Prohibited Stock Exchange Transactions and Insider Trade

If we look at the most dangerous and widely spread prohibited stock exchange transactions, we may identify seven main types of them:

• various types of fraudulent activities including insider trade
• deception
• misleading activities
• criminal operations connected with signing the contracts
• discounting operations made outside the stock exchange
• the operations that do not lead to the change of the owner (money laundering)
• different types of short term speculative transactions.

The insider trade activities are considered to be the most dangerous and hard to prove. The history of the governmental regulation of these activities starts in 1934 in the United States, where the Congress has worked out and accepted the laws concerning the unpublished insider information. In the 1980’s the number of such illegal operations grew enormously and this led to the creation of the so called misappropriation theory. This theory explained the necessity of increasing the fines and introducing criminal responsibility for insider transactions.

The above mentioned insider operations have several typical features that help to discover them and punish their participants: the importance of the information; limited access to the information; guilt and financial losses incurred.

There are many types of insiders according to their position in the company and access to the information that can influence the market participants’ decisions – primary, secondary, corporate, temporary and controlling insiders. The primary insiders usually are people who have a certain position in the company and have easy access to important information. The main shareholders are also included to this group. The mentioned persons are also called classic or corporate insiders and if we speak about different consultants, auditors, advocates and other people who provide services to the company, we may call them temporary insiders as they get temporary access to the company’s financial and other statements. The secondary insiders are people that have personal contacts with the primary insiders and may get the unpublished information from them (the family members for example) or people who steal the information using various fraudulent schemes. The consulting companies and investment funds are often considered to be controlling insiders that also have a certain amount of information that can be used in speculative stock exchange transactions.

The insider trade operations are usually discovered with the help of the informants and various statistical checking. The US has the most severe laws punishing the insiders. The court has the right to prohibit the guilty person from carrying out any stock exchange activities, to disgorge the profits made or losses avoided, to set a civil penalty (up to 1 million dollars for persons and 2,5 million for corporations) and moreover, to set the imprisonment for 5-10 years depending on the negative consequences of the operation.