A Look at What Constitutes Unfair Practice and How You Can Ensure You Always Play Fair in The Eyes of The Law

Keep out of insider trading
A look at what
constitutes unfair practice
and how you can ensure
you always play fair in
the eyes of the law.
Srividhya Sivakumar
Your investment banker friend calls
up and tells you to buy a particular
stock. He says he knows of a big deal
the company is going to make in a few
days. Are you thinking easy money?
Well, think again. It could also become
a case of insider trading.
Getting price-sensitive tips on a
company, its financials or a probable
M&A from colleagues, broker or in-
vestment banker friend, before it is out
in the public domain can become a
potential minefield. For that matter, in
your capacity as an employee of an
organisation, privy to its impending
order win or merger plan, you can
come in harm’s way even if you share friends about
these little ‘nuggets’ with your trader stocks the as-
friend or act on them. set manage-
With allegations of insider trading, ment
front-running and price rigging mak- company
ing the rounds once again in the mar- was planning the case of hedge fund
kets, here’s a look at what constitutes to buy, thus Galleon, which specialised in
insider trading and what puts it on the helping them front run the stocks and to keep their employees from acting on trading stocks of technology compa-
wrong side of the law. make profitable trades. SEBI stepped such information. While some disal- nies such as IBM and Google Inc. Raj-
in and meted out penalty to the parties low their employees from taking direct aratnam, the fund’s founder, was
INSIDERS’ JOB involved. equity exposures, others allow such an alleged to have used insider informa-
But first, who is an insider? An insider While SEBI has, over the years, exposure only after the go-ahead from tion, procured through his contacts in
would be a person who is, or was, con- tightened the noose around potential the company’s compliance office. the technology industry, to earn mil-
nected to the company and who is rea- violators, information leaks are not For that matter, mutual funds and lions of dollars in profits for his fund.
sonably expected to have access to getting plugged. Traders and investors prop desk dealers aren’t even allowed Ridiculous as it may sound, there
unpublished price-sensitive informa- who have tracked equities across mar- to take mobile phones inside the deal- was also the case of a company that
tion in respect to the securities of that ket cycles would probably know that ing room. But that leaks occur despite hacked into computers to get the
company. such leaks aren’t really new. such measures, observers say, high- much-priced ‘insider information’!
That said, the law doesn’t implicate Unfortunately, these abound in the light that people are and will only be as A Hong Kong firm Blue Bottle made
such insiders on possessing, buying markets most of the time, as can be good as they want to be. about $2.7 million by trading on in-
and selling their companies’ shares, as seen in the running up or falling of formation it had gathered by directly
long as they make adequate disclosure certain stocks before a significant GLOBAL SIMILES hacking into computers to view press
about the transaction to the regulator event — winning of a big order, acqui- The insider trading malaise plagues releases of companies before they
and the exchanges on which the shares sition, or even results. even the highly-regulated developed were published.
are listed. Both NSE and BSE carry markets. Take the case of Sam Waksal
such disclosures on their Web site. REGULATORY HAZARDS and Martha Stewart (2001), who acted MIND YOUR SOURCE
There are, however, ‘punishments’ More often than not, regulating such on insider information to cut losses on The case of insider trading is a much-
and ‘penalties’ if the insiders fail to illegal insider trades isn’t easy. It needs their ImClone Systems’ shares or the debated one. While some argue against
abide by the rules laid down for them. a full-fledged team of analysts poring case of a ring of bankers and fund man- it, as it puts a handful of investors at an
For instance, Adlabs founder Manmo- over trade patterns to even pin-point agers, including ex-employees of UBS, advantage, there also are those that
han Shetty was found guilty of insider the possibility of illegal insider trades Bear Stearns and Morgan Stanley, argue in its favour, saying insider trad-
trading in June this year by SEBI. He being done. which was busted in 2007 by the SEC ing makes the market more efficient.
was slapped a fine of Rs 1 crore on While SEBI on its part is trying hard for illegal trading ahead of mergers They go on to say that investors should
violation of the 24-hour embargo on to level the playing field for all in- and analysts’ stock-tips. be encouraged to dig out information
directors, officers or designated em- vestors, a large part of its efforts also There were instances of insider on companies in any way they can!
ployees of a company from undertak- depend on the quality of corporate trading in Enron too, with some of the But as long as SEBI doesn’t say so,
ing any transactions when important governance in companies. top officials in the know of the compa- you may be better off knowing the
corporate announcements are made. Note that brokers, investment bank- ny’s real state of affairs selling their credibility of your source. Don’t try to
Some time ago, there was also the ers and financial intermediaries — who shares much before the whole issue inadvertently ‘string your source’
case of a dealer with HDFC Mutual by virtue of their profession qualify as became public. along, as it can put you in serious trou-
Fund who passed on information to his insiders — have a stringent set of rules Among the more recent instances is ble.

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Keep out of insider trading

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