Back in 1825, the New York Stock and Exchange Board (the predecessor of the New York Stock Exchange) had had to request data on a listed company, only to be refused. The board had asked the directors of the New York Gas Light Co. for information “so the public might be informed through us of the existing state of things in relation to the company”. Since the company refused, investors had no choice but to depend on rumours or trading tips of stockbrokers to make their investment decisions.
Things have come a long way since, with listed companies providing immense financial and business information, through announcements of quarterly results and by meeting analysts and investors regularly. Still, because stock trading is essentially about pricing new information, there is a high premium for unpublished information, as is evidenced in the Galleon case.
In the criminal charges filed against Galleon Group, prosecutors allege that the firm traded such insider information with executives of other firms. The executives who passed on the information included executives in listed firms in which some of the trades were done. But the major source of the alleged profit from unfair trading was information from analysts at a rating agency and one at an investor relations firm, both of whom had unpublished information ahead of a corporate announcement.
Insider trading affects the integrity of stock trading, since the majority of investors who don’t have the same information are at a disadvantage. To tackle this, regulators (mainly in the US and UK) have spent significant resources in deterring insider trading and trying to ensure that there is no selective dissemination of information. But they have had little success, primarily because gathering strong evidence hasn’t been easy. Detecting the source of the leak is difficult, since it could be from within the firm or even outside.
Exchange trading data just before a major corporate announcement or earnings release normally throws up a number of insider trading leads, which are passed on to the enforcement division of regulators. But although the leads are many, successful prosecutions have been few and far between. In the Galleon case, the presence of recorded conversations should help prosecutors, but that was possible because of the cooperation of an ex-conspirator. Law enforcers may not always be that lucky. But if they manage conviction in this high-profile case, many insider tippers and the recipients would think twice before trading information.
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