Insider trading has long been a taboo activity for traders to engage in, as Martha Stewart found out to her own chagrin. Yet, there is no actual definition of the activity in federal statutes. Two recent cases brought about by the Securities and Exchange Commission show just how flexible the term "insider trading" is.
A majority of insider trading cases are filed as a violation of Rule 10b-5, the language of which prohibits a variety of activities that are designed to specifically defraud investors. Proving a case of insider trading requires demonstrating that the defendant knowingly violated his duty of trust and confidence by taking information not known to the public, then using it for his own gain.
In one such case, the S.E.C. sued Ladislav Schvacho on trades that generated over $500,000 in profits from Comsys IT Partners stock. The profit was made shortly before the company announced it would be acquired, which caused a 31 percent jump in its shares. Schvacho is accused of learning about the trade from Larry Enterline, who was chief executive at Comsys, and a close friend.
The second case involves Manouchehr Moshayedi, the chief executive and chairman of STEC, for selling shares. Moshayedi sold shares for over $133 million, and did not disclose negative information about the company's sales. What is unclear is how taking this action can be construed as insider trading.
Moshayedi sold his shares through a secondary offering, at a discount to the market price, when STEC released its quarterly earnings report in August 2009. The announcement included a statement of sales its top flash memory product to EMC. The S.E.C. is claiming that Moshayedi had STEC enter into a secret deal on the side to buy more merchandise than was needed, allowing STEC to claim increasing sales in order to prop up stock prices. Yet, there is nothing about using secret information for personal benefit.
The S.E.C. did not settle with either Schvacho or Moshayedi, which means the cases may go to litigation, allowing the courts to explore the definition of insider trading.
Source: New York Times, "The Evolving Contours of Insider Trading," Peter Henning, July 30, 2012
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