Movie Case Study
The above scene comes from the movie Wall Street. It shows Bud Fox (Charlie Sheen) providing information to Gordon Gekko (Micheal Douglas) about Bluestar Airlines. This information isn’t publicly available. In this blog, Learning Perspectives will explore the meaning of insider information.
What is insider information?
Bud in the above scene mentions that Bluestar Airlines is about to have a major surge in their stock prices as soon as their legal issues are resolved. This information would serve Gordon as he can take financial advantage of this information. Bud feels physically uncomfortable after sharing this information because he knows what he has done. This is called sharing of insider information.
Insider information is the truth about the company that is listed on the stock exchange. This truth is generally only known to the insiders of the company such as shareholders and or some employees. An insider is prohibited from trading on such information. Events that would occur such as as product recall, a merger or acquisition, or setting up of a new business unit, etc. These favorable or unfavorable events would cause the stock prices of the company to either swing upwards or downwards.
Regulatory
The Securities Exchange Board of India or SEBI is the regulator of the capital markets in India. SEBI gives guidelines to companies and investors regarding insider trading. Securities Exchange Commission or the SEC is the regulator in the United States of America.
According to SEBI, an insider is any person who is a connected person and who has unpublished price-sensitive information. People who share this information could be imprisoned and have to pay a high penalty.
Types of Scenarios where inside information can be used:
Spread inside information amongst friends and family so that they can purchase or sell on the stock exchange.
Buy or sell shares on the stock exchange using the unpublished sensitive information for your advantage.
Using such information for personal gain even if shares aren’t purchased or sold directly.
Sharing inside information or acting on it can have an extensive impact. It can include criminal charges, civil charges, and payment of high penalties.
Real-Life Case
Rajat Kumar Gupta was convicted for sharing insider information. He was the managing director of McKinsey & Company. He was also a board member of Goldman Sachs. He acquired information as a board member that Berkshire will infuse 5 billion dollars in Goldman.
He leaked this information to the Galleon Group, a hedge fund company where more than $14 million in profit was made. Rajat Gupta had money invested in Galleon’s founder. He was sentenced to 2 years of jail and a fine of 5 million dollars.
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