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ETHICAL ISSUES: EARNINGS MANAGEMENT 2
INTRODUCTION
Since the establishment of the stock market, insider trading has been an ubiquitous
activity. Viewpoints vary on whether insider trading is legal or illegal and whether it is ethical or
unethical. There are many competing viewpoints on the ethical implications of this behavior
(insider trading) and how severely it violates justice and the social contract of modern finance to
which market participants tacitly agree when they invest (Wenzel, n.d.). The Securities and
Exchange Commissioner (SEC) has been quelling insider trading in which numerous arrests,
convictions, and prison sentences have been handed down through the court system.
individuals with access to confidential or non-public information about the company. Taking
advantage of this privileged access is considered a breach of the individuals fiduciary duty
(LII, 2016). Insider trading can be legal or illegal dependent upon when the insider reveals the
trade.
Insider trading is legal when executives, administration, and/or other personnel purchase
or sell their own company stock. Once insiders trade their own securities, it must be reported to
the U.S. Securities and Exchange Commissioner (SEC). Also, insider trading is legal if the
information has already been made public. On the other hand, insider trading is illegal when the
could influence the companys publicly-traded stock price. Illegal insider trading happens
behind closed doors, in whispers, and phone calls which makes it one of the hardest crimes to
After a 12-year-long investigation, Raj Rajaratnam, founder of Galleon Group and one of
Wall Streets savviest investors, was arrested in 2009 of insider trading. In 2011, Raj was found
guilty of fourteen counts of securities fraud and conspiracy to commit securities fraud. He was
sentenced to 11 years in prison and fined $10 million (Wenzel, n.d.). The Galleon Group hedge
fund managed more than $7 billion in assets. Raj was using insider trading to illegal trade stocks
such as eBay Inc., Goldman Sachs Group Inc., and Google Inc., which amounted to $63.8
million in illicit profit from 2003 to 2009. There were forty-seven conspirators, in overlapping
networks of insider trading, who were also charged with insider trading (Packer, 2011). Raj was
charged with partaking in one of the biggest insider trading cases in U.S. history (Karnik, 2015).
Since the arrest of Raj, Preet Bhara, U.S. Attorney for the Southern District of New York,
surveyed the extensive rot of illegal activity on Wall Street and concluded, The bigger and
better question may not be whether insider trading is rampant but whether corporate corruption
in general is rampant; whether ethical bankruptcy is on the rise; whether corrupt business models
are becoming more common. The Galleon case helps to answer these broader questions about
the culture of the financial world: it illustrates how, over the past decade, cheating and self-
dealing became the principal ways to succeed on Wall Street (Packer, 2011).
There is much debate on whether illegal insider trading is ethical or unethical. The illegal
form of insider trading is believed to be unethical because it is a form of securities fraud, and
fraud is viewed as a type of larceny or theft (Henning, 2011). Insider trading, however, is not
merely a complication in the free market mechanism. Insider trading, whether it is legal or
illegal, affects negatively the ideal of laissez-faire of any market: competition, just as insider
ETHICAL ISSUES: EARNINGS MANAGEMENT 4
rules affect the fairness of the trader even if that activity is not illegal and even if one could, in
theory, obtain inside information oneself. This is because the same information, or equal
Illegal insider trading is unethical because the company whose information was taken are
victims of fraud because it is their own information that is stolen and used for personal gain by
someone else (Henning, 2011). Insider trading is discriminating against investors who are not
person who then takes advantage of that information to achieve personal gains.
Illegal insider trading has negative effects. Some of the negative effects are (1) dislocates
the market, (2) shareholders suffer, (3) erodes market confidence, (4) raising of capital is made
more difficult, and the (5) company is harmed by the misuse of information which belongs to it
(Canberra, 1991).
Insider trading is unfair in the same way as a fixed horse race is unfair (Canberra, 1991)
CONCLUSION
There will be continued debates concerning the legality and ethical repercussions from
insider trading for years to come. Insider trading is unethical as it violates the use of company
information in order to obtain a personal gain for an individual(s). A prime example of insider
trading and the consequences is Raj Rajaratnam. According to the theory of John Rawls, traders
should avoid engaging in insider trading in order to protect their own interests as well as the
interests of others (Wenzel, n.d.). Insider trading not only affects a companys capital and
The ethical principle is easy to understand because the principle tenet of our
References
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