Insider Trading Flashcards
Insider Trading
Insider Trading
Insider trading has been described as the purchase and sale of shares of a company by a person with access to material non-public information about a company that can affect the value of its shares and that is not known by other shareholders or the general public.
Connected to an reported issuer
A person is connected to a reporting issuer if the person has an evident connection to the reported issuer. This can be through familial ties or working environment for example senior, or junior officers. Another connection can be if they have control over voting securities, plan to engage in take-over bids or mergers, or learns, directly or indirectly, of material nonpublic information with respect to a reporting issuer from any person and knows or ought reasonably to have known that the other person is connected to the reporting issue
In the case of United States of America, appellee v Martha Stewart and Peter Bacanovi, Mr Bacanovic was the stock broker for the CEO of ImClone and he notified miss stewart that the CEO and his families were selling shares. Ms Stewart was connected to Mr Bacanovic who was connected to the reporting issuer.
Material non-public information
Material non-public information means in relation to securities of a reporting issuer, any material fact or material change that has not been published.
“material fact” means, when used in relation to the affairs of an issuer or its securities, a fact or series of facts, the disclosure of which would be considered important to a reasonable investor in making an investment decision
“material change” means- a) a change in the business which would be considered important to a reasonable investor in making an investment decision and includes a decision to implement such a change or b)change in the business which would be considered important by a reasonable investor in determining whether to purchase, sell or transfer or continue to hold security of the issuer
There is also no clear answer as to what constitutes “material, non-public information.” In general, “material” information is information that fits into one or more of the following
categories: (1) there is a substantial likelihood that a reasonable investor would consider the information as important in making his or her investment decisions,(2) the disclosure of such information would be “viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available” or (3) the disclosure of the information is “reasonably certain to have a substantial effect on the market price of the security.
In the case of United States of America appellee vs Martha Stewart and Peter Bacanovic, Ms Stewart had information that the CEO was selling shares as he knew the value was about to drop. This information was not available to the public but was communicated to Ms Stewart as she is close friends with the CEO.
