Implications from recent insider trading enforcement efforts

With the start of a new calendar year comes the opportunity for trying out new ideas and resolutions. Not all of them may be advisable, however. One recently published debate in the context of securities fraud seems particularly ill advised: The author invited two Wall Street experts to respond to the question of whether insider trading should be legal.

If nothing else, the question is at least timely, considering the recent enforcement efforts by government prosecutors, including attorneys from the U.S. Securities and Exchange Commission and the U.S. Department of Justice. By the author’s tally, government officials have brought securities fraud charges against 80 individuals to date, and with a high success rate: 78 ended in a conviction or guilty plea. 

Regardless of whether a negative effect on market efficiency resulting from insider trading can be proven, the act itself suggests that stockbrokers are not upholding their duty to keep all of their clients informed about market conditions relevant to particular securities. Passing along such material information is part of a stockbroker’s fiduciary duty to his or her clients. If breached, any investor losses might give rise to a securities fraud lawsuit.

In addition, a financial professional that is willing to bend the rules regarding insider trading may lose the trust of his or her clients. For example, it may be a slippery slope between a stockbroker that participates in market or stock price manipulation and one who fails to provide accurate market research data to investors. At a minimum, a stockbroker that participates insider trading may be perceived to have a conflict of interest between his or her own personal gain and a client’s best interests.

Source: Frontline, “Should Insider Trading Be Legal?” Jason M. Breslow, Jan. 7, 2014

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