks. This is just another example of greedy people willing to cut corners to make a profit, when it all eventually will catch up with you, as we can see with the many cases that have come to light. As these cases continue to develop, investors could begin to have less confidence in the market and be wearier of the investments, due to the fact that information may be one-sided and the stock price based on information only few know.

  6. I can understand how someone with insider information could be tempted to participate in insider trading. Hypothetically, if you were privy to information that you know will cause you to loose millions of dollars, it would be against your natural instinct to just sit back and watch your money disappear. For accountants, I think we really need to think about what we would do in a situation like this and prepare ourselves on how we would react. Making a rash decision during the heat of the moment could comprise our ethical beliefs…as well as, send us to jail.

  7. I am amazed to see the amount of insider trading that goes on in our economy. Wouldn’t we all like to make the right investment decision or become successful by making a good move in the marketplace? It would be an easy way to make fast money or even a nice chunk of change to live off of–like a hit and run in the marketplace.

    However, insider trading in my opinion is unfair. I see our market as a place to invest with hopes of making money overtime based on analyzing information and making good decisions. Insider trading can make people like me loose confidence in the market. Why would I want to invest my hard earned money if people are trading against me? Our economy should be based on equal rights, and we all clearly do not have equal rights to inside information.

  8. I am especially interested to see what the outcome will be for the “networks of experts” that you discuss in your article. It is very clear that by accepting this consulting work, the professional boundaries of confidentiality could easily be crossed.

    During my accounting internship this semester, this issue was actually discussed in our ethics training. The firm stressed that if we considered engaging in any type of consulting work outside of the firm, we were required to disclose it to the firm before beginning work, with the chance that we would eventually not be allowed to perform this outside work. This way, the firm could determine whether the consulting infringed upon any confidentiality or ethical guidelines and stop the problem before it occurs.

    Other industries or firms may have different policies about whether outside consulting work is appropriate, but for the firm I worked for it was certainly discouraged. It makes me wonder whether these “experts” were acting unethically by just accepting the work, let alone by potentially giving out too much information! This will be interesting to see if any court cases result from these scenarios.

  9. I think insider trading represents one of the few instances in which a completely free market isn’t always ideal. Fairness must certainly be taken into account if we are to encourage everyday Americans with no connections to corporate insiders to put money into the market. In this case, I believe regulation trumps the desire for ultimate market efficiency.

    I was glad to see that you mentioned the Enron pension debacle. How frustrating it must have been for hardworking employees to watch helplessly as their retirement accounts dwindled down to nothing! Every time I feel just the slightest bit of sympathy for those individuals who ultimately contributed to the fraudulent practices that led to Enron’s downfall, I’m immediately reminded of those employees who were totally blindsided by the entire ordeal.

    Sure, it’s easy to say, “CFO X was just responding to pressure from the CEO and Board of Directors. He had no idea it would create such a catastrophe.” But the signs are almost always there, the ones flashing “WARNING! FRAUD AHEAD!” And the ones who end up losing the most (at least proportionate to their overall wealth) are often those with the least responsibility for creating the situation.

  10. Like many people have mentioned, the inherent wrong in insider trading is a justice issue. Insider trading has a lot of moral implications because people in certain positions may choose to act on information that is confidential and unknown to the larger public. In knowing information before it is public, the holder of that information has a difficult choice to make. I think the funny thing is that most people convicted of insider trading are not poor by any measure. It is true that greed is behind all of the insider trading violations, but also is pride and the thrill of knowing things most people do not. It’s hard to say what anyone or I would do in similar circumstances, but this is why developing a clear moral compass is so important prior to entering into any professional position. The reality is that business is about money. When it becomes only about money, that is when problems start to arise.

  11. “There is not in all America a more dangerous trait than the deification of mere smartness unaccompanied by any sense of moral responsibility.” –Theodore Roosevelt

    What if companies rewarded moral responsibility rather than mere smartness, wisdom rather than mere “high-performance”? As a young professional, it is surprising how fast those around me will climb out onto the slippery slope of making morally questionable decisions whimsically, just to get ahead or to appear “smart”. The lengths to which people will go to avoid being “wrong” is astonishing.

    I’m thankful for men like Mike Shaub that combat these cultural norms by teaching about the dangers in today’s corporate environment and of our inevitable human susceptibility to trying to get ahead no matter what the cost.

    Keep speaking truth, Dr. Shaub. We’re all counting on it.

  12. “There is no place for government to prohibit consumers from buying products the effect of which will be to harm themselves.” – Milton Friedman, Free to Choose

    Let’s get one thing straight: the only problem with “insider trading” is the possibility of coercion or deceit. No one is upset with an “insider” making a financial transaction when his intentions are proper (that is, behaving like an ordinary trader). The argument that insider trading is “unfair” implies an opposite party is harmed by participating in the transaction. But, remember, it’s a two-way street in order to make a financial transaction. Clearly a non-insider faces an inherently higher risk when trading with an insider, but what if that investor is willing to take that risk? Why should the government stop an investor from participating in the transaction?

    Imagine a scenario – where insider trading is legal – with a CFO who is going to trade his personal shares in his company’s stock. He knows his company has been overstating earnings illegally for years, and he’s ready to sell his shares before the SEC shows up and he loses his shirt. Now imagine that the individual on the other side of the trade is the company’s CEO, who just received word his company finally found the cure to cancer. Clearly he’s in the market to buy, and buy as much as he can before the information becomes “public.” Both the CFO and CEO are beneficiaries of insider information, but have either of them been wronged by participating in the transaction?

    It is also important to note that in the previous example all shareholders would receive reparation: when the CFO is finally caught for fraudulently reporting earnings, he will have to account for his actions in civil court (and, of course, criminal court), resulting in compensation and “justice” for the shareholders that had been wronged.

  13. I too believe insider trading is just another form of robbery and completely unfair to the vast majority of society. Although I guess you could argue and say when has life ever been fair? I believe that many people get insider information on a daily basis, whether it be an overheard phone conversation or a compeltely innocent chat with an old friend that gets passed through the business world, but it is what those people do with that information that is really what matters. It is unethical in all aspects to act on these bits of information we may be given in our careers, and maybe you let it slip once with a small investment in that little thing you heard about walking by someone’s office. That, I believe is how it all begins- very small. Once you reap the benefits of that one time, I’m sure it is very hard to stop, and you become greedy and overly confident. You have it in your mind that you wont get caught and you will only do it a couple of times, until a year later and your face is plastered all over the Wall Street Journal. I think it is important early in our careers to focus on being ethical in all aspects of our lives and only acting on those actions that we believe in our hearts to be right.

  14. Let me preface by saying that I am a staunch advocate for a free market system. However, with insider trading happening so frequently, should we look to maybe putting regulations on stock purchases by these high powered executives? I am not talking about taking away executives’ rights to purchase stock; I am talking about considering having the SEC more closely monitor the purchases of stock by executives in investment companies. It seems like we catch people for insider trading after the damage has been done. Is there a way we can stop it from happening before their company buys a company that the executives hold stock in?

  15. ‘All that is necessary for the triumph of evil is that good men do nothing’

    Like everyone else, I completely agree that insider trading is wrong. I know what I believe, but after reading through numerous articles about insider trading and other types of fraud, I also have an extremely hard time believing that certain individuals think that they DESERVE to have the ability to conduct an inside trade. I realize that some of these individuals claim that they have worked hard to get to where they are, and use that as justification for trading illegally. To me, I agree that they probably have worked hard to get to where they are, but the reward is not to make money off insider trading, it is the large paycheck they are probably already receiving. Its the typical story of the rich getting richer. And while the rich are getting richer from the information that they know and someone else doesn’t, other people are trading based on their knowledge of the market. They may not be getting hurt by it, but they are definitely at a huge disadvantage.

    My main point is that it is no surprise to me to see story after story about rich business men going to jail for things such as insider trading. It is all about pride. Most of these men and woman are already millionaires, but they lack contentment. They just want more, and we will continue to see these stories of unethical business men and woman until there is a radical change in the way people think. I believe thats starts with us. I pray that all of us will seek to conduct ourselves in ethical ways in everything we do. I hope we all don’t forget the little guy, and are quick to help those in need. I hope we don’t fall in love with money, but rather with the other blessings in life such as are family and friends. It will all just come down to a decision one day for most of us. Do we seek to benefit ourselves (illegally), or do we stand up for what is right and do what is right? I pray that by the grace of God I make the right decision, and I hope we all learn from others mistakes and do what is right.

  16. Obviously the temptation for insider trading will always be there. When you have so many outside parties with access to this “inside” information: attorneys, accountants, consultants, advisors etc. The availability of information will indeed be a temptation for some. With regards to a recent comment, I do think that a free market is and always will be ideal and what makes this country so great. I do however; think that the punishments for some of these white color crimes are insufficient and almost disgraceful to some people. A prime example is the line and
    file workers at Enron. When they see their entire nest egg tanking from 350K to 15K in a matter of days and no way of getting out, this is extremely disheartening. Meanwhile, you have everyone in the “C-Suite” having free access to their 401Ks with prior notice of the impending downfall and the ability to exit at free will. Yes, some of the top echelon received hefty sentences; however it is clear there were many others who got off scott-free.

  17. I was intrigued by our insider trading and ethics discussion in class. I was not aware that there are so many “ethical” arguments that can be made to support insider trading, such as ethical egoism. However, I believe that at the end of the day, no matter how you make your own personal ethical decisions, insider trading is unfair to outside investors, and therefore, is unethical. Yet, when you look around at businesses today, a decision being unethical is not a good enough reason for so many people to walk away from an opportunity to make money. Apparently, a decision being illegal is not always enough either.

    The SEC seems to be doing a better job of cracking down on insider trading over the last couple of years, but the pressure needs to be applied further. Too many people are getting away with it, and at the rate we are going, insider trading cannot be put to a stop. The SEC does not have the answer, and I do not either, but something drastic needs to be done.

  18. I agree that insider trading is wrong and unfair. Having information that is not accessible to the rest of the public and using it for self-gain is unjust. It gives those who are cheating the market an unfair advantage over those who trade ethically and fairly. There is no justification for cheating the system; and alike, there should be no tolerance for it.

  19. Insider trading may increase market efficiency, but that’s not what they are trading for. The people conducting insider trades aren’t the least bit interested in how efficiently the market runs, they want to make money. That’s why people are getting more creative with their schemes. Why would you make 7 different accounts in fake names if you were interested in market efficiency? I can’t believe some of the things people will say in court to get out of their wrong-doings. I wish people would almost just fess up and say, “yes, I wanted to make a few million dollars.” The sad truth is that there is still a large amount of insider trading going on and will probably always be going on. I hope legislation helps to tune this down to some degree. If some shareholders are going to lose money becasue their stock prices are going to go down, then the fair thing is for EVERY shareholder to lose money. That’s just how the stock market game works.

  20. I believe insider trading is wrong, even if it makes the market more efficient. No one should be able to make gains just because they have access to privileged information. It is not fair to others who actually study the market and engage in legal transactions. People with access to insider information need to respect the confidentiality rules, not use that information in a conniving way to make money.

  21. I agree that insider trading is more of a moral issue, but I believe that it can do some harm on the efficiency level as well. If our country legalized insider trading, many of the gains in the market would be absorbed by the ones possessing the insider knowledge. This could lead to people refusing to participate in the market out of frustration or a belief that the system is corrupt. If a market that is perceived to give them more of a fair chance is available, such as one in another country, you can count on them moving to that one. So, although in the short run the prices may respond faster with insider trading, long run implications may prove problematic.

  22. While I agree that sanctions should be brought against “experts” hired by firms who reveal too much information, I think it may be a better idea to further regulate the way that firms ask for, and receive advice on an industry. To clarify, I don’t think the the entire fault rests with the experts, but much of it with those trying to glean the information from them.

    Overall, however, I think insider trading poses an interesting problem: our economy, and our capitalistic society have made it clear that to succeed both people and businesses need to have the right knowledge and the right contacts. It’s how political campaigns are run, it’s how start-up companies grow, and it seems to be the stance that those involved in insider trading take. They work in cut-throat environments, with so much pressure on quotas and deadlines, that they have to, on a day-to-day basis, find solutions that no one else has found in order to succeed. So when the time comes when they are insiders, and have an opportunity that others don’t have, they take it.

    I’m not siding with those involved in these scandals, because I think fairness weighs heavily in this decision, but I am saying that I think many of these people have been molded by their environment into the thieves that we consider them to be today.

  23. I don’t think the fact that insider trading can make the market more efficient should be used as justification for committing the crime, or as a means for legalizing it. While I see the point that said insiders have perhaps “earned” the right to this information, or that their corporate environment cultivates such competitive and self-interested behavior, I still think it unfair to use for personal advantage only. Those with inside information need to keep the best interest of the general public in mind – and acting on inside information simply doesn’t do that. Furthermore, some charged with committing insider trading are not receiving adequate punishment. Serving jail-time is one thing, but allowing many to keep the millions made as a result is what to me is most unethical, in my opinion. Many lost all of their savings – money they have been working towards saving for years, and people like Andy Fastow served a few years and will likely still live more than comfortably for the rest of his life.

  24. I also believe insider trading is wrong, but I think we need to examine what the line is between insider trading and acceptable trading. The argument has been offered that insider trading is wrong because it is unfair, but who decides what fair is? Is fairness based on legality or morality or something else? We should also consider the environment that these traders are in. They are trying to gleam every bit of knowledge available in order to make the best decision possible in the shortest amount of time. In a world where you must scrape for every bit of information in the timeliest way, it can be hard to discern or even care where the information came from as long as it was reasonably accurate. If the traders are only seeking is information rather than evaluating every detail, I can see how it would be easy to get caught up in insider trading. That is not to say that it is ok, but to say that each trader needs to look at their environment and make sure they put in safeguards to protect themselves from insider trading and unacceptable moral behavior. Each trader needs to be intentional about their accountability and ethicality in each action that they take.

  25. Insider trading is not only unlawful but it is morally wrong as well. It is the prime example of an ethical egoist viewpoint. The people that partake in insider trading are out to better themselves no matter the cost to the rest of society. What they fail to see is that while they are making money off these transactions, they are essentially stealing the money they are making from other individuals that do not have this information.

    As much as I would like to see Insider Trading done away with, I just do not believe that we will ever fully cleanse our hands of it. Many people in today’s society embrace a consequentalist point of view and will always test the limits in place. These people will continue to trade illegally unless the government and the SEC makes a punishment that these insider traders view as not being worth the risk. Even after a sufficient punishment is developed, there will still be those select few that will continue to trade illegally thinking they will never get caught.

  26. Insider trading has some benefits. It does make for the most efficient market. Also people that have worked very hard to network and gain insider access are being rewarded for that work by being able to trade stocks based on information that not everyone has access to. Is this fair? No. It is not fair. Haven’t we been told from a young age that “Life isn’t fair.” When playing a game someone has to win and someone has to lose. While equality is great from a theoretical standpoint, it doesn’t work as well out here in the “real world”. If life were equal and fair, everyone would be complacent. There would be no drive to work harder. For what? You will always have what your neighbor has whether you work all day or don’t work at all. Just my thoughts…

  27. I believe that the ability for one to use insider information cannot be reduced in any near time frame; however these recent charges and signs of corruption will certainly bring light to the flaws of the regulations that are present. By following due process with cases such as the Rajaratnam trial, the process of how this information is commonly acquired can be made known to those responsible for holding users of the market accountable. By making examples of known cases and learning how these corrupt actions were able to exist, the regulatory arm of the market can develop methods of reducing the ability for users to advantageously manipulate the market. While there is not a light switch to turn off insider trading, there can be regulations adopted over time to adjust the ability for these acts to occur. The line must be drawn of what is right and wrong and clearly defined for users of the market. Through enforcement and persistence of ensuring that justice is sought after during these cases, the regulations will adapt and better enforcement will prevail.

  28. I believe that insider trading is wrong. It allows those whose duty it is to protect the interest of shareholders to profit from the trust placed in them. While it can be said that those privy to insider information have earned the right to use the information, they are, more often than not, fairly compensated for maintaining the shareholder’s interest.

    In addition, without trust in the markets, buyers and sellers are less likely to participate. Thus, while you would have a more efficient market with insider trading, you would also have a less liquid market.

    So, while insider trading is wrong from a duty perspective, the benefits that it would confer may be minimal.

  29. I feel that a person does not just develop the sense that insider trading is wrong overnight, but instead I feel that it is a process that never ends. One has to first consciously tell oneself that it is privileged information, and that he/she is not given the right to act on it. Whether the act be buying/selling stocks or telling others to do the same thing. We have the duty to keep confidential and privileged information just that-confidential and privileged. If the general public is supposed to know about it, they will. The next step is continuously telling oneself that insider trading is wrong. We can’t fall into the realm of the fraud triangle (which to me is basically what insider trading is) whenever we have this type of information. We have to continue to keep an ethical mind and resist the temptation of making an easy buck on the expense of others through insider trading.

  30. With all of the insider trading cases coming to the attention of the public, I feel that this might be the scare that people need to question themselves before becoming involved with insider trading, Not only does someone get the natural instinct that this is wrong and unfair, but seeing the consequences of discovery happening more frequently could potentially frighten people from any pre distinct notion of becoming involved.

    One could argue that getting insider trading information should be legal to those receiving the information because they have worked their way up the totem pole enough to deserve to have that knowledge. This ratification is what could override any consequences of discovery, and unfortunately, is what most people will likely believe. This is why I believe it is very important for the SEC to keep such a close watch on insider trading, and the SEC has been doing a great job on this recently. The good work needs to be kept up in order to try and successfully do away with insider trading as much as possible.

  31. I usually hate using the word “fair” because it really just does not make that much sense. I tend to view the world in “true versus false” terms rather than “fair versus unfair.” Whenever I think of the word “fair” I revert back to childhood. “Mom, can I stay up all night and eat all the pizza and chocolate in our house?” Obviously her answer was no, which I answered her right back with, “It’s just not fair; my best friend’s mom lets her!”

    Although I agreed completely with this article, I did not agree with the usage of the word “fair” itself. I think it is true that insider trading increases the efficiency of the market. I also think it is true that insider trading leaves the stockholders who are unaware of the insider information broke. With these two true statements, who is to question whether it is “fair” or not? For the insider who worked very hard to gain prominence in his firm, it is fair for him to partake in insider trading. For the stockholders who invested their hard earned money in the stock market, it is fair for them to say that insider trading should be illegal. When I put myself on both sides of the issue, I can easily see the argument for both options. That is when I switch to my true versus false mentality. In a given situation, if it is true that a person or group of people get hurt, lose money, or lose any part of themselves in the process, then I believe it is wrong.

  32. I think some experts have crossed the line and do not neccesarily even know that they have done so. It seems as people get closer and closer to the line, the grayer and less defined the line becomes. Insider traders often rationalize their actions based on arguments related to market efficiencies, but I think it would be a lot harder to justify insider trading if they were truly thinking about the people being affected by their trades. One characteristic of the global market is that the buyer and seller are virtually invisible to each other. When you aren’t directly interacting with the people you are potentially causing harm, the lack of accountability and awareness makes your actions that much easier to rationalize. In situations like this, I think it’s important that we not only be aware we have a duty to fairness, but think of the consequences for those on the wrong side of the deal.

  33. Like everyone else, I completely agree that insider trading is wrong. The thing that stuck with me most from this blog was the mention of the Enron executives who were dumping their stock during the transition between penion plan providers.
    The first time I heard the story of Enron (in a classroom setting) was during my first Accounting class. There are many tragedies that surround that story but I think the most unsettling for me has to do with the transition between penion plan providers and the Enron employeesnot being unable to move their stock while the top executives could. I honestly don’t see how any of the Enron executives could live with themselves knowing what they were doing. It really does remind me of a Titanic- like scenerio where the rich are the first and only ones on the life boats and the rest of the passengers are left to take their chances in the freezing water.
    It definitely brings to light an inequality in the market place which I think the laws against insider trading try to remedy.

  34. To me, no matter which ethical reasoning you use, duties, consequences, or virtue, insider trading is wrong. Therefore, I have to believe that not much ethical reasoning is behind these decisions, simply greed. I relate it to the fact that today when I heard there was free ice cream at Ben and Jerry’s, I flew out of my desk and drove straight there. No thinking involved, just the promise of free ice cream. I believe that is case in insider trading; the promise of free money overshadows duties to stockholders, consequences if you’re caught (and you probably will be), and virtues you claim.

    Because of this lack of ethical reasoning, I feel govenment must continue to enforce insider trading laws. While I agree with Adam Smith’s “invisible hand,” I also agree with Milton Friedman that this is possible only when the participants play the game right.

  35. I definitely agree that insider trading is immoral, but I can also see how it increases efficiency in the market place. I like to think of insider trading as Kant would using the categorical imperative. The markets would become highly efficient because of the influx of information, but only a select few would reap the greatest profits. Moving to a utilitarian point-of-view, the average shareholder (the majority) would make lower returns since they do not have the necessary “connections.”

    I also think that investors should be required to keep documentation of their use of experts. This documentation might include recordings of their conversations and support showing how they used this information along with their own due diligence to make their investment. This way they can be held accountable for their actions.

  36. I believe that insider trading is one of those types of crimes that is going to happen no matter how many people are put behind bars, or how much in criminal charges are paid out. I do agree that is is extremely unfair but unfortunately, to the Wall Street geniuses and high-end executives, it is easy to do, therefore, it will happen. I also agree that it increases market efficiency and it is one of those topics that make you wonder how the economy would be without it happening so often and for so long.

    On another note, my personal issue with insider trading is that it seems like the easiest type of fraud to fall into. Business people live in a competitive, fast-paced environment everyday with constant learning. That mixed with the fact that we are naturally driven by bias decision making, whether we know it or not, insider trading is an evil that seems almost inevitable (do not worry I do not involve myself with insider trading or ever plan to, its just a point). To me, this is a grey topic because at what scale is it considered insider trading? Do the more ethical business people only invest small amounts while involving themselves with insider trading? Bringing the people like Raj Rajaratnam and others to the public eye daily is the only thing reminding us that it is wrong and no matter how easy or tempting it is, stay away from insider trading!

  37. Insider trading is a double-edged sword. It accelerates the efficiency in the market and benefits the key player, but it takes away from the people playing the game the right way and potentially imprisons the guy selfishly acting on his immoral greed. I hear all the time in cases like this where the person feels like they ‘deserve’ this one-sided benefit, it’s merely a justification. As humans, we tend to justify things more often than we should; it’s part of our nature. However, it’s important to realize when our judgment is crossing over into that grey area of right and wrong.

    It’s crazy to me to see these intelligent, talented people, that know what consequences may follow, play this risky game. Is it worth throwing everything away for some extra cash? What startles me the most is that these white-collar criminals were most likely just like us. Probably went to a great school, had big dreams of becoming successful and having a family, when and why did they decide to push their morals aside and give in to corruption? It’s scary to realize that we’ll be venturing out into this world in the near future with the possibility of running into people like this. I just hope our generation will stick to our ethical standards and not fall into this immoral temptation.

  38. I don’t think anybody is going to disagree that insider trading is inherently unfair. Clearly, there should be stricter forms of monitoring and punishment available for those that feel they have the right to manipulate the market in their favor. From my understanding, an executive at a company can still buy and sell as long as it is reported to the SEC. I think the only stipulation is whether or not the company buts a hold on the executive buying and selling. So in a case like this it could be perfectly legal for the executive to commit insider trading and get away with it. To me this seems like a clear violation of the shareholder’s trust. If you are buying or dumping stock, you should have to use the same information that is available to the public.

    The part I don’t understand is how Sokol can get away without getting into any trouble. He clearly purchased Lubrizol stock and then helped convince Berkshire to buy Lubrizol (raising the Lubrizol stock price). In the process, he happened to make $3 million dollars. This is clearly a way of taking advantage of the market place and more importantly, taking advantage of the investors that he bought out. I would only hope that the SEC goes beyond a couple sanctions and makes an example of Sokol. The way I see it, if we are trying to make an example out of those committing insider trading, we need to be consistent and stop letting people slide on technicalities.

  39. I find this article intriguing because of the number of people referred to who didn’t find what Sokol did as unjust or an issue to investigate. Insider trading is unfair, but maybe that is the opinion of people who don’t have the means to partake in it. Many executives seem to think they ‘deserve’ to know information before the public because of the work they do and the position they are in. But aren’t they already making more money than they could possibly deserve?

    I find it interesting that if the circumstances are flipped and Sokol sold his stock to prevent losing money (like Martha Stewart’s case) that it would be worth fighting and investigating. But why not let a top executive receive a few more million dollars? In my opinion, it’s stealing. It’s stealing from the company in which he purchased the stock from and stealing from other investors who didn’t have the same knowledge he had on the investment. We need to start treating every insider trading case the same and make a point that insider trading is illegal and it will not go unnoticed or unpunished.

  40. I am currently reading a book called “Confessions of a Wall Street Analyst” and in the book there are many insider trading scandals. At one point the author, Dan Reingold, quotes, “This guy was my rival; how was I supposed to compete with someone who was trying to win favor from clients by passing on insider information?” I think his view really shows the effects of insider trading. People who inside trade are selfish only looking out for themselves, but if they would take the time to think about their actions they should realize how much harm they are causing to everyone else.

    I believe that the love of money is the root of all evil. An insider trader is only looking to make money on a deal and not looking at any of the consequences. Time and time again you hear about the hurt they’ve caused to so many others, especially their families. When will people see that no good comes from insider trading. People can only get away with so much before they eventually get caught. I do see how there can be a gray line at times of what is right and wrong, but I think it is important to stay as far away from that line as possible in order to avoid making those tough calls .

  41. As most people have said, insider trading is not ethical nor is it fair to others not privy to key information. From an ethical egoist standpoint the trader may be inclined to say all’s fair in love and war, but I know I would want to have equal opportunity to make money (or not lose money) as the insider trader. If everyone was allowed to trade based on whatever knowledge they could obtain, I believe the schemes people would use to get that information might become more and more devious. A lot of people would do anything for money, so I believe that it is really important that children are taught self control so they won’t fall prey to such selfish actions.

  42. Insider trading is unfair. Although it does represent the public’s response to news faster than any other way, it’s unfair because of the limited number of people who have access to the information. Although all stockholders in a company have the freedom to buy and sell whenever they want, they should all be able to make that decision based on the same amount of information provided. Just because one group is closer to the action, doesn’t mean they deserve more profits or smaller losses. If this concept were true it would undermine everyone’s confidence in the market and people would be less willing to invest in companies. As a professional, I feel that you should not have stock in a company that you could receive inside information on. Although this is a problem, I don’t believe there is any way to stop it, but it should be more highly regulated and enforced to discourage others from doing it by letting them know if they partake in it, they will go to jail.

  43. I am always stunned by how short-sighted some people are and how much chances people are willing to take. I am not going to go over all the calculations that suggest how wrong insider trading is. I just want to say that from my experience, I think it is a lot easier to make a decision that would benefit someone you know (or yourself) and hurt the public than one that would benefit the public but hurt the person you know.
    Trading on inside information will bring great profit to themselves, and the victims are “faceless” in the eyes of those alleged. I think we can expect more insider trading cases in the future.

  44. If anything of a positive nature came out of the Great Depression of the 1930’s, it was regulation. The Security Exchange Commission was one of a number of regulatory agencies with the mandate to protect the investor, the firm and the consumer. These three groups of actors in our economy may help explain and validate why economics is indeed the hardest of all subject matters. Contrary to a unified set of central ideas- economic principles or laws, thank you Alfred Marshall, we are not always rational people who think at the margin. Simply put, we are quite unpredictable. Regulation and yes the SEC, cannot regulate our morals but such regulatory commissions can contain to some degree our ” animal spirits” . Thank you Mr. Kaynes on that one. Government can at times improve market outcomes-promote effiiency and promote equity but that is also a bit unpredictable. Does insider trading promote market failure, positive or negitive externalities and market power? Good question. Does the private benefit of insider trading create a social benefit? I think not. Certainly that explains why we have the SEC. Of course, the issue of moral hazard and the “too big to fail” mentallity of certain corporations demonstrates that the Security Exchange Commission, like all of us, are unpredictable.

  45. Insider trading is such a hot topic right now, and rightly so. As the name suggests, there are obviously some people on the “inside” who are privy to information that the “outsiders” are not, which in essence makes the situation completely unfair. Those insiders who decide to act on information they have received are blinded by the extreme glamor of making a huge profit thus forgetting the long-term effects that their actions may have. So what about those in the marketplace who are honestly trying to make the most out of their money? They are the ones who get the shaft, not the insiders. One day (hopefully) we are going to be the honest individuals who are investing our money wisely and attempting to make the best choices in order to maximize our profits and our hard work very well may be thwarted by one of these insiders trying to take the easy way out. Hopefully the regulations that will come out of these recent insider trading scandals will help to keep the playing field more even and better protect us and our investments in the future.

  46. The aspect of current insider trading that astounds me most is the magnitude of offenses that continue to occur. It is nearly impossible to look at any business media without being reminded of insider trading and the numerous industries that are affected. The potential repercussions of insider trading infractions are widely publicized and damaging on both a financial and personal level. The drive to protect one’s best interest after acquiring insider information still remains to be stronger than their ability to consider the potential consequences. This makes me wonder how sever the punishment must become before insider trading opportunities become less tempting and promt people to reconsider their unethical actions. The constant reminders of insider trading cases should serve as reminders that temptation in our careers is a large possibility and we need to each personally prepare to respond with fairness in mind.

  47. In the dilemma with insider trading I can see the duties, consequentialist, and the virtuous character viewpoints but the viewpoint that stands out the most to me is duties. I believe that as an employee to an organization you have a duty to keep inside information confidential and I also think there is a duty to the public to be fair. I think a lot of the ethical dilemmas we have discussed in class have dealt with fairness. So many people put their self-interest above others and it’s really sad. If you center your life around yourself then I don’t think you will enjoy your life as much as someone who puts others before themselves. I would much rather have friends, family, and a good reputation then all the material things in life. Life is too short.

  48. I do not believe anyone will disagree that insider trading is wrong but think it is an inevitable situation that will continue to occur in society today. Even while people accused of this crime are prosecuted, I believe the temptation of fast, easy money will be too hard for some people to pass up. When looking at both sides of the argument, I can see a case for each. If someone has access to this information, why can’t they use it to their advantage? However, for investors who place their earnings into companies expecting management to earn a return, this should not have to be an area of concern. Their investment represents a trust in the management team to do what is in the best interest for the shareholders at all times. Like I said, I believe insider trading will continue in the market but hope that the next generation acknowledges something needs to be done.

  49. I believe insider trading is not something that can eliminated from the market. As long as there is an opportunity for someone to make a move on information no one else has there will always be someone unethical enough to make that move. What is surprising to most people is that despite the number of people getting caught and prosecuted by the government, insider trading continues to take place. I believe the reason is that these people think they are smarter than the government, and know how to get away with it. Often times they are probably right, I think most people would be shocked if they knew how much insider trading actually went on undetected. While I am not in support of big government, I do feel it is necessary for the government to actively regulate and pursue instances of insider trading in order to keep a level playing field, and encourage investment by traders who want to conduct honest business.

  50. The issue of insider trading is based on an utilitarian view. What will benefit the most people for the greatest good? Insider trading goes against this view because it allows special individuals access to advantages that will harm others. Insider trading permits select individuals to make or save millions while the “average” investor loses. I agree that it is unfair for these individuals to be able to profit at the expense of others.

    Insider trading is in opposition with the golden rule, “Do to others as you would have them do to you.” I wonder if proponents of insider trading would still hold to their stance if they lost a majority of their saving because someone traded on information that they did not have access to.

  51. Insider trading is one of the most sensitive issues in the last decade. It is easy for a trader to rationalize the reasoning behind him/her trading with information that is not public yet. By trading on these public-to-be information, you are not actually hurting or stealing from a specific person like criminals do. This crime is not directed towards a person but a group of shareholders. Therefore, committing such an act wouldn’t make the wrongdoer regret the consequences because he won’t be able to see the person affected unless there was a major shareholder in the company (owns more than 50%). Moreover, a person who is striving to be a millionaire would justify it by following “Ends justify the means” or in other words :”some millionaires did it so I can do it too”. Due to this reasoning, I feel that any person can fall in the trap of rationalizing the insider trading scheme and implements it with the information they possess.
    I don’t think insider trading will be abolished completely soon, but once they start setting more strict laws, less people would find it appealing and will not think of doing it.

  52. When I think about insider trading, I try to think about how it would be if it was allowed. Since most of our market is based on trust, I believe that a vast majority of investors would pull out. If you don’t know who exactly has the information or to what extent they know, investments become much riskier. I don’t believe that the majority of people would be willing to take the extra risk associated with picking the wrong investment group (ie the one who can’t bribe for the best inside info). As it is now people other than the insider traders already take big hits, why would we want this to increase?

    On a side note, I think that if we truly want to eliminate insider trading, we have to deal harshly with each case that is found. Since it is near impossible to completely regulate all inside information, I think a huge factor to dissuade people from doing it is fear. Fear that they will be the next caught and suffer such harsh penalties. Of course being educated to the negative aspects of insider trading I would hope they would not participate in it, but greed is almost always greater.

  53. Although insider trading might accelerate the efficiency of the market, it is unfair to the other investors. When you’re trading on insider information your essentially cheating the system. It’s like having a class with pop quizzes and you know exactly when they are going to be. Therefore the rest of the class is at a disadvantage because they might have studied more and gotten a better grade if they knew. The same is true with insider trading, because you’re able to use that information to know when you should trade giving an unfair advantage the other shareholders. No one wants to play when the playing field isn’t level and that’s exactly what insider trading does.

  54. Whether you believe insider trading is right or wrong, it is illegal. It is unfathomable to me that people still continue to make huge trades on insider information when they know the consequences. Is a 3 million dollar gain worth potential jail time?

    I especially don’t undertand the individuals who are clearly “crossing the line”. People who go through the trouble of creating several fake accounts or covering their paper trail clearly know they are breaking the law. I believe that these individuals should face the consequences of their blatantly unjust actions. While insider trading remains illegal, I don’t think it matters too much if it makes the market more efficient because at the end of the day, it’s not allowed regardless of your intentions.

  55. I agree that the problem with insider trading is the lack of justice for all parties involved. Many benefit, but many innocent parties also suffer.
    Also, in your article, you mention that companies often hire experts as consultants. I think the job of “expert consultant” would be so difficult! How would you give your opinion and answer the inquiries of these banks without leaking insider information? Someone with this job must face ethical dilemmas every day. I hope that they are making decisions based on strong ethical principles and not to please their clients.

  56. Insider trading is obviously illegal, and I appreciate the explanation of how insider trading can hurt the average person who doesn’t have that information. From my view as an average person without inside information, I would be upset too if someone from a company worked the system, kind of like Sokol, and made millions after I had just trade out. But then again, even if he hadn’t bought up the stock I was selling, someone else would have and I still would have missed the profit from the increase in stock price through the acquisition. I figure the main point is that it is illegal and unfair in general. I hope the authorities do round up more people who are taking advantage of the free market. I think seeing other people go to court for insider trading will hopefully be a deterant for others.

  57. Insider trading is a way for a person and most likely another individual party to get a heads up on what others do not know about. I can understand how some people may say, “well I have worked so many years for that company so what I am doing should not be illegal” but in fact it is. It is unfair for someone to have the competitive advantage over others just because we are not “insiders” of the company. Taking advantage of a company by doing insider trading is extremely unethical and hurts the company. If I were a shareholder or a partner of a company, or anyone involved with the company, I would want to know if insider trading was taking place because it is “unfair” and very much so illegal.

  58. I think that insider trading is such an easy act to commit that people are coming out of the woodwork now that have been trading on non-public information for years. It seems that there should be stronger controls in place to prevent insider trading although I have no clue what they could be. Until then, I think that it will continue to surprise the public what has been going on involving insider trading. Even the most reputable firms such as Berkshire Hathaway have committed the act which proves that everyone is capable of this crime. Hopefully the SEC will find a way to crack down on insider trading in the future because it is clearly a big issue right now.

  59. I tend to disagree that any party is harmed from insider trading. For example, if the CEO of a company is aware that his company is about to miss their consensus EPS and sells his shares as a result, the price may decline if he is selling a large chunk of shares. The argument is that the investor who purchased the CEO’s shares is the victim of the crime, since he clearly overpaid for his investment in light of the earnings miss. However, in a liquid market these two parties are not negotiating with each other individually to determine a fair price for the stock transaction. The investor made his decision to purchase the shares based on his own research and opinions. He would purchase the shares regardless of whether the CEO decides to sell. In fact, the insider’s trade provided a benefit to the investor because the CEO’s sale brought down the price of the stock, allowing the investor to purchase the shares for cheaper than he otherwise would have.

    Based on this reasoning, I believe that insider trading is a victimless crime. Nonetheless, it should still be outlawed based on a desire to have a marketplace defined by equality of opportunity. The market should be as transparent as possible, with everybody having equal access to that information. Investors can then analyze the same set of facts and come to various investment conclusions. If someone is privy to information that is not available to the rest of the marketplace, they should be excluded from trading in that market until the rest of the market is made aware of it. Insider trading is wrong based on a desire to achieve equality of opportunity.

  60. There are reasons why we, as auditors, are not allowed to trade with companies our firm does work for. We simply have too much information at our disposal and too many ways to make that information profitable through client connections. In my opinion, there is definitely a fairness issue within the insider trading realms. This is one area I feel our profession has definitely put a stop too with a matter of independence. The same should go for our clients.
    When I first started trading in the market, I was in way over my head, but my parents felt it was best to let me learn myself. So needless to say I lost about everything I put in because I went with the companies I heard on the news (which was normally never for a good reason). If I had the access to the insider information at that age, I would not be working to pay for college probably. This is the fairness issue coming in a small dose, but what about those who invest millions and lose everything?

  61. The argument here about whether or not insider trading is fair is a moot point. The thought of people being able to get out of a losing situation or buy into a good situation on information that is not yet available to the general public is extremely unfair. Overall market efficiency should be sacrificed to an extent when dealing with this. Otherwise you will continually see things like what happened at Enron continue to occur. People will lose millions because they were unable to trade on information that others were able to trade on until it was too late.

    Ethical egoists like Raj Rajaratnam will continually try to justify why they did this, but the fact of the matter is they have no moral compass pointing them in the right direction. They know it is illegal and unfair to other investors and still feel like they can get away with it without any sort of punishment. But as the famous line from Gladiator goes, “The time for honoring yourself will soon be over.”

  62. I do not think that market efficiency should be an accepted excuse for the people trading on inside information. This might be a side effect of their actions, but it is definitely not the intended purpose. This market efficiency excuse seems to be more of a utilitarian argument; however, I believe most insider traders are ethical egoists. They feel that they ought to be able to use the information that they have worked so hard to be in the position to get. They feel as if this information and the money stemming from it are owed to them. I find this incredibly hard to believe. They might have worked their way to the top, but they are being more than fairly compensated for being there.

    I am currently reading the book “Liar’s Poker” in which the author used to work for an investment bank on Wall Street. I find the tone set from the top at this specific firm fascinating. Employees are encouraged to use whatever means they have to make money for the firm, even if it means cheating their own customers. It seems that this tone of greed and deception is becoming generally accepted. Until this problem is solved, I think there will continue to be major headlines each week about new insider trading scandals.

  63. People are quick to condemn concepts that seem to put the vast majority at a disadvantage, and I agree. We should seek to promote the overall good. But I think we tend to forget that there are two sides to insider trading. Not only can losses arise from the act, but gains are just as likely. Would we be so quick to put down insider trading if most of the shareholders were to reap great benefits in the form of gains? When we are losing, it is easy to loudly cry out UNFAIRNESS. But when we are winning, that cry soon dwindles into a faint whisper of uncertainty. “unfairness…I think??”

    I think there is a deeper and more basic argument that can be made against insider trading. I don’t think insider trading is necessarily wrong. However, I do believe that stealing (or being an accessory to the fact) is wrong. Trading on inside information is usually trading on stolen information. The information is nonpublic and rightfully belongs to the company.

  64. In my opinion, in order for a market to be operating efficiently, it needs to be built on trust. However, the problem is holding everyone accountable to this trust. By trading on information that is not available to the public, you are giving up the right of others to a fair trade. It is like taking a test, and having all of the answers to the test. While others are forced to study and do their research, you are left with an unfair advantage. Lastly, people continue to use insider information, despite intense enforcement of the laws, because the temptation to make a quick profit is so great. I think it is quite sad to see people so driven by money and greed that they take on the potential risks of getting caught in order to make a few bucks.

  65. The use of “experts,” presents an interesting opportunity for regulators to get further involved.

    If the border between right and wrong is so ambiguous as to allow the regular passage of insider information, why are these conversations with “experts” not subject to some from of regulation?

    Allowing an auditor/regulator to listen in on these “expert” testimonies would seem to keep things a little more honest. Not sure the cost benefit analysis would work out favorably, but it seems it would add a little incentive to do the right thing.

  66. I agree that insider trading isn’t fair, but where is the line between unfair and fair trading? Is there a gray area or is it all just black and white? I am reminded of the definition of justice we learned in class that people vary on what they see as a just distribution. In America today, people could say insider trading on some levels is just because the stocks should be distributed to each person according to merit or who has earned them.
    I agree it doesn’t seem fair, but I feel like corporate America is a man-eat-man world at there. People don’t play by the rules, and if you do, it is harder to survive. That is one of the reasons why I have decided to not go into a profession in corporate America because I know I would get eaten alive!

  67. It is really shocking to see so many insider trading cases going on. You would think people would learn from other peoples’ mistakes but I guess the egoism mentality sucks them into insider trading and they don’t think they will ever get caught. I feel like the theme of almost all of our weekly ethics readings is “Do to others what you would have them do to you,” the Golden Rule. How would these people who have been trading on insider information feel if their best friend got wind of some news that they hadn’t and gained a lot of money of the information? Why can’t companies be honest about how they are doing or what new ventures they are or are not pursuing? I guess their main concern is losing money and a decreased stock price but honesty and transparency has to start somewhere if they world of business is ever going to improve and become a more ethical environment.

  68. When reading this blog, I think we have to ask ourselves what is more important. To be honest and not steal OR to make a couple bucks off trading stocks? What gets me is that most of the people that engage in insider trading seem to be rich as it is…why do they always need more? Greed can make people overlook fairness and forget all about the “small people.” Sometimes I feel like greediness can cause people to act and live in a way where they only see themselves and everyone else becomes invisible, even those closest to them. There are people out there that will lie, cheat, steal, and even kill because of money.

    And what about the illegal aspect of insider trading…does greed make a person feel as if they are above the law? Well, we all learned that money can not buy EVERYTHING when Martha Stewart landed in federal prison despite her millions. Hopefully, the consequence of having freedom taken away will become apparent to those engaging in insider trading and will deter it from happening. But then again, is greed stronger than the gift of freedom? Can we really put a price on freedom? Apparently, money has blinded some people, which is unfortunate. It is not only unjust to steal from others, but it is also wrong to do it in order to improve one’s own financial position. When it comes down to it, we know what is right. Insider trading is wrong.

    -Mary Larkin

  69. I’m surprised that Mr. Sokol is not being criminally charged. It seems fairly obvious that he committed insider trading, he even resigned over it, why does the government not try to go after him? He made a profit of $3 million!!! The government went after Martha Stewart for avoiding a POTENTIAL $240,000 loss. It is things like this that make non-business people wary of Wall Street. A major person can commit a blatant felony and not be punished.

  70. Dr. Shaub,
    It is always interesting to see another point of view on these matters. No matter how often we have discussed insider trading I still hadn’t really considered from who the insider traders were stealing until I read this. You make a good point about who this is really hurting—the average investor. This is something that the inside trader, as a typical ethical egoist, would not consider.

    I think that the hardest part of keeping up with the insider trading and similar scandals is seeing how much money some of these people are able to walk away with. As the rich keep getting richer, I have no doubt that insider trading will be a continual problem in the future business environment. It is up to each individual to determine what they will do when privy to inside information.

  71. I am interested to see the outcome of the Raj Rajaratnum’s trial because I feel that it will set a few more standards and precedences for trials to come. I agree that insider trading is wrong because it gives people who are in a position to use information not known to the public to make a little more money for themselves. I think this relates to what Dr. Smith discussed the other day. He said we must choose integrity as our goal and not other things like wealth, popularity, or fame. This is very true for insider trading. We must choose integrity and not use information that we are trusted with for our own benefit, this means that we have put wealth above integrity. Finally, I agree that insider trading is a moral issue, and is a fine line. We must respect confidential information to protect the fairness of the market.

  72. Like everyone else, I feel that insider trading is morally wrong and those who are able to justify it are ethical egoists, not people who we should set our ethical standards by. As most of us will start of our careers in public accounting, insider trading is a real issue that we will all face. We will know confidential information that if used or shared will be a violation of insider trading laws. We all know that insider trading is wrong, but as we have seen through the many lectures on Enron and Martha Stewart, it is easy to fall down a slippery slope and make justifications that can lead to time in prison. While market efficiency is always to be sought after, insider trading is not the way to do it. We can only hope that people will learn from the mistakes of others and choose to be ethical when they are privy to such insider information.

  73. There are always going to be those people who try to push the boundaries, many of whom will go unpunished. If they value consequentialist calculation, perhaps the punishment is not enough to outweigh the reward. If the government was to take a harder stand and increase the scope of investigation for potential acts of insider trading then it would occur less. The appeal to me personally is one of duties. I know that as an accountant it is my duty to protect the general public interest. When people trade on insider information they most always undermine the casual investor by using information only they have privy to and to me that is something that I could not do and live with.

  74. There is no question this is material and is obvious relevant to the average user. If the market knew Berkshire was interested in Lubrizol the stock price definitely would have increased. I feel Sokol’s sudden resignation reminds me a bit of Skilling’s sudden resignation from Enron. Coincidence? Unfortunately, listening to Paul Atkins, former SEC commissioner, it is unlikely they can prove insider trading. There also is a morality issue when it comes to insider trading. There is no level playing field at all when someone has an illegal boost forward. Unfortunately, even after the Rajaratnam trial, there will definitely be more insider trading cases, because greed will never die.

  75. I equate insider trading with stealing because the trader is making a profit on information unknown to the public. The ethical egoists will accept this action more often than utilitarians. Gaining the extra returns via insider trading is putting one’s own self-interest first, thus ethical egoism. On the other hand, many people choose not to engage in insider trading because they would not want someone else to steal their returns, so it is not right for them to take unfair returns. Insider trading is an issue that we will encounter as auditors, and we must always choose our integrity over the potential returns.

  76. This post gave me a different perspective on insider trading. I’ve always thought it was wrong because it was illegal, but I have never thought about the victims of the crime of insider trading before. It is easy to pinpoint the victim of crimes like assault and theft, and to assess their damages, but to me those people that are affected by insider trading seem like an ambiguous group without an unclear amount of damages to claim. But Dr. Shaub’s point about the employees of Enron who had to sit back and helplessly watch their pensions decline in value as Enron stock tanked would argue that their are real victims of insider trading.

    You would think that in a society like ours where information flows so freely that insider trading wouldn’t be a prevalent issue, but I think our addiction to speed of information and instant results has exacerbated the problem and made it harder to prevent.

  77. After reading some of the previous posts, I read some people saying that they did not realize the harm insider trading provides to the people who are cheated. I mean the reason that insider trading is illegal is because of the victims that it claims. The unfair advantage over the opponent is what drives the illegality. I mean if driving drunk didn’t cause harm to others, then it wouldn’t be an illegal thing to do. However, when an action causes harm to others, that is when are regulators usually step in and attempt to prevent any wrongdoing. Like we have studied in class, the laws are usually too late and were brought on by past events that caused people harm. So when you say you have never thought about the victims I find it hard to believe, because the basis of laws on insider trading are the victims it claims.

  78. Market efficiency, like the forces of competition, does not have to be absolute for generally favorable outcomes to occur. Hayek and Friedman both represented this to be true in the Road to Serfdom and Free to Choose. Every company states that is against their code of conduct, as does every person who knows what insider trading is. It is also illegal. So, why is it still big enough that we are discussing it? Simply saying that situation-based egoism is wrong doesn’t begin to cover why it is still a problem, eight decades since Joseph Kennedy was charged with making the practice – which was entirely the basis of the Kennedy fortune – illegal.

    Consider this idea. Most people that get arrested for insider trading do so because they perceive the likelihood of being caught and prosecuted is so low. In 2010, the SEC and DOJ together brought a total of 58 insider trading actions, down from 65 in 2009. Even if we consider that half of all these cases come to a guilty verdict (a very conservative estimate), and every win nets an average of $10 million in damages, the government has penalized insider traders by less than $300 million dollars from 2010 cases. Many insiders trade for relatively small amounts compared to their real fortunes – Rajaratnam is a billionaire. If you want to eradicate insider trading, make the penalties so great that the expected value of penalties makes even the tiny chance of being caught enough to stop insider trading.

    David Sokol, whose book – Pleased but Not Satisfied – I read, was a front-runner to soon be CEO of a corporation with over 200,000 employees and almost $13,000,000,000 in net income. He is worth many multiples of what he earned on the Lubrizol transaction. As a Berkshire Hathaway shareholder who will be in attendance at the meeting this weekend, I can attest to the shareholders’ feeling that his action is malum in se. However, everything I have ever heard him say or do tells me that he is an honest man who did not see anything wrong in what he was doing. Buying shares in a company that before any letter of intent or specific due diligence has been performed isn’t illegal. He didn’t have inside information (Citigroup’s bankers didn’t have access to any confidential information about Lubrizol pre-LOI), and Buffett had passed up on literally tens of thousands of past opportunities such as Lubrizol.

    So why does this example, which we find hard to pin down as being insider trading, still continue to steal headlines and gall us? The SEC’s prosecution of insider trading is predictably linked to recessions. When stocks are going up, people are not interested in insider trading scandals. Convictions fall off, and I can’t think of many scandals that occurred in good years (Allied Crude and Cendant aside). But it’s when the market crashes that such scandals are on every front page. When we are feeling financial pain, we like to see financial criminals in prison. So we find a way to penalize someone who did something wrong in connection with something financial.

    Who caused more financial pain, Angelo Mozilo or Raj Rajaratnam? Jimmy Cayne or Martha Stewart? Chuck Prince or Bernie Madoff? Joe Cassano or Ivan Boesky? What do you think decreases confidence in markets more – a decrease in perceived fairness from insider trading, or a 50% decrease in the average American’s net worth? Yet the first individuals of each pair will face no jail time, and only Mozilo has paid some civil penalty. You know what happened to the second set of individuals.

    The real ethical problem is how we have set up a system that paints insider trading as so much worse than criminally negligent judgment that nearly destroys capitalism, time and time again. Is there some overlap? Of course. You know why Mozilo, who was chairman of Countrywide and lost tens of billions of dollars, was charged? Insider trading.

    So what seems more unethical to you? Insider trading, or a system that rewards executives for blowing up?

  79. I have found the topic of insider trading very interesting, both what has been discussed in class and this blog post. Prior to this class, I understood insider trading, but honestly did no really care that is was happening. My believes were most likely because I had never been effected by insider trading, or I had not worked in a business setting where I saw the importance of the stock value. Recently my opinion has changed. Yes, insider trading makes the market move at a more efficient pace, but the people who are causing the change are stealing from the other investors.

    Today in ethics coffee, we discussed insider trading and its future effects on regulations through the Raj case. Because of the inside information gained and used for gain by investors such as Raj Rajaratnam, our government will most likely increase the regulations on the economy. I am very interested in the outcome of the case and how it will affect us in our future jobs.

  80. Insider trading I think is a difficult issue because it is hard to judge who you are really hurting, and very easy to see to is getting all of the benefits from it. Are people really disadvantaged because certain individuals were able to profit off of information that is not available to the public, or are people just making this unethical because there is no utilitarian justice? If the information was obtained through hard work and by ethical means does making millions of dollars off that hard work make you unethical? Coming across the information in an unethical manner I think would warrant negative consequences, but I do not think this subject is a matter of black and white, and right or wrong.

  81. Initially, Warren Buffett came out and defended the actions of David Sokol saying that he did not do any wrong. However, as of today, Berkshire determined that Sokol violated the company’s insider-trading rules and misled Berkshire about his personal stake in Lubrizol. It is undetermined whether or not Berkshire will take legal action against Sokol. The report put out by Berkshire increases the likelihood that there will be further investigation by the SEC into Sokol’s actions. The change in heart by Berkshire highlights further evidence that Sokol did in fact trade on inside information and wrongfully deceived Buffett about the takeover.

    Throughout the course of the semester, we have had the opportunity to hear about the actions of David Sokol and many others who have committed insider trading. Each time I hear their stories, I place myself in their shoes because I know that all of us are going to have an opportunity to trade on inside information. We must constantly be aware of the information we are privy to and understand the negative consequences should we act on that information. This opportunity to act on inside information and rationalize our actions will always be there. It is our duty to be aware of this temptation in order to ensure we do not act on it.

  82. While reading this, I was imagining what it would be like if insider trading was fully legal and accepted in the US. While I believe that the markets would truly be more efficient (the stock price would adjust more quickly to the actual value, based on unrevealed information), the overall effects would be drastic. In this case, the large executives and majority shareholders, who are likely to have access to inside information, would be the only ones able to sell a stock at it’s highest or buy a stock before a spike. In the end, insiders would be able to trade-in/out at the right time, thus making them even better off. Meanwhile, average investors, who are relying on these investments for retirement, college, etc. would be absolutely devastated when they bought / sold after insiders drove the price up / down. Ultimately, this would only lead to an even greater wealth gap. I think this is the main reason why insider trading must not be tolerated, and why it is considered “unfair.” Under an utilitarian approach, it is for the greatest good if insider trading is not tolerated.

  83. I think it is definitely wrong to partake in insider trading and fairness is at the root of my opinion. I think people working for a company in a position where they are privy to inside information typically have a duty to the company to not profit solely from that advantage. Ultimately the employees who do end up using inside information are not keeping the shareholders’ best interest in mind. I think these types of actions can be rationalized by people looking for a reason to profit from their position. For example, I have worked hard and deserve this return from the company or it is not my fault that others are not smart enough to figure out what I have. In either situation the question the question fairness arises for both parties involved. If it is the insider’s ability that gives them the advantage over other market participants is it fair to no t allow them to gain from that? I think this is where they have to prove their integrity. Although they may believe they worked hard for the information they have, I think they have to consider the person they are purchasing the shares from. In the end, insider trading takes away from someone else and causes distrust in the market. I think insiders are able to trade a lot of the time because of the trust the public puts in those companies and the market its self. If insider trading is allowed to continue, I think people will be less likely to invest in those companies all together which would cause more inefficiencies rather than efficiencies in the market.

  84. I read both Matt Wey’s and Ryan Smith’s posts also, and they gave me some different perspective on the issue. Overall, I believe insider trading has to be outlawed. But to me, it would be false to say that someone was hurt because Raj wanted to sell shares of Goldman before Buffet helped capitalized them. The market for Goldman is extremely liquid. That person, fund, or broker made the decision to sell because they liked the price. Obviously they would have held on to the shares if they had the same information as Raj, but you could say the same thing about good analysis of a company or expertise in a industry.

    I do think it should be illegal. Take Enron for example, C-level guys sold off as much as they could while the employee’s didnt even have the choice. That was an awful situation. However, in a “liquid market’ the situation is more tricky. At the end of the day, it is unfair to trade of non-public information. I agree with Ryan though, in most cases it’s a victimless crime. I would say (with no personal research) most insider trades are buys in anticipation of some positive event, and that does not cause problems for people wanting to sell. There would be buyer on the other side of the trade, whether it be someone with inside information or just a brokerage house.

    It has to be illegal though because there are plenty of downside issues. Executives selling when they know things are about to blow up, etc. However, to me, there are valid arguments that it doesn’t hurt anyone in some situations. Financial success is often attributed to “who you know, not what you know.” This may not be fair, but it happens in a lot of legal transactions. Insider trading is obviously not one of these legal transactions, but there’s no way to outlaw every unfair situation. It’s probably for the best that one case of “who you know” is illegal though.

  85. The most significant arguement against insider trading, to me, is virtue theory. To me, acting in a virtuous manner trumps acting self-interestedly all the time. This doesn’t mean that I always do a good job of this (I don’t), but I think it is very important to place the needs of others above our own needs. As you mentioned, Dr. Shaub, there is always someone on the other side of the transaction that loses the same amount that the inside-trader gains. This is not fair, given that the person on the other side of the transaction did not have access to the information being used by the inside trader. This seems to relate to one of the ethics presentations given in class about the NBA referee who profited by making calls to affect the point spread of game he was officiating. This again seems very unfair. I think it’s going to take more than laws to prohibit this type of profit-at-all-costs behavior.

  86. Fairness is something that for a long time people would argue is “in the eye of the beholder”. I still believe this to be the case for some people in some circumstances. However, when it comes to the topic of insider trading, I think there are a very stark few who would argue for the issue that insider trading is fair across the board. The argument always brought up, as Dr. Schaub has pointed out, is that it makes the market more efficient. The problem with that statement, however, is that it completely eliminates the individual out of the equation. It places the emphasis on the market over the people investing in it. I think it is frightening to ever make a choice that puts any inanimate object over people. That is why you can only make a case for insider trading if you are on the inside reaping the illegal profits. Otherwise, it is evident that insider trading is detrimental to society as a whole and is not fair to pretend in anyway it is.

  87. To me, this insider trading topic draws similarities from the steroids topic. How fairness is critical to the success of the game of baseball or to the economy and the people as a whole. Insider trading is one of those phrases that most people have heard of, but I think that few people outside of business really understand what it is. Even though everyone may not know what it is, I think most people know insider trading is bad, and should be stopped. This has to do with how it is unfair if everyone isn’t exposed to all the same information. But then again it’s hard to stop something that’s difficult to define and that some people may not even really know what it is.

  88. I associate insider trading closely with the word cheating. Both are taking unfair opportunities for an individual to gain an advantage in some way – definately the signs of an ethical egoist. I believe rationalization plays a key role in insider trading, thinking it’s a one time deal that turns into fifteen instances. I can see the benefits of a more efficient market but is it worth the acceptance of an unfair practice?

  89. The situation involving Mr. Sokol makes me think of my duty to remain independent from my audit clients. This duty includes not only remaining independent in fact, but also in appearance. Regardless of whether or not Mr. Sokol traded on insider information or influenced the price offered to Berkshire, I believe that he also has a duty to make personal investment choices that appear fair to outsiders. For this same reason, I also believe that it is wrong for Warren Buffett to be unbothered by the transaction. Mr. Sokol’s actions compromised the integrity of the Berkshire as well as the profession and I would like to see Mr. Buffett take a less accommodating public stance.

    In the more blatant case of insider trading exhibited by Mr. Rajaratnam, it is very appeasing to hear that the “expert” consultants who were leaking the information will be targeted following the trial. In my opinion, the people who are leaking the information are the root of the problem. Regulators can’t eliminate the pressures bestowed upon these high ranking financial officers, nor can they keep these greedy individuals from rationalizing these unethical acts into fair business practices. However, regulatory bodies can eliminate the opportunity. I think it would send a strong message to the financial sector if the individuals leaking the information were handed harsh sentences. Insider trading may make the markets more efficient now but how efficient will the markets be when all public trust is lost.

  90. I would agree with Brad in that the greatest deterrent from insider trading is virtue. Personally, I would never be involved in insider trading because of the principles that were instilled in me by my parents. I wonder what Mr. Sokol was like as a child or in college. Did he have the same upbringing that I had? If so, where did he go astray? Did he let the prestige and power of his position corrupt his moral compass?

    This makes me think about possible solutions to the problem, since virtue or duty is obviously not enough for some in the C-suite. Could some additional provisions (more restrictive than current legislation) be written into executive’s contracts stipulating when and how they can sell their shares (and is this even a realistic alternative)?

  91. What I don’t understand is how you can really stop insider trading, it is so easy to do… And yes, I know they can come down hard on those that do it to set an example, but I still do not think it can be completely stopped. I was thinking about my internship and how auditors would tell their other auditor friends all about the companies they were working on. Now I know most auditors would not be able to trade millions and millions of dollars on this insider information, but it is still sharing private company information with other people. Why are auditors allowed to talk to other auditors about their clients? I see the only solution for this as not allowing any auditor to own stock in all of the firm’s clients, but is that really fair?

    I agree that insider trading is all about fairness, and although the free market principle makes sense, it still seems necessary to have some limitations. People invest in the stock market knowing it is risky, allowing insider trading eliminates a lot of the risk for these wealthy investors and ensures they do not lose their money. Is that fair just because they know people in the right places? Very interesting post, I love the topic of insider trading!

  92. I love the very last sentence where you used maturity to describe markets that use or do not use insider trading. I agree, and would add that immature markets are also those that allow bribery of foreign officials. Insider trading regulations and the FCPA help ensure fairness in the market. Typically people who “insider trade” are top executives who are financially secure and do not need the help from the inside information. Some previous readers have commented that insider trading can not be prevented and will never stop. While insider trading may never stop, at least our country has regulations attempting to protect the fairness of the market.

  93. Few would argue that Insider trading is a good thing, which this article solidifies extensively, but the problem I see is how do we know that there aren’t hundreds of trades being made every day on inside information. The cases that come forward tend to be of huge volume and value. What about all the little trades that could be going on in the market by mid level employees that will not be caught. I wonder how we will ever be able to fully get rid of this problem.

  94. This issue reminds me of the “what is your price” question. It appears that most inside traders approach this question with an egoist mentality. Alleged inside traders such as Sokol might consider immediate risks to themselves, but seem to ignore what effect their actions might have on others. To some extent, this situation could be helped with more stringent laws that impose harsher punishments to inside traders. However, if those who participate in insider trading consider this activity a balance of risk versus reward, harsher laws may just create another type of criminal. While harsher laws would perhaps reduce the frequency of the problem, there is nothing to say that perpetrators will not just commit larger infractions.

    The real issue appears to be a problem in the ethical reasoning of inside traders, which is a problem much more difficult to fix than simply changing the law. Rationalization is situational, and can be hard to recognize. In the case of insider trading, we should not ever reduce the potential to harm others to a number that is the reward we stand to gain. We should strive to achieve success with others than success that is built on others.

  95. The motives behind insider trading are almost never good. One either acts out of greed or self-preservation. The opportunity to make a large sum of money can be very hard for people to turn down, even when they know the information is confidential or ill-gotten. If a person is about to lose a lot of money and they see a way to avoid it, it’s very hard to do the right thing. It’s against human nature to take the hit when we could have just run away (think fight or flight). We will undoubtedly be privy to confidential information in our professional careers. The question becomes how do we keep ourselves from falling into the trap of insider trading?

  96. Insider trading is an extremely difficult crime to prove and is an extremely easy crime to commit. In the competitive zoo that is Wall Street, traders will do anything to have a leg up on the competition. Greed casts its dark shadow over the US economy and is highly prevalent among investment banks and other trading institutions. People feel pressure to always achieve more then they already have and thus never feel that they’ve achieved enough. So caught up in achieving more, individuals rationalize taking an unfair advantage over other shareholders in order to profit. The same pressures that we see in schools that cause students to cheat on exams and projects are the same pressures that cause individuals to commit insider trading. Both situations involve an individual or group of individuals more focused on the end result then on the means to the end. When we take shortcuts that aren’t available to everyone we violate our duty to uphold and participate in a free market or a fair system. Such violations render the systems and markets as worthless or completely inefficient. Until success is measured by how much one can acquire by giving his best and honest efforts as opposed to how much one can acquire, market imperfections and unfair opportunities to cheat the system will prevail.

  97. I feel like insider trading is something that will continue to be a problem in our market because the opportunity arises to often. While regulation helps it cannot keep all of it from happening. I believe that it is wrong to do because of the unfair advantage it gives those people. While it does speed up the reactiveness of the market it does so at the expense of the other shareholders that do not have that knowledge. I just hope that the sec continues to monitor and enforce anti-insider trading laws to help at least make people who are consequentialists think twice about what they are considering doing.

  98. I’m a proponent of fairness, and I don’t believe insider trading can ever be considered fair. If insider trading it made legal, it will only benefit the few people who have access to inside information they obtain through their jobs. Meanwhile, the majority of investors do not have access to the same inside information, which means they could decide to stop investing in the stock market altogether if they feel they are being cheated out of their money by insider traders. What sort of long-term effects would that have on the market in general?

  99. Just because someone is in a position to be privy to insider information does not give him or her the right to trade on this information. In reading the headlines about insider trading, these people are well off, not in financial trouble, just acting out of self greed. What about the person that works diligently to track the market, where much of their wealth is invested, just to lose money? Insider trading is cheating. It is not fair to everyone who learns of the information once it is public and reflected in the stock price.

  100. I feel that most people who succumb to insider trading use the reasoning that “if the information is available to me why not use it?” In my opinion, these people are ethical egoists; they are only looking out for themselves and harming those who do not have the benefit of knowing this information before it hits the market. I can understand their rational of not wanting to lose money if they find out that their stock is going to plummet, but using this information for profits is flat out greed. These people need to take a step back and think about how fair it would be to them if they were on the other side of the insider trading, and were the ones being affected negatively by it. As a part of our profession, and many others, we do have access to information that is not available to the rest of the public. It is our responsibility to remain ethical, and uphold client confidentiality.

    In a way insider trading can be compared to taking a test. Like ethical investors who study the market and a given company, ethical students take their lecture notes and text book and study them to prepare for a test. Unethical investors gain access to information that has not yet been given to the public and use this to influence their investments either for profit or to prevent loss. This can be compared to students who gain access to the test beforehand and use it to benefit their test score. In summary, insider trading is illegal, unethical, and is considered cheating no matter how it positively affects the market.

  101. I agree that insider trading is wrong. I think that it will be something that many of us will have an opportunity to participate in, hopefully it will be something that we stumble into and not actively seek out. I see it as profiting by having seen the future. Kinda like betting on a fight after you have already paid one of the fighters to take a dive. You already know the outcome of the fight and you exploit that to earn money. Exactly like insider trading, the trader knows information that will become public (winner of the fight at the end) before hand and makes a bet on it knowing it will see 100% return. Stealing from the blind on a large scale.

  102. I don’t see any place for insider trading in our markets. It is not right to all the people who are on the outside of these things and have to see the consequences of not knowing information translated into losses or missed gains. What makes the people who trade on insider information so special that they seem to feel they deserve this extra income? Especially the people who don’t need it. What about the guy who spent his whole life working as hard as possible for meager salaries and does not get to benefit from this? One could argue that it is these egoists that have this messed up idea that they should get to keep these ill-gotten profits. From reading Harry Markopolos’ book titled No One Would Listen, I have learned that this is something that happens all the time on wall street. It is great to see that they are cracking down on this.

  103. While insider trading does encourage a more efficient market, the fact that it is simply unfair makes it wrong. Particularly in the case of avoiding losses, insider trading harms investors who aren’t “in the know.” Those with access to insider information related to a particular company often have large stakes in that company. Therefore, if they begin to make large scale dumps of that company’s stock, it can have the effect of rapidly decreasing that company’s stock price. This unfairly forces losses onto the other investors who hold stock in that company. While this kind of trading encourages efficiency, it creates an unfair playing field that cannot be tolerated. Nobody has the right to an unfair advantage, and nobody has a right to trade on insider information. While I don’t see insider trading ending any time soon, I hope that the SEC continues to prevent it however they can.

  104. In response to Holman Jenkins’ article, I agree that it is possible that the Berkshire Hathaway’s shareholders were not negatively affected by Sokol’s actions. If Sokol buying $10 million in stock did not drive up the price, if Berkshire would have acquired Lubrizol at the same price without Sokol’s influence, and Sokol did not allow his personal investment to effect his actions while acting on behalf of Berkshire, then maybe Berkshire’s shareholders were not affected. However, I find it hard to believe that a $10 million dollar stake in Lubrizol would not have at least been on the back of Sokol’s mind when Berkshire was in the process of making that acquisition. This situation kind of reminds me of the Enron situation with Andy Fastow acting as CFO of Enron and the owner of the Special Purpose Entities Enron was doing business with. It is impossible for someone acting on both sides of a transaction to be looking out for the best interest of both parties simultaneously.

    I would also like to offer my opinion on a quote from the blog article. “When an insider buys shares on inside information, the insider is taking those shares from someone at a discounted price from their true value, which is unknown to the seller.” This is true, and I am not trying to defend insider trading; however, I think in most situations the seller of the shares would have ended up selling those shares at the same or similar price even if the person with the inside information was not the person buying them. Assuming that this is true, the seller is really unaffected by the person with inside information.

  105. I think it is very interesting to read about insider trading articles, and it seems like most people always have the same excuses and rationalizations for why they were doing it. I think that it is very important for us as accountant to follow the independence rules so we do not get into difficult situations with inside information. It would be extremely hard to just sit back and do nothing if you knew that you were about to lose millions of dollars, but knew that it was the wrong thing to do to save yourself from losing the money. That is why it is important to have the independence rules that we do.

  106. Knowledge is often power, and those with privileged information have great power, but they have a responsibility to use it ethically and wisely. It is unethical to monetarily benefit from that knowledge through insider trading, because it is unfair to the public. Raj Rajaratnam seems to be one of the biggest inside traders as of late, and he’s done it all to make some extra money. It upsets me that while others involved have plead guilty and confessed, he still enters a plea of not-guilty, even with evidence such as wiretapped telephone conversations mounted against him. Sometimes I feel that insider trading laws can be accidentally violated or the lines can be blurry, but I feel that Rajaratnam knew exactly what he was doing and that is was completely unethical and illegal. Clearly, he is an ethical egoist, as he abused this knowledge, and hopefully, he will pay the consequences.

  107. Inside trading is, as Dr. Shaub mentioned, a hot topic in the media right now. It is interesting to me how those who engage in insider trading do not seem to have a conscience telling them that it is wrong. If I had privileged information on certain companies, drugs, etc., I would never even think about using it unethically to gain an unfair advantage over the rest of the market. It sounds extreme, but I think that there should be some brainstorming on what regulations could be put in place that would limit the investing abilities of those who have this privileged information similar to auditor independence. If people engage in insider trading, shame on them. If we continue to allow it by not passing stricter regulations, shame on us.

  108. Of course insider trading has to be prohibited. It is the same argument for using steroids. It is an unfair advantage that messes with the efficiency of the system. The defenders of insider trading try to rationalize that it is open for everyone to use. That does not excuse the disadvantage they put people at. If you look at insider trading from a utilitarian standpoint, it would be essential that insider trading is prohibited. I agree with Dr. Schaub’s point that there is always another party at the other side of the transaction and they get taken advantage of because the insider trader did not play by the rules. One person getting an advantage means that many others will inherently be at a disadvantage, which makes society worse off.

  109. Some could say that “Life isn’t fair,” but it doesn’t mean you should do the insider trading. I think if we all were to invest our money, we’d love to do it with the money plans that work for us. However, that money plan isn’t insider trading. This insider trading takes the advantage of the information of stock’s activities in the future that very few people have access to the information. That may be unfair to most people who do not have access to the information. And because of that, it is illegal to do so.

    To me, it all is about freedom and fairness. They are very important in our society even though they often conflict each other. It is just like driving. You are free to drive anywhere you want as long as you have the proper license, but you are not allowed to drive faster than the speed limit.

  110. Although I have many opinions about the ethical implications of insider trading, those are not the only thoughts that enter my mind when I see yet another insider trading headline. As a future possessor of inside information, each article is a reminder to stay true to my ethical code. Something that “Romeo Mike” said during the Taking the Harder Right presentation struck me very deeply. He said “you don’t really know yourself until you have tested yourself out”. Although we have joked many times about not being the topic in an ethics class 20 years down the road, it is startling to think how easy it would be to slide down that slope. Society regards those who trade with inside information with scorn and contempt, but they likely started as business students similar to us. What will make me different from them is adherence to my code. Each title is a reminder of what not to do, and more evidence of the importance of holding steadfast to my beliefs. I will gladly be the keeper of inside information. But, I will remember it is called INSIDER information for a reason and constantly remind myself that “market efficiency generator” is not my job title.

  111. As many people have already mentioned insider trading is wrong for the many obvious reasons of being unfair, harmful, deceptive, dishonest and many more. It is a very selfish act that benefits the knowledgeable party and harms the public. It is important to remember that with knowledge comes great responsiblity and the way in which we choose to use this knowledge will ultimately define who we are.

  112. Prior to taking this class I had only heard of the obvious insider case of Martha Stewart. I had no idea insider trading was so prevalent, but most of all I didn’t know how unethical it was. I was more than a couple years younger when Martha Stewart went to jail and at that age I thought the offense was too minor for jail time. After 4 years at Mays, and a semester in Dr. Shaub’s class I realized listening to insider trading tips is basically stealing, and I now firmly believe the offense deserves jail time. Investing is a chance you take, it is not forced upon, but to take that risk and deceive everyone else playing by the rules is completley wrong.

  113. I agree. I believe insider trading is wrong due to the lack of fairness to other investors. Unfortunately, I also believe that insider trading is also one of the hardest things to prove and therefore, causes many people to escape untouched by the judiciary system. In addition, I believe that if insider trading was allowed much inefficiency would be introduced into the market. Mangers, CEO’s, and CFO’s may begin to choose irresponsible choices to gain advantages in the stock rather than chooses what is best for the corporation.

  114. In my opinions, insider trading is manipulating market efficiency, which is against the theories of economics. Market should be operating freely and regulated by “the invisible hand”, without intervening from excess government regulation or “private controls” of the malicious. Therefore, I will not think that insider trading increase the efficiency of the market.

    In addition, I do not think that it is a “victimless crime”. Like Enron case, when management deceived their employees with inflated stock price but they quickly sold their stocks to get rid of loss, their employees lose almost everything because they were out of work and did not have retirement benefits to sustain temporary financial difficulty. Insider trading is definitely an unfair issue and the people who commit this fraud have a heinously selfless heart because inside trader sacrificed most of shareholders’ benefits. But do the shareholders deserve this outcome? Therefore, I believe that insider trading prohibitions should be strongly enforced and severely punished the insider trader because they are very selfish and not only violate business code of conduct, but also lack of basic human conscience of being a person.

  115. It is ironic that almost a year later the same insider trading crime is prevalent in the world. After talking with Garrett Bauer yesterday, it is apparent to me that insider traders do not feel that they are stealing from anyone. Bauer kept emphasizing that the information he received was vague and that there was more specific information that other people were trading on. He repeated that he was not harming anyone directly, so he didn’t think it was a big deal. Ultimately it is not fair to the shareholders of that particular stock because they lose their earnings faster, whereas the person with inside information avoids huge losses or gains highly from the transaction. Your statement that immature markets are dominated by insider trading is exactly how Garrett justified his behavior even though the American markets have never tolerated it. I believe that the government will continue to crack down on insider trading scandals since there are millions and millions of dollars being stolen.

  116. I agree with your overall assessment of insider trading, but at the root of the issue is this question of fairness. While I agree that it is unfair when individuals trade on inside information in the markets, I’m not sure what the fair penalty is to those who have traded on inside information.

    It’s clear that the government is trying to make a statement on insider trading, and now has the tools at its discretion to do so. The ethics and morals of using those tools (including the patriot act) is a discussion for another time, but the penalties that traders like Garrett Bauer are facing is what I have trouble reconciling.

    The ultimate question is the guidelines for fines and sentences related to insider trading. When you compare Garrett Bauer to Rajaratnam, is it equitable for Rajaratnam to receive a lower sentence when he deliberately created a network for insider trading. For me it’s tough to grasp the idea that Garret Bauer, who admittedly was involved in insider trading for 17 years will most likely receive a tougher sentence than Rajaratnam. On one hand you have Garrett Bauer who used a middleman to gather crumbs of information some of which sounds like anyone could have heard if they ate at the right restaurants. On the other hand, Rajaratnam who founded the Galleon Group, and deliberately sought out information to trade on. It seems that at this point in time the government is more concerned with the statements it is making than equitable punishments.

  117. Listening to the comments said about Mr. Bauer during class made me feel like maybe I dont have this ethics thing figured out. The entire time I kept hearing people judging whether or not Mr. Bauer had changed, I didnt realize that was our place to say. After listening to a few comments and questions in class I almost forgot Mr. Bauer had committed insider trading because some people made it seem like he had killed a child. I felt some students were being too judgmental. If we aren’t approachable how can we ever expect to be someone’s ethical check?

    I understand insider trading can hurt many people but I think a lot of students fail to understand that it can happen to any one of us. Being future accountants we are going to learn privileged information and there may be times where we unintentionally disgorge that information. You may have not made an illegal trade but mentioning non-public information is still considered a crime. I know that I will be working closely in the financial industry so I feel the more aware I am of the likelihood I may commit insider trading the better I can hedge against it.

    Furthermore I agree with the comments made by Matthew Shirley that the government is trying to send a stronger message to defendants recently convicted of insider trading. Recent insider-trading defendants have received considerably harsher sentences than similar offenders in the past. I think 11yrs to give to someone for a white-collar crime is a little harsh.

  118. What really got me thinking was the part of this blog where you spoke about the Enron fraud and how management froze employee pension plans until management got rid of their stock while the stock price dramatically declined. You asked if that was fair, and if pose that question to the employees of Enron they would say absolutely not as they lost most, if not all, of their retirement funds.

    On the flip side insider trading just gets information to the market faster, and once the information about Enron’s fraud hit the market without the aid of insider trading would the employees have saved any more retirement money? We can speculate about how much more the employees could have recovered if they weren’t frozen out of their retirement plans, but the part that is the worst is that top management benefited from the information while leaving it’s employees out to dry.

    For that reason, I believe the real issue of insider trading isn’t the speed of information infiltration into the market; the most beneficial way for the information to get to the market is when it is ethically put there. The real unethical issue of insider trading is the use of this information to benefit one more knowledgeable and powerful group of people over another.

  119. I agree with a lot of what is being said above. Coming in to this class I thought insider trading was a very black and white issue. You either had the Information that made you money before others, or you didn’t. Admittedly, I have not done a very good job keeping up with the news on Bauer, Rajaratnam, or any of the other insider trading cases, but it really does seem like while they are committing the act, they don’t see anything wrong with it.

    After our conversation with Mr. Bauer, I was amazed that he actually made huge losses off of these tips. But if that wasn’t enough, he made it sound like trading off of tips like that is fairly common.

    It has been my experience that the mindset of ” well if they are doing it, we can do it” is very common in the work place, especially when their is high competition. We have seen some of the biggest crack downs on insider trading while we have been in college, but it will be interesting to see the ripple effects it has to the convictions of people in the future.

  120. I think part of the reason insider trading exists is because it is so hard to see the parties that are hurt by it. But in the end, it is unfair. Though the damage may not always be drastic, someone has to suffer so that the inside traders can make a gain. I thought it was very interesting to hear Garrett Bauer talk about his insider trading. He hardly thought he did anything wrong. He rationalized it so many ways; everyone else was doing it, his information was not that specific, he had to research the info just to be able to use it. But in the end, he was still using information that was not publically known. And even though he lost money some of the time, he gained from the information.

  121. As more and more people are being successfully prosecuted for insider trading, I think people are becoming more aware of the unfairness of the situation. After our class spoke with Garrett Bauer last week, we got some insight into his mindset and his rationalization of his actions. He explained that he never thought he would get caught, and that when he first started, it seemed like everyone was trading on inside information. This philosophy of doing something just because everyone else is can be a very dangerous one in the workplace. As Professor Roach explained, it is our duty to have the courage to not tolerate unethical behavior, and to stand up for what is the right thing to do.

    I agree that the insider trading issue does come down to the fairness of the situation. Ultimately, it is unfair for those with inside information to make a profit that others cannot. As Bauer explained, if insider trading is not punished, our markets will eventually become like those in other countries, where it is not even feasible for the average person to bother trying to trade.

  122. I am glad you covered this topic in your own words Dr. Shaub. I had a hard time swallowing the concept of insider trading during Garrett Bauer’s presentation because to me, the cost of catching insider traders just about outweighs the benefit. Mr. Bauer spoke of the culture of trading that he experienced and how it was common to trade on inside information. What will it take to get this culture of trading to change? Education? a new generation of better educated traders? As with anything, when an issue permeates the culture of something, it is very difficult to change what people are used to. So back to cost vs. benefit analysis, is it worth it to persecute insider trading? So here is my thought about the solution:
    Maybe the companies whose information is being “insider traded” should be punished. If companies would keep their confidential information under tighter security than the information would not be leaked. This would be an easier way to prevent insider trading than catching traders after the trades have been made.

    • I think that solution could lead to many groups being wrongfully accused of leaking inside information. With major deals that lead to many cases of insider trading, too many groups are involved in dealings to always be accurate in solving who released insider information. I think the system of fear through punishment should continue so more people will decide to earn their money without extra help. Maybe having officials hired at each company to look out for this should be a requirement if scandals continue to arise each year.

  123. I believe many insider traders think they are doing a victimless crime. When Garrett Bauer spoke to our Ethics class he stated that he was basically taking tenths of a penny from each shareholder and thus he wasn’t doing anything terribly wrong. He also stated that people in his industry traded on insider information all the time and they never get caught. But, my favorite thing Garrett Bauer said was that if everyone traded on insider information, then our market would be similiar to China’s and India’s due to the corruption. If people had an advantage in the market, then it would not be wise to invest at all in the market. Insider trading should be illegal and keep punishing the individuals who are taking the fairness out of the market.

  124. While insider trading allows for greater market efficiency, it also sacrifices the effectiveness of the market. As we discussed in class (and even mentioned by Garrett Bauer), a lack of regulation on insider trading stunts the growth of emerging markets. It’s important that those with inside information have an overriding duty to their shareholders; a duty that trumps their own financial success.

  125. I imagine the fact that the victims are so far removed from the actual fraud being committed that it becomes easy to convince yourself that the crime itself is victimless. While I can understand how insider trading could lubricate the market towards greater efficiency, you be hard pressed to come up with an argument as to how this outweighs the damage done to less informed shareholders.

  126. I think this post is incredibly interesting in light of the recent insider trading scandal at KPMG. From a teleological perspective, it can be easy to assume that other stakeholders will not be affected. Or, even if they are affected by insider trading, the consequence will be minimal to them. For this reason, one can consequentially justify their action as making the market “more efficient” and therefore creating the most good for the largest number of people.

    I am not arguing that insider trading is right, but rather I am attempting to walk through the thought process of a selfish individual seeking their own self-interest.

    • I understand this thought process, but it is still hard to imagine that insiders like Mr. London would have even reached this justification or really thought that they were helping the market by making it more efficient.

      The nature of insider trading bring huge rewards to the traders, and I think that Mr. London and Mr. Sokol simply thought they wouldn’t get caught. I think they were focused on the consequences which were financial gain with a slight chance of getting caught, instead of their duty to shareholders, the SEC regulations, or firm policies.

      Fairness isn’t black and white or easily measured, but inside traders are knowingly disregarding regulations put in place for the benefit of shareholders.

  127. hqkdsk Some genuinely interesting info , well written and generally user genial.

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