In the “Inside Traders or Astute Observers?” case study, two employees, Griffiths and Steffes, profited from knowledge of an impending merger at their company. The case raises serious questions regarding the broader implications of insider trading and employees’ legal and ethical obligations to their employers (Ferrell et al., 2021). Therefore, insider trading is a pervasive issue that raises serious legal and ethical concerns. This article will address how employees’ legal and ethical obligations to their employers are breached when they engage in insider trading and that this practice should be prohibited to ensure a level playing field for investors. Moreover, the paper compares the Galleon Group case to SEC securities fraud prosecutions from 2010 through 2022.
Did Griffiths and Steffes break any ethical or legal obligations to their company? Were they unfair in their treatment of you?
Both Griffiths and Steffes had access to private data that had a significant impact on the market. However, they took advantage of their employer’s plans to purchase other companies by trading in the stocks of other companies; this was a violation of their fiduciary duty to their employer, as they were tasked with looking out for the business’s best interests rather than their own. As a result, they broke insider trading regulations that forbid profiting from non-public knowledge.
When Griffiths and Steffes purchased company stock before the merger was announced, they broke insider trading regulations. Their actions undermined the confidence and trust of their employer. The credibility of the financial markets, which depend on investors having equal access to information, was also compromised. Since Griffiths and Steffes had an unfair advantage over other investors, their actions were unethical. They made money from insider information (Ferrell et al., 2021). Furthermore, it is unethical and unfair to other market players not privy to the same data. By participating in insider trading, which is seen as a form of cheating and undermines investors’ faith in the fairness of the market, Griffiths and Steffes’ activities have also damaged the reputation and integrity of the stock market (Schwartz, 2017). This meant they had broken legal and ethical obligations to their employer.
Should the law prohibit employees from acting as Griffiths and Steffes did? Explain why or why not. If actions like theirs are tolerated, will it diminish people’s faith in the fairness of the stock market? Would permitting it set a bad precedent in other cases?
The main reason that contributes to insider trading being illegal is that it undermines the fairness of financial markets. The stock market is based on free and open competition, with all buyers and sellers having equal access to data. However, the market becomes less fair and transparent when some participants have access to privileged information. As a result, People’s faith in the stock market’s fairness would be harmed if such behavior was accepted. Furthermore, public confidence in the market declines, and fewer people choose to participate, which is bad for business.
When insiders trade on non-public knowledge, they have an unfair advantage over investors who do not have access to it. As a result, it creates market distortions that harm some investors; also undermines investor confidence in the integrity and transparency of the financial markets, which can be detrimental to the economy (Ferrell et al., 2021). To promote honest and open financial markets, insider trading is prohibited by securities laws. Therefore, employees should face legal consequences if they act similarly to Griffiths and Steffes since trading on inside information is illegal and carries severe penalties if caught.
Securities fraud committed by Galleon Group compared to other cases submitted to the SEC between 2010 and 2022.
The scope and complexity of the Galleon Group case set it apart from previous insider trading scandals. Raj Rajaratnam, founder of the Galleon Group, and his friends exploited a massive network of insiders to collect sensitive information about public businesses and trade on it for profit. The plan entailed paying insiders enormous quantities of money in exchange for non-public information and then using that information to execute trades that yielded millions of dollars in profits.
The STATISTA database shows that between 2010 and 2022, the SEC received reports of several high-profile incidents of securities fraud, including the Galleon Group case. One of the most significant insider trading instances in history involved the Galleon Group, a hedge firm that participated in insider trading (U.S. Securities and Exchange Commission, 2011). However, this was not the only instance of insider trading brought to the SEC’s attention. Between 2010 and 2022, 221 incidents of insider trading were reported to the SEC, as documented by the STATISTA database. Former SAC Capital Advisors portfolio manager Mathew Martoma was accused of insider trading in a high-profile case. For trading on non-public information on Alzheimer’s treatment trials, Martoma was found guilty of insider trading. He was imposed a $9.3 million fine and a nine-year prison term (Raymond, 2014). The insider trading case against ex-Goldman Sachs board member Rajat Gupta and the accounting fraud case against Olympus Corporation were reported during this period. When Olympus Corporation settled with the SEC for $646 million for its accounting fraud, Gupta was convicted of insider trading and sentenced to two years (U.S. Securities and Exchange Commission, 2011).
Conclusion
In conclusion, workers like Griffiths and Steffes have a moral and legal duty to protect their companies’ interests and refrain from using proprietary information for their benefit. To maintain the securities market’s fairness and safeguard the interests of all investors, the ban on insider trading is essential. Compared to other SEC-reported cases, the Galleon Group securities fraud shows how severe and far-reaching insider trading and securities fraud may be. A level playing field and public confidence in the financial system can only be maintained via the strict implementation of laws and ethical behavior in the securities market.
References
Ferrell, O. C., & Fraedrich, J. (2021). Business ethics: Ethical decision making and cases. Cengage learning.
Raymond, N. (2014, September 9). SAC’s Martoma Gets nine years prison for insider trading. Reuters. Retrieved April 8, 2023, from https://www.reuters.com/article/uk-sac-martoma-idUKKBN0H327020140909
Schwartz, M. S. (2017). Business ethics: An ethical decision-making approach. John Wiley & Sons.
U.S. Securities and Exchange Commission. (2011, November 8). SEC Obtains Record $92.8 Million Penalty Against Raj Rajaratnam. Retrieved April 8, 2023, from https://www.sec.gov/news/press/2011/2011-233.htm
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