Insider Trading - a Trade of Secrets

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PENALITY:

SEBI directed HLL to pay UTI Rs. 3.5 crore as compensation.

HLL’S DEFENCE:

As expected HLL decided t appeal against the SEBI’s verdict to the Union Ministry of Finance. In its defence HLL stated that before the transaction, the merger as the subject of wide speculation by the market and the media. It also pointed out that SEBI had to establish the financial benefit from the transaction to prove an insider trading charge. HLL argued that it was aware of information about merger only because it was one of the parties to the merger itself and not merely because of its connection to BBLIL. HHL also mentioned that the share price of BBLIL moved from Rs. 242 to Rs. 320 between January to March indicating the fact that merger was “generally known information”. HLL stated that information regarding SWAP ratio could be deemed as price sensitive but it was not known to HLL or its Directors when the transaction took place.

RESULT:

The Union Ministry of Finance, in its ruling, cited 21 press reports indicating “prior market knowledge”. Authority also said that SEBI was not capable of initiating investigations and awarding compensation without passing an order under the regulation 11B.

CASE STUDY: 2 JUSTICE DEPARTMENT VERSUS RAJ RAJARATNAM

It was October, 2009 when a New York hedge fund manager, Rajaratnam, was charged of securities fraud and conspiracy. He was alleged of cultivating a network of Executives at INTELL, McKINSEY, IBM and GOLDMAN SACHS.

FACTS OF THE CASE:

- On September 23, 2008, Warren Buffet agreed to pay $5 billion for preferred shares of Goldman Sachs. This information was not made public until 6 p.m. after the NYSE closed on that very day.

- Just before the public announcement regarding Buffet’s infusion, Raj Rajaratnam bought 175,000 shares of Goldman Sachs.

- On 24th October, the time by which the infusion was made known to public. Rajaratnam sold his shares, for a profit of $9,00,000

ALLEGATION:

The allegation on Rajaratnam was that he had made a figure of $60 Million from insider trading by having access to inside information which was provided to him by insider Rajat Gupta, (A former director of GOLDMAN SACHS and Head of McKINSEY consulting). Preet Bharara (United States Attorney for Southern District of New York) it was claimed that Rajat Gupta had called Rajaratnam immediately after the board meeting and told him about the money GOLDMAN SACHS expected to receive from Warren Buffet.

RESULT:

Rajaratnam was 35th person to be convicted for insider trading out of 47 persons charged since 2010.he was convicted with 11 years in prison. He was also ordered to pay back $53.8 Million plus a $10 Million fine. Rajat Gupta got convicted for 2 years.

CONCLUSION

Insider trading is the most dangerous corporate crime of all. Specially, small investors and the market on the whole, suffer from this kind of fraud, misappropriation whenever it takes place. It leads to erosion of confidence of investors, it makes capital raising process more difficult, and it damage the efficiency of the market. It directly harms investors who lose money to those who are engaged in insider trading. It is widely said that insider trading is a “victimless crime”, as its victims are not known usually. On the legal aspect part, SEBI is trying its best to prevent the corporate crime by making amendments in the regulations from time to time. SEBI also has enacted the SEBI (Prohibition of Insider Trading) Amendment Regulations, 2011. Powers in the hands of SEBI do not seems enough to handle this type of frauds so, extension of powers of SEBI to regulate insider trading is required.

REFERENCES

- “Rajaratnam guilty as charged,” The Economist online, May 11, 2011, http://www.economist.com/blogs/schumpeter/2011/05/galleon_trail_0, accessed: July 11, 2011. Peter Cohan, “Does Rajaratnam Conviction Level the Playing Field?”Forbes, May 5, 2011.

- Peter Cohan, “Does Rajaratnam Conviction Level the Playing Field?” Forbes, May 5, 2011.

- Brooke Masters, “Cross-border clampdown on insider trading,” Financial Times, November 28, 2010.

- “Guilty as Charged: The Verdict is Finally In,” The Economist, May 12, 2011.

- “Network effects,” The Economist, March 12, 2011.

- Kara Scannell, “Ex-Goldman director on insider charge,” Financial Times, March 1, 2011.

- US Department of Justice, http://www.justice.gov/usao/nys/.

- “Goldman Ex-Director Insider Trading Charges May Solve Long-Running Market Mystery,”

- CNBC.com, March 1, 2011, http://www.cnbc.com/id/41851041/print/1/displaymode/1098, accessed March 1, 2011.

- https://www.google.co.in/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=insider+trading+case+studies+top+10

- http://www.investopedia.com/articles/stocks/09/insider-trading.asp

- http://www.investopedia.com/articles/stocks/09/insider-trading.asp

- http://www.icmrindia.org/casestudies/catalogue/Finance/FINC014.htm

- http://www.icmrindia.org/casestudies/catalogue/Finance/Finance%20%20Case%20of%20insider%20trading%20-%20HLL-BBLIL%20Merger.htm.