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Insider Trading Description

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1) What is the best way to describe Insider Trading for complete understanding?

2) With regard to the two video clips,

http://www.youtube.com/watch?v=H9_yhkoy09M
http://www.youtube.com/watch?v=FWCYpUinsiw

1) What are the specific issues that the viewer should be taking away from the viewing?

2) How would each of these help someone to understand the following:

a) What insider trading is.
b) What the ethical issues are regarding insider trading.
c) What the economic issues are regarding insider trading.

3) What are some examples from society/news of insider trading ethical issue?

4) What are some examples from society/news of insider trading economic issues?

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) What is the best way to describe Insider Trading for complete understanding?

Insider trading in laymen's terms represents any person who buys or sells a security based upon access to material that is nonpublic information about the security that is bought or sold. It is illegal because of the fact that access to this special knowledge is unfair to other investors and provides the person engaging in insider trading with an unfair advantage.

2) With regard to the two video clips,

http://www.youtube.com/watch?v=H9_yhkoy09M
http://www.youtube.com/watch?v=FWCYpUinsiw

1) What ...

Solution Summary

This response describes the ethical and economic issues with insider trading.

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Insider trading

Generally defined, insider trading is the buying or selling of a company's securities, by corporate officials or others with a fiduciary duty, on the basis of nonpublic information that's supposed to remain confidential. As noted in McLean (see the attached material, page 266) such inside trading is illegal under U.S. securities law. Non-insiders aware of a fiduciary breach can also be held liable. A recent example in healthcare is the case of Senate Majority Leader Bill Frist. Mr Frist was under investigation by the U.S. Attorney's office for possibly having engaged in insider trading. According to the U.S. Attorney's office, Frist "...sold all his stock in his family's hospital corporation about two weeks before it issued a disappointing earnings report and the price fell nearly 15 percent."

Avoiding such problems with the insider trading laws may be more complex than you think. Consider the following short case for question 2 of 2:

Dr. Brown is a well known professor of Oncology. He is the principal investigator in a phase III study of a new drug being developed by Company X, a publicly listed pharmaceutical company. This new drug could have blockbuster potential when it is registered for sale. Dr. Brown has been invited to speak about new scientific trends at the next World Oncology Congress; a part of his presentation will cover the study on this new drug. With its promising results and excellent therapeutic and safety profile, Company X, which is sponsoring the study, has already approved Dr. Brown's presentation and is preparing a press release on the preliminary results of the phase III study to be delivered on the first day of the Congress. Well in advance of the Congress, the Scientific Committee and the responsible Professional Congress Organizer (PCO) have requested scientific abstracts of all proposed presentations. Is there anything which should concern Dr. Brown if he submits his abstract - as requested - before the Congress starts?

Answer: Yes, because Dr. Brown is considered to be an "external insider" under EC Directive 2003/6/EC of January 28, 2003. This Directive and a similar ruling by the Security Exchange Commission in the US ("Selective Disclosure and Insider Trading", release 33-7881), - collectively known as "Insider Trading Rules" - exist to ensure that price sensitive data, which could influence the stock price of a publicly listed company, is not released in a selective way, and to punish any subsequent insider trading of such stocks. Therefore, the transfer of sensitive data to the Scientific Committee and the PCO is a problem for all of them (including Dr. Brown) if it is done before the data is issued to the public. Dr. Brown is an independent physician and is not employed by Company X, but he is still considered to be an "external insider" under the "Insider Trading Rules outlined above because he is in possession of data which could influence the stock price of Company X.

Questions (the first is primarily based on the attached material)

1. What are some implications on the prohibition of trading on the basis of inside information? Is that prohibition, on balance, worth retaining? (use the attached material)

2. What should Dr Brown (and others in similar situations) do to avoid charges of insider trading?

Again, Please, do not exceed 100-150 words per answer.

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