Insider Trading Is More Common Than You Think

Posted by Stephanie Mau

on July 2, 2014

I’d Like to Buy a Thousand Lottery Tickets Please

illustration cartoon judge and lawyerThree in one trillion.

According to a groundbreaking new study, those are the odds of an investor randomly purchasing a stock that perfectly coincides with a corporate merger or acquisition that has not been announced to the general public yet.

To put this in perspective, you are over a thousand times more likely to win the lottery than you are to luck into such a fortuitous transaction. However in reality, these types of transactions are occurring so often these days – you’d think lottery jackpots might start raining from the skies.

Insider Trading Is Alarmingly Pervasive

First, let’s define insider trading. Insider trading, also known as informed trading, refers to the activity of trading stocks using knowledge that is not available to the general public. An investor who has engaged in insider trading can be prosecuted for such activity.

It’s always been known that this seedy practice is more common than we’d like it to be, but it wasn’t until this recent study out of New York University and McGill that we discovered just how common it was.

This study, which the New York Times referred to as “perhaps the most detailed and exhaustive of its kind,” looked into 1,859 stock deals stretching from January 1996 to December 2012. Using the context of major mergers and acquisitions, the professors compared the transactions that seemed suspect to other, seemingly random stock activity.

Their study concluded that in a shocking 25% of the cases they examined, there was evidence of insider trading.

Punishment for Insider Trading Is Much Less Pervasive

The professors also found that little action was actually being taken to prosecute this type of insider trading. To be exact, the Securities and Exchange Commission (SEC) only prosecuted about 4.7% of the transactions that they examined from 1996 to 2012.

This information comes on the heels of an announcement by the SEC’s new enforcement director that the SEC is doubling down on prosecuting insider-trading cases.

Granted, it has been two years since the last case that the NYU and McGill professors analyzed. But according to the study, the SEC’s approach towards litigation is going to need an awful lot of improvement.

The study claims that on average, it takes the SEC more than two years to begin prosecution of a “rogue trade.” Considering just how common these types of illicit trades are, and the fact that the average one costs about $1.6 million, one has to wonder just how many cases – and how much money – the SEC is letting slip through the cracks.

What with the alarming prevalence of such “informed trades” and the scarcity of the responsible investors getting caught, we must look to corporate whistleblowers to report when such shady deals are going on in the workplace. Having a strong ethics reporting system with an easily accessible whistleblower hotline can be integral for preventing rampant fraud in your workplace.

WhistleBlower Security prides itself as Canada’s independent certified ethics reporting provider for businesses, and is committed to promoting a culture of integrity, collaboration and transparency for all our employees and clients. This includes working with our clients to establish a strong Code of Ethics. With a 24/7/365 whistleblower hotline, employees can be assured that all of their ethical concerns will be heard and addressed.

eBook: 10 Best Practices to Build a Strong Compliance Program

Source: 

http://www.thefiscaltimes.com/Articles/2014/06/20/New-Evidence-Shows-Insider-Trading-Pervasive-and-Rarely-Punished

http://dealbook.nytimes.com/2014/06/16/study-asserts-startling-numbers-of-insider-trading-rogues/