This topic came to my mind as I sat @ work reading what is a mandatory online course in most organizations (called by different course names in different places) - insider trading & guidelines on how to prevent oneself from indulging in insider trading says one firm; what is inside information & insider trading says another. Some firms include the policy on preventing insider trading along with the larger topic called business ethics & conduct and guidelines. Albeit the name of this course may vary from one firm to the other, the overall objective remains almost the same - to impart awareness to employees about the perils of indulging in insider trading, if one is exposed to some sort of inside information as a consequence of being the custodian of such information, having known the information thru' a friend or acquaintance who may be associated with the firm in question.
This topic has also been @ the back of my mind ever since Rajat Gupta (former global MD, McKinsey & Co) was charged with insider trading. It in fact appears that, Gupta had been sharing inside information with his "trusted" good friend Raj Rajarathinam. While human desires are infinite & thereby have no end, having policies such as preventing insider trading, without giving enough muscle, teeth, and mechanism to the enforcement agencies makes it look a lot like a bit of a joke.
Take Gupta's case itself. The nailing evidence that the SEC & other agencies have been able to provide is the record of conversation between him & Raj. The point here is, Gupta was a fool not to have realized that the G was watching him & keeping a tab on who he called & for what reason(s) he called. It is an open secret that Governments across the world sneek and track high flying corporate czars, politicians, activists, & other public figures. Given that, and also the fact that Gupta was apparently considered to be the benchmark for success hungry corporate wannabes, the question that keeps lingering in my mind is - how could he not have suspected that someone may be tracking him? In corporate reality, one is most often alone, in the sense that one has to endeavor by oneself (mostly) to succeed and also that should something go wrong, one will have to fight on one's own to come clean & set the record straight. In such a scenario, that too when he knew what he was up to, how could he have used so easily trackable a device like a telephone? Before writing further, I'd like to stress that neither am I supporting Gupta or his means to strike it rich quick nor am I a big supporter of insider trading. Although I am not a big fan of free market economics, I also am aware that, to the extent that markets should be free, access to confidential information by individuals should be used very juduciously and with utmost responsibility and care. For, even a small amount of greed to make quick bucks by capitalising on the confidential information one is privy to, could lead to the financial breakdown of a few individuals or families. Let's face it. In life, if someone is profiting, then it is definitely at the cost of someone else's loss. Take the stock market for example, where inside information comes in handy the most. While using the inside information to one's advantage may bring in some quick bucks, the fact is that somebody else has lost that money because he wouldn't have had access to the information, otherwise using which he too would have made similar decisions.
The point here is not about barring people from having access to inside information, for, the very nature of corporate world is such that those in positions of making decisions will invariably have access to inside information of some form or the other. While some of these information may be about big corporate deals, others may be about one's salary details (which too are supposed to be confidential in nature). So, inside information of confidentiality of the information has to be handled extremely carefully.
While Gupta made a few millions of dollars by indulging in insider trading, one question that comes to my mind is - should he have personally passed on information to Raj verbally, say over a drink @ Raj's, what kind of evidence would the prosecution have presented to prove its case? For, Gupta and Raj could always have argued that they are holier than others. We cannot stop or prevent decision makers from having access or being privy to inside information; but, how do they handle them, how do they manage such information is the question. This should be looked at from the angle of providing legal framework and platform for prosecuting those indulging in insider trading. Not just that, in the absence of nailing evidences such as - mails, recorded telephonic conversations, etc., what options do prosecuting agencies have if inside information is passed on verbally, in which case there will obviously not be any proof or trace of such information having been passed on? This is my concern.
I have utmost respect for the intention with which most corporates mandate all their employees to religiously go thru' such e-learning courses. But, the fact remains that the laws require more strengthening so that investigating and law enforcement agencies have more teeth to bring out evidences for prosecution; in the same manner, corporates also have to secure the means by which one controls the authority, responsibility, & accountability of individual owners or stakeholders of inside information by making it foolproof. Only such 2 prong approach in which corporates and Government come together to put in place such foolproof systems to ensure a far more fairer operation of the markets will have greater impact on the people participating in markets. Such a system will also increase the faith of individual investors in the Government about their safety that inside information will not be misused and in such an eventuality, the law is stringent enough to prosecute the misadventurers. Technology and partnership between Government and corporates can herald a new beginning for the way in which market operations are insured against insider trading.
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