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Wyatt A. Chartrand

Professor Layish

Financial Management (FIN 311-A0)

Wednesday, October 19, 2013

Insider Trading Ethics Paper

One of the more notable ethical lapses in modern business and finance today is insider

trading, and one of the more recent events concerning insider trading has been billionaire

entrepreneur Mark Cuban’s clearance of charges against him related to insider trading. The

Reuters article “Billionaire Mark Cuban Cleared of Insider Trading; Blasts U.S. Government” by

Janet J. Pruet explains how Mark Cuban was charged by the Securities and exchange

Commission (SEC) for trading on non-public data when he sold a number of shares in his search

engine company Mamma.com, thereby avoiding large losses (Pruet).

The article goes on to say that prosecutors alleged that Cuban had sold his shares after

learning that the company (Mamma.com) was planning a private placement that would have

diluted his holdings in the company, although Cuban argued that there were many other reasons

for selling his stake. Cuban’s lawyers claimed that news of the private placement had already

leaked into the marketplace (Pruet). While the SEC was reportedly unsatisfied with the Texas

Court’s decision, it stated “While the verdict in this particular case is not the one we sought, it

will not deter us from bringing and trying cases where we believe defendants have violated the

federal securities laws" (Pruet).

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Though this article helps to explain the challenges the SEC faces in successfully charging

individuals of insider trading, a greater question remains: why don’t more individuals engage in

insider trading? Aside from the obvious legal repercussions, I believe the answer is probably one

of fairness. Most individuals have a reasonably equitable sense of fairness, and this aspect of

ethics likely prevents more people from engaging in insider trading. However, there is evidence

to suggest that more people commit insider trading than is typically thought. According to an

article in Bloomberg Businessweek by Seth Stern, “There was an increase in insider trading

probes, which are a ‘widespread problem’ that has plagued the ‘fair and orderly operation’ of

securities markets, according to the [FBI] report” (Stern). This would indicate an increase in the

number of individuals and company’s engaging in insider trading, even if the number remains

low as a proportion of the number of U. S. firms in total.

But what is insider trading, and why is it illegal? Both questions are related, and the

website Investopedia helps to explain both of them. It generally defines insider trading as the

trading of shares that is partial towards certain information not available to the general public. It

goes on to explain the harms of insider trading, which include the violation of transparency,

something that is the foundation of capitalism. This is unfair as well as disruptive to the market.

For these reasons and others, insider trading is illegal in the United States (Heakal).

If insider trading were legal, markets would likely change by becoming biased towards

whoever had inside knowledge. These people would gain an unfair advantage over other people

and the public in general. Also, investors would likely be unenthusiastic about investing because

of the disruption legal insider trading would cause in the market, even further disrupting the

market.

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Works Cited

Pruet, Jana J. "Billionaire Mark Cuban Cleared of Insider Trading; Blasts U.S. Government."

Reuters. Thomson Reuters, 16 Oct. 2013. Web. 19 Oct. 2013.

<http://www.reuters.com/article/2013/10/16/us-usa-sec-cuban-verdict-

idUSBRE99F0ZM20131016>.

Heakal, Reem. "Defining Illegal Insider Trading." Investopedia. ValueClick, 27 July 2013. Web.

19 Oct. 2013. <http://www.investopedia.com/articles/03/100803.asp>.

Stern, Seth. "FBI Fraud Probes Increase as Insider Trading ‘Widespread’." Businessweek.

Bloomberg, 27 Feb. 2012. Web. 19 Oct. 2013.

<http://www.businessweek.com/news/2012-02-27/fbi-fraud-probes-increase-as-insider-

trading-widespread>.