Insider Trading Analysis. Misappropriation Tipping Cases

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The sale of the Inspire Company to Massive has caused a lot of breaching, and several employees used the information given to them to their advantage, leading to insider trading incidences. Carl Covetous works at Inspire in the office of public relations, where he learns about the sale that is planned between the two companies. He buys 120,000 shares at $12 to sell at $20 and profit after the sale. Priscilla Prehensile is an employee at Inspire Company and also a member of the merging team who came up with the percentage increase for the price of the shares; she learns about the sale as she is involved in the merger process, and they set the price of the stock purchase at $20. Priscilla decides to inform her college roommate Gail Grabby about the sale, although she may lose her job. The college roommate who was informed about the sale of shares also tells her brother-in-law and buys 50,000 shares at $12.

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David Devour is Gail’s brother-in-law who, upon getting the insider information, calls his broker, informs him, and asks him to buy 5,000 shares. Charles Counsel is a lawyer representing Massive Company during the sales, making him fully aware of the shares being sold. He decides to buy 200,000 shares for himself with the intention of selling when prices increase. Stephanie Snoopy is a passenger in the same bus as Priscilla, and she overhears Priscilla’s phone call concerning the sale. She does her own research and buys 500 shares. Immediately an announcement concerning the sale of Inspire Company to Massive Company is made, there is an increase in the price of Inspire shares to $20, and all the above individuals sell their shares, making a profit of $8 per share.

Misappropriating Theory

The theory implies that an individual who is not an insider of the organization uses the inside information revealed to them by the company employees or managers concerning the trading securities and uses the details to their advantage. The disclosure is often unintentional, but the individual uses the data to benefit themselves (Fox & Tepe, 2018). They can decide to buy the item and sell it at more than what they bought at or look for buyers such as their friends or relatives who can make the purchase (Fox & Tepe, 2018). They could decide to buy the shares and sell them at a higher price or do something else to their benefit. This type of insider trading is also termed security fraud in courts and is used to sentence those who are guilty of illegally benefiting from access to classified business data.

Tipper or Tippee Theory

Tipper refers to an employee or other insider who reveals the firm’s private details to those who are not members of the firm, while tippee is an individual who takes advantage of the information revealed to them and makes a purchase with the intention of benefitting. Tippers can give the information to a friend or relative, who in turn tells another person, and the cycle continues (Fox & Tepe, 2018). For example, an employee who learns about the sale of particular goods in a company and they decide to tell their family members about the sale so that they can buy shares at a lower price is called a tipper (Fox & Tepe, 2018). Family members and friends who learn about the sale being made at the company and decide to purchase the shares at a lower price are known as tippees.

Classical Theory

The employee does the trading as they are aware of the company’s personal information. They breach the company’s laws and their duty to the employer for exposing confidential information or using it for their benefit. The individual buys or sells securities, stock, or options due to possession of material that is not made public legally by the company. Such a person engages in violations involving insider trading.

Carl Covetous

He can be classified under the classical theory since he had the information concerning the sale of the company as an insider, and he took advantage and bought shares and after the merging of the two companies and increase in stocks, he sold the shares and made a profit; thus, he used the information to his advantage.

Priscilla Prehensile

Priscilla can be described under classical theory because she was a member of the merging team and even came up with the percentage increase for the price of the shares and also is an employee at Inspire Company. She is also a tipper because she went ahead and informed her college roommate known Gail Grabby and gives her the details concerning the merge and also the increase in shares. Once she is through, she concludes by telling her that she did not get the details from her, which implies that the information is not being given to the open. Through Grabby, David knows about the sale and also buys shares. Priscilla also unintentionally gives Stephanie details about the merge, and she does her research and learns that the information was true.

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Charles Counsel

He is the attorney representing Massive Company in the merge, and he, therefore, has full details about everything that is taking place, falling under classical theory. He decides to buy some shares and retain them until the merging comes to an end. The sales between the two companies are made official through a press briefing, and he eventually sells the shares after the announcement is made.

Gail Grabby

She is a tippee for receiving confidential information from an insider and also becomes a tippee when she informs her brother-in-law.

Stephanie Snoopy

She falls under the misappropriation theory because she overhears the confidential information during Priscilla’s phone call to her roommate.

Conclusion

Insider stock violation is clear during the merging transactions. The employees took advantage of the details that they had and bought shares since they knew that after that, the price would increase. Immediately the sale was made official, every person who bought shares sold them, and they made a profit of 8%. This was a result of insiders giving information to the outside people or insiders taking advantage of the information given to them. The above case also shows how news spreads fast, mainly when there is a win-win situation. For instance, Stephanie took advantage of what she overheard and made the purchase which was to her advantage. Moreover, it is clear that people look out for their families and friends when Priscilla gave Grabby the information and Grabby told David, who is her brother-in-law. There are also individuals who just benefit themselves from the information they get, although they will not tell anyone else. Such people are, for example, Charles Counsel and Carl Covetous.

Reference

Fox, M. B., & Tepe, G. N. (2018). Personal benefit has no place in misappropriation tipping cases. SMU Law Review, 71, 767. Web.

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BusinessEssay. (2022) 'Insider Trading Analysis. Misappropriation Tipping Cases'. 22 June.

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