Insider Trading
According to the SEC (n.d.), For many years, insider trading has been a source of contention and dispute in the corporate world. The activity of purchasing or selling shares based on substantial, non-public knowledge is known as insider trading (SEC, n.d.). This approach may provide certain investors an unfair edge over others, threatening the integrity of the financial markets (SEC, n.d.). For decades, intellectual and regulatory circles have debated whether limitations should be imposed on insider trading.
Limits on Insider Trading
Pete Rose, a former baseball player and manager, was penalized for wagering on the performance of his club. The argument in this instance is whether he should have been permitted to profit from the success of his own squad. Insider trading is a type of market manipulation that can be harmful to investors who do not have access to the same information (OpenStax, n.d.). To avoid such harm, it is critical that everyone has access to the same information at the same time. As a result, the answer is negative; Pete Rose should not be permitted to profit by betting on the performance of a club he manages.
It is much more important to avoid such methods when betting on the downfall of a team he coached. Managers owe it to the organization they oversee to behave in its best interests. Betting on a team’s failure contradicts this fiduciary obligation and damages investors who do not have access to the same information. As a result, if Pete Rose benefitted by betting on the demise of a team he coached, he should face harsher punishment.
Enron Case
In the Enron case, numerous executives sold all of their Enron shares approximately an hour before it was revealed that the firm was not as valuable as everyone imagined (Segal, 2023). The concern in this instance is whether the management should be penalised for acting responsibly based on knowledge they found honestly solely because the wider public lacks that knowledge (Segal, 2023). Insider trading is banned because it unfairly favors certain investors over others. As a result, the executives who sold all of their Enron shares based on insider knowledge should face criminal charges for insider dealing.
Disclosing Private Information
Managers are supposed to have better knowledge about a firm due to their position within the corporation. They frequently have access to information that others may not have (OpenStax, n.d.). Managers are expected to disclose any private information they possess that might impact the public’s investing decisions (OpenStax, n.d). Companies must report any important information that might influence the price of their securities. To avoid insider trading, this information should be made accessible to the public as soon as practicable.
The choice of when to disseminate information is equally essential. Companies should release information as quickly as feasible on a public website to guarantee that all investors have access to the same information at the same time. If the material is serious enough to merit such an announcement, a formal news conference may be necessary (OpenStax, n.d.).
Conclusion
Insider trading can be harmful to investors who do not have access to the same knowledge as insiders. To avoid such harm, it is critical that everyone has access to the same information at the same time. Managers owe it to the organization they oversee to behave in its best interests. Companies must report any important information that might influence the price of their securities. To avoid insider trading, this information should be made accessible to the public as soon as practicable.
References
OpenStax. (n.d.). Financial Integrity — Business Ethics. Retrieved from https://openstax.org/books/business-ethics/pages/7-4-financial-integrity
SEC. (n.d.). Insider Trading. Retrieved from https://www.sec.gov/fast-answers/answersins
Segal, T. (2023, April 5). Enron scandal: The fall of a Wall Street darling. Investopedia. Retrieved April 29, 2023, from https://www.investopedia.com/updates/enron-scandal-summary/
This article is written based on University of The People Business Law, Ethics, and Social Responsibility (BUS 5115) written assignment by Fristy Tania in April 2023
