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Insider Trade: A Critical Approach Essay

3387 words - 14 pages

Juan Guillermo Gonzalez |
12/20/2014 |

This academic document in intended to make an analytical approach of insider trading in the U.S. It will also discuss the European case and how it compares to the U.S. Finally, it will describe international implications of insider trading and the cooperation among nations. |


Introduction …………………………………………………………………………………………………………….. 4

Insider Trading – Opposing Viewpoints ……………..………………………………………………. 5

Insider Trade in the United States .………………………………………………………………………… 7

Insider ...view middle of the document...

This practice reflects a good example of illegal insider trading.
This document is intended to identify, analyze, and discuss insider trading in the United States. It will explore the extent to which legislation has been promoted and enforced as well. It is also intended to debate the issue in terms of insiders walking the line between legality and illegality. In this research, I will discuss how legislation has been implemented in other regions such as the European Community, and the extent of cooperation among international enforcement agencies.


Historically, the United States stock market has been one which investors trust. Americans now have almost twice as much invested in the stock market as in commercial banks. Our stock market enjoys the highest level of confidence and reputation worldwide. There is a general consensus regarding the efforts of the American regulators to uphold and promulgate the fairness and integrity of the stock markets. By means of civil and criminal prosecution, authorities make relentless efforts to punish and prevent illegal insider trading.
As former Chairman Levitt of the United States Securities and Exchange Commission ("SEC" or "Commission") remarked in an address to the legal and investment community:

“Our markets are a success precisely because they enjoy the world's highest level of confidence. Investors put their capital to work – and put their fortunes at risk – because they trust that the marketplace is honest. They know that our securities laws require free, fair, and open transactions”.

Despite all the efforts made to maintain a fair and honest stock market in the United States, insider trade remains an issue of concern among investors, intermediaries, the public sector, and governmental agencies. But insider trading is not a new to Americans. In 1909, the United States Supreme Court held that a director of a corporation who knew that the value of the stock of his company was about to skyrocket committed fraud when he bought company stock from an outsider without disclosing what he knew.
As stated previously, corporate officers and employees might be tempted to use their privileged position for personal benefit and for detriment of investors and the market in general; in any case, there will always be supporters. It is for ruler makers to clearly define the boundaries between legal an illegal insider trading.
Those in favor of insider trading argue that it provides an incentive to innovation, by promising huge rewards for developing a plan or product that will lead to a precipitous rise in the stock. This argument even though is valid, fails to recognize the risks associated with insiders engaging in trading for personal gain in detriment of shareholders.
Others have argued that American reliance on several antifraud provisions, and the absence of a statutory definition of insider trading, may lead to unfairly penalizing...

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