Caught In the Act of Insider Trading

The recent USD5billion takeover attempt by News Corp (owned by Australia's media tycoon Rubert Murdoch) over US Financial News giant, Dow Jones, had taken the world by storm. The news had sent Dow Jones stock soaring by almost 60%! As the event unfolded, there was another storm brewing...the regulators. A Hong Kong couple were charged by US Securities Commission for insider trading, whereby both of them had apparently profited a whopping USD8million by allegedly buying into Dow Jones shares before the takeover news were announced. The Hong Kong couple were believed to be connected to David Li, Hong Kong's most powerful financier, who is also the chairman and chief executive of Bank of East Asia, Hong Kong's largest local bank, who also sits on Dow Jones' board of directors. Li has since denied the allegation. The couple's bank accounts have since been frozen pending investigation.

So what is insider trading? Let's take a closer look. First, we need to distinguish the legality of insider trading. Illegal insider trading is the buying or selling of a security by insiders who possess material that is still not public. The act puts insiders in breach of their fiduciary duty. A common misconception is that only directors and upper management can be convicted of insider trading. In fact, anybody who has material and non-public information can commit such an act. This means that nearly anybody, including brokers, family, friends and employees - can be considered an insider. eg., The CEO of a company sells a stock after discovering that the company will be losing a large contract next month that will have major impact on bottom line earnings. The above scenario could extend to CEO's family, friends, relatives and employees! If this is the case, does it mean insiders cannot buy or sell shares? That's not the case either. The Securities Commission would require insiders to disclose their buy or sell transactions within the stipulated time frame and as long as this requirement is adhered to, it is considered legal (provided there is no intention to trade unfairly, mislead or to undermine investors confidence and the integrity of financial markets)

However, persons caught in insider trading are never easily prosecuted as it is difficult to obtain evidence. That's not to say that it is impossible as there were cases insiders got convicted!

So the next time you are "gifted" with a piece of valuable tip from your close friend who happens to be the CEO of the company, evaluate your position carefully before jumping into it! There again, the regulators normally only go against significant transactions....to the amount of millions of trade! Small investors may not need to worry too much.