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Inside Traders or Astute Observers?

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Insider trading is a serious corporate problem that mostly affects executives, owners, and shareholders in publicly listed companies. The phenomenon is often regarded as contentious, and it poses many concerns. Insider trading decisions pose ethical as well as legal concerns, and those investigating the actions take the matter seriously. Failure to follow corporate principles is called poor business which often results in legal repercussions.
Griffiths and Steffes betrayed their legal obligation to their boss when they used their jobs at Florida East Coast Railways to obtain intelligence indicating that the firm was in the process of being sold. The two were expected to maintain a fiduciary relationship with their organization and shareholders, and their attempt to profit from information they gathered put their interest above those of the company to which they owed the duty. Although the two individuals were not the typical corporate insiders and did not hear about the acquisition, their positions at the company allowed them to collect information that gave them an idea of what was about to happen. By betting that a deal was in the works, they violated the moral duty towards their company which required them not to trade or disseminate vital non-public information.

An individual is described as an insider if they have a relationship with the organization that makes them aware of some form of information that is not yet available to the public. In other words, insider trading takes place when a trade is influenced through the privileged possession of information about a company that has not been made public (“HG.org,” 2017). As such, any information not available to other investors gives an individual a significant amount of unfair advantage over other people in the market. In this case, both Griffiths and Steffes were in possession of information that was only available to a few individuals working for the railway company. The information gave them an unfair advantage over other traders allowing them to generate more than $1 million.

Illegal insider trading has a detrimental impact on both investors and markets and should for that reason be prohibited. Illegal insider trading undermines fair play, and consequently, there is no legitimate demand and supply of stocks which is vital for the functioning of a healthy capital market. According to Bandow (2010), this type of trading weakens investor faith in the system and permitting it could discourage individuals from investing capital, and this could have a huge blow to the economy. Shareholder investment in the stock market used for product research, overseas expansion and capital improvement would run short. As a result, publicly-traded companies which rely on shareholders’ capital could suffer and eventually lose the ability to stay afloat.

Griffiths and Steffes acted unethically when they used the information they gain in their organization for their own personal gain. The tactic they used to generate money was not fair since the two individuals had the upper hand over the average investor who relied on publicly available information to make decisions about investments that could be profitable. Insider trading is unethical because it inflicts a negative externality on the society by discouraging trading and therefore increasing the capital for companies slowing the economy. The acts could also encourage other types of activities and bad behavior that could harm firms so that individuals could short or unfairly benefit businesses to profit individuals.

Trust is of great importance in the arrangement between a firm and its investors and company employees ought to act in the best interest of its shareholders (Shaw & Barry, 2014). Inside trading is immoral because it betrays that trust; by using information that shareholders are not aware of for financial gain, the management of a business entity is only concerned about its own best interest. The average investor depends on the management to guard their interest. As such, decisions must be for all investors and not for the management’s or employee’s personal gain. If companies were allowed to decide for themselves how to deal with the issue, greedy insiders would work attempt to transfer wealth from shareholders to themselves. If entire markets are perceived as tainted by insider training, investors could avoid the markets and have an adverse impact on their value. It is, therefore, unjust on moral grounds and should not be legalized.

If Griffiths and Steffes were not employees of Florida East Coast Railways, but lives near the company and guessed what was going on, they could not have been guilty of insider trading. According to the U.S. Securities and Exchange Commission (2013), illegal insider trading is buying or selling securities in breach of trust and confidence while in possession of valuable nonpublic information about a particular security. If the two were not employees, they owed no one any fiduciary duty. Additionally, if they guessed, it meant that they were not guilty of having acquired the information from family members, friends, employees, business associates or any other individuals in the company.

Griffiths and Steffes’ example proves that it is possible for individuals who do not hold powerful positions in a firm to benefit from vital organizational information unavailable to the public. Prosecuting the two is, therefore, a wise use of the U.S. Securities Exchange Commission resources. If SEC ignored such cases, it could incentivize employees in other organizations to come up with ways to obtain material nonpublic information and use it to gain an unfair advantage over other shareholders and traders.

Conclusion

Regulating insider trading is a complex topic which raises critical questions for employees, shareholders and regulatory agencies. As demonstrated in the case study, insider trading can negatively influence market effectiveness. However, arguments for and against regulation show a certain level of ambiguity, and even though some scholars argue that companies should be allowed to choose how to deal with the issue, the interest of investors must be taken into account. Therefore, regulation of insider trading is necessary.

References

Bandow, D. (2010). What’s Wrong About Insider Trading? CATO Institute. Retrieved on February 22, 2017 from https://www.cato.org/publications/commentary/whats-wrong-about-insider-trading

Insider Trading. (2013). U.S. Securities and Exchange Commission. Retrieved on February 22, 2017 from https://www.sec.gov/answers/insider.htm

Shaw, W. H., & Barry, V. (2014). Moral Issues in Business (13th ed.). Boston: Cenage Learning.

What is Insider Trading and Why Is It Illegal? (2017). HG.org. Retrieved on February 22, 2017 from https://www.hg.org/article.asp?id=31598

October 20, 2021
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