Hopefully many of you have played “
Monopoly” at least once
Think about these!
How might this be a
stand in for investing
in the stock market?
Does the game have
potentially
advantageous
strategies?
Would you enjoy
playing with
cheaters?
What pair of objects
is missing from the
screen?
Insider Trading
Probably the most publicized investment crime
What is an Insider and what is Material Information?
Anyone who has access to non public facing
Material Information relating to a company with
Material Information meaning information that is very likely to impact a company’s stock
price once released to the public.
Typically
Insiders
tends to be high level executives within the company like the CEO and other
C level executives, members of the Board of Directors, and very often other members of the
management team, company lawyers and accountants and in some cases, lower level
employees. But the SEC tends to concentrate on the high level executives.
Shareholders who own more than 10% of a company’s stock are also considered Insiders.
Sometimes government workers and politicians can be Insiders. They can be involved in
approving products or know of soon to be passed laws that can impact a company’s future.
And technically, these Insiders can pass along this non public material information to relatives
and friends placing those people in the Insider category for the authorities to go after but their
trades are harder to track. The SEC has even gone after a CEO’s babysitter!
What is Insider Trading?
Having the information isn’t a crime. One would expect Insiders to have access to
information about a company prior to public release of the information via the financial
media, press releases, financial web sites, interviews, etc.
The crime of Insider Trading begins when the Insider acts on the information by making
stock transactions based on that information (in your terminology by buying, selling, short
selling or short covering shares of stock). Of course it will only have a chance of being
discovered by the authorities in the event a large profit was made by the transaction(s) or
the avoidance of a large loss. But the attempt itself is considered the crime!
Prior to the mid 1930s, Insider Trading wasn’t even considered much of a crime but the
newly empowered Securities and Exchange Commission (part of FDR’s New Deal)
changed all that, or at least tries to. And today they have more tools at their disposal.
Why is Insider Trading a crime?
There are some who don’t believe it should be considered a crime but generally speaking, there are two main
reasons why it is classified a crime.
1. Investing in securities like stocks has rules, much like any game, and it’s a generally accepted rule
that all the participants should be playing by the same rules of research gathering and gut instinct.
Inside Information is only available to a select few so it’s essentially considered cheating.
2.Every transaction influences the price of the next transaction so this cheating artificially inflates or
deflates a stock’s price punishing whoever didn’t have the information.
This combination, when done to excess, would negatively impact the public perception of the stock market, a
fundamental pillar of our Capitalism based economy and drive investors elsewhere (real estate, commodities,
etc.) and fewer investors means less profits for Stock Brokerage Firms. A disastrous outcome for TX residents
like you!
How does the SEC catch Insider Trading
violators?
Let’s start with the truth. Not all crimes are caught. Perhaps only a small minority. But the SEC will
prioritize two types of Insider Trading schemes. The first is of course when large amounts of money are
involved. Those are conveniently easier to catch anyway. The second is when the crime involves one or
more celebrities where the mass media will plaster the news all over the TV and internet.
They do have a great deal of information gathering experience and technical expertise, especially after 9-
11 resulted in the passing of the Patriot Act some 20 year ago. The same technology used by the FBI,
NSA, Homeland Security, FBI and local police forces, is available to the SEC to gather cell phone
records, texts, social media posts, wire taps, use high powered microphones, interview associates, and of
course every stock transaction is now computerized and they look for patterns and timing.
Usually the Insider, when caught, will claim it was just luck. The SEC’s job is to prove it was an intentional
disregard for the law and there are rules that certain investors must follow when their own company is
involved. Penalties can hit the millions plus 4-5 times the value of the trade(s) and jail time.
Can “Insiders” EVER trade their own company’s stock?
Absolutely. For most of a company’s employees, if you have no Material Information,
such trades are not illegal. You just need to concern yourself with appearances to
the SEC. There is a special process for “clearly designated” potential Insiders to
follow to avoid breaking the law. These individuals must report their plans to buy or
sell to the SEC in advance and the SEC determines an appropriate waiting period
and typically news of the planned transaction is made available to the public. So if
Apple CEO Steve Jobs wants to sell 100,000 shares of his Apple stock, he can. He
has to inform the SEC, follow their waiting period guidelines (probably 30-90 days)
and make his plans available to the financial media (press release, interviews, web
site announcements, etc) so the rest of the investor community know Apple’s CEO is
selling off some Apple stock and we can make our own decisions accordingly.
Team Assignment “Insider Trading Similes”
Create Team Journal Page and put it in the table of contents labeled Insider Trading Similes. Each of the 8 teams comes up with their two
best similes for Insider Trading with short explanations.
A simile is a comparison of two different things that are alike in certain respects, and are introduced as a figure of speech using “like” or “as.”
For example, that stick is like a snake, or America is like a melting pot, or as American as Apple Pie, or as cool as a cucumber or as clear as
mud.
The similes should help explain what insider trading is, and why it is wrong and importantly understandable to 6th graders. An acceptable
format might be {Insider trading is like ________________ because…} with the explanation after the “because”.
Any of what we discussed today is fair game but priorities would be:
●Someone has information that others don’t have.
●Someone will reap profits that are not available to others, unless by pure chance.
●This someone has reduced his or her risk and cost.
●Those without the information stand to lose something valuable.
Teams present their similes during double period tomorrow so consider doing more than two and vote your two best.
