Question
Background: Securities violations are the subject of review and enforcement of the Securities and Exchange Commission (SEC), a federal agency. Two types of violations found in SEC cases are: (1) spoofing, and (2) insider trading.
Spoofing is a deceptive trading practice to manipulate the market where traders place fake orders to trick others into trading at either inflated or depressed prices, resulting in losses to the deceived purchasers and profits to the spoofing trader. For further information on spoofing, go to: https://www.sec.gov/news/pressrelease/2015-236.html
Insider trading is buying or selling on the basis of personal knowledge the trader has or acquires by benefit of a relationship not available or known to the general trading public. For further information on insider trading go to: https://www.investor.gov/additional-resources/general-resources/glossary/insider-trading
PROMPT: For this forum discussion, research further, either spoofing or insider trading SEC violations. Find and share a case example no more than 5 years old in SEC cases (do NOT use the spoofing case already cited in the above press release) that illustrates the practice you have selected. In your initial Forum post cover the following in reporting the case:
Briefly explain spoofing or insider trading (whichever one you have chosen) and why it is illegal (e.g., effect on business, society);
What is the specific statute and/or regulation violated by this conduct?
Identify the SEC case you have selected and provide a link to the case;
Describe the violation illustrated by the case, e.g. Who are the parties? What did the violator(s) do that constituted spoofing or insider trading? Who was harmed by the violation?
What is the ethical framework you observe was followed by the violator(s) in committing the illegal conduct? (Explain.)
Explain how the case was resolved, e.g., What happened to the violator(s)? What were the penalties levied against the violator(s), if any?
Do you believe the result is a just resolution of the violation? Why or why not?
Share any other thoughts you have on this topic.
Locate SEC cases at: https://www.sec.gov/litigation/litreleases.shtml
Solution
Securities: Spoofing and Insider Trading
Over the past few years, the stock exchange market has widely been used by traders to conduct illegal activities such as insider trading. The Security and Exchange Commission (SEC) describes insider trading as the buying or selling of security based on material, non-public information about the stock (“Insider trading”, n.d.). The practice is illegal since it promotes unfair advantage in the stock market, whereby an insider utilizes non-public information to reap huge profits at the cost of those involved in the venture. Furthermore, insider trading violates the regulation of fiduciary duty, where parties in the security exchange market are required to act in the best interest of other sectoral participants. Despite being illegal and violating the existing SEC regulations, insider trading continues to be a significant problem in the securities market, with perpetrators using the ethical framework of an “even playing field” to conduct the practice, as exhibited in the case involving Comcast-DreamWorks acquisition.
The Comcast-DreamWorks acquisition case scenario illustrates the prevalence of insider trading in the security market. Notably, Michael Yin, a partner at a Hong-Kong private equity firm, amassed more than $56 million of DreamWorks stock in the U.S. through brokerage accounts of five Chinese nationals’ weeks before the acquisition of the firm. Following this action, the five accounts reaped $29 million from the DreamWorks trades (“SEC charges Chinese citizens”, 2017). The activity constituted insider trading since Yin participated in suspicious trading that involved the use of other accounts in trading to hide his involvement in the practice. Besides, Yin, and the other five nationals reaped significant profits at the cost of the DreamWorks, a blatant manifestation of insider trading.
Based on the case analysis, it is evident that the violator followed the ethical framework of “even playing field in investment” to commit the illegal conduct. Notably, the majority of the investment decisions in the security market are governed by a need for equal access to information to all traders. For instance, Yin followed this ethical framework to commit insider trading, whereby he traded using other people’s accounts, assuming that this would not constitute information asymmetrical. Arguably, Yin might have believed that the activity would only be illegal if the other five nationals possessed the confidential information that triggered the trade. Therefore, the perception that the five account holders were on an even playing field might have led Yin to commit insider trading.
As a violation of the SEC rules and regulations, the insider trading committed by Yin was resolved through a lawsuit. Notably, the SEC filed complaint charges against Yin with the U.S. District Court for the Southern District of New York, which granted the request to freeze the five brokerage accounts used during the insider trading (“SEC charges Chinese citizens”, 2017). The five account holders, Su, Yin, Qin, Zhou, and Xie, were also considered relief defendants and charged with securities fraud. Moreover, the SEC sought a permanent injunction against Yin, the return of the ill-earned profits, and civil money penalties (“SEC charges Chinese citizens”, 2017). Generally, the case was resolved through the imposition of penalties on the insider, and an injunction to prevent Yin, and the other five defendants from accessing their accounts.
Based on an analysis of the selected case and existing Insider trading Act, I believe that the resolution of the violation was just. The Insider Trading Sanction Act of 1984, and Insider Trading and Securities Exchange Act of 1988 provide imposition of penalties that surpass three times the profits gained from the trade on insider traders (“Insider Trading”, n.d.). While it is unclear on the amount of penalties imposed, the fact that the fine charged on the insider trader is an indication of a just resolution of the case.
References
“Insider trading” (n.d.). Legal Information Institute. https://www.law.cornell.edu/wex/insider_trading
“Insider trading” (n.d.). U.S. Securities and Exchange Commission. https://www.investor.gov/introduction-investing/investing-basics/glossary/insider-trading
“SEC charges Chinese citizens who reaped massive profits from insider trading on Comcast-DreamWorks acquisition” (2017, February 10). U.S. Securities and Exchange Commission. https://www.sec.gov/news/pressrelease/2017-44.html
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