Insider Trading

INSIDER TRADING

INSIDER TRADING. Gaining an unfair advantage in buying or selling securities based on nonpublic information, or insider trading, has plagued Wall Street from its earliest days. Prior to the formation of the Securities and Exchange Commission (SEC) in 1934 in response to the stock market crash of 1929, insider trading occurred more frequently. Since the mid-1930s, the SEC has regulated trading and attempted to make it a trustworthy system. Spotting and prosecuting illegal insider trades has been a major priority.

Although insider trading is usually associated with illegal activity, it also happens when corporate officers, directors, and employees buy and sell stock within their own companies, for example, exercising stock options. Legal insider trading occurs every day and is permitted within the rules and regulations of the individual company and federal regulations governing this kind of trade, which the SEC requires be reported. Because legal insider trading is reported to the SEC, it is considered part of normal business activity. Illegal insider trading, however, is corrupt, since all parties involved do not have all the information necessary to make informed decisions. Most often, the average investor is duped in insider trading scandals.

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Illegal insider trading gained great notoriety in the 1980s, epitomized by the criminal charges brought against junk bond king Michael Milken and financial speculator Ivan Boesky. The hit motion picture Wall Street (1987) centered on insider trading and brought the catchphrase "greed is good" into the popular lexicon. Tom Wolfe's best-selling novel Bonfire of the Vanities (1987) employs a Milken-like figure as its main character.

Given that in the late twentieth century people placed a larger percentage of their money in the stock market and that they tied retirement funds to stock-based 401K programs, any hint of an unfair advantage undermines the spirit of fairness that the general public associates with democracy and capitalism. Breaches in insider trading laws and enforcement efforts routinely become headline news, which helps perpetuate the idea that the stock market is a dependable institution.

Insider trading is punishable by hefty fines and imprisonment, and is prosecuted as a civil offense. Milken pleaded guilty to six counts filed against him and paid fines of $600 million, the most ever levied against an individual. The SEC has broad authority to investigate violations of securities laws, including subpoena power and the ability to freeze profits from illegal activities. In the early years of the twenty-first century, insider trading returned to the forefront of the national conscience as a result of the downfall of Houston-based energy company Enron and many other corporations that used illegal accounting procedures to artificially bolster stock prices.

BIBLIOGRAPHY

Chernow, Ron. The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance. New York: Atlantic Monthly Press, 1990.

Gordon, John Steele. The Great Game: The Emergence of Wall Street As a World Power, 1653–2000. New York: Scribner, 1999.

Holbrook, Stewart H. The Age of Moguls: The Story of the Robber Barons and the Great Tycoons. New York: Doubleday, 1954.

Stewart, James B. Den of Thieves. New York: Simon and Schuster, 1991.

Bob Batchelor

See also Stock Market .