Insider trading appears to be a rampant problem on Wall Street. Individuals at some of the US’ largest financial institutions continue to benefit from non-public information, according to a study by the University of Cambridge and Stanford. The report highlights a number of insiders at major US banks who increased their profits thanks to advanced knowledge of government programmes during the financial crisis – and the practice is still rife today.
For legislators and enforcement agencies, insider trading is a grey area. In the US, prosecutors are required to pursue cases despite there being no law defining insider trading. Moreover, courts in the US remain at odds over whether the use of private information should be considered illegal.
“The constant evolution and rapid development of digital technology provides those who would use inside information malevolently with new opportunities to do so,” says Claire Cross, partner at Corker Binning. “For those involved in the fight against insider trading, the key is to stay abreast of these changes. Enforcement agencies are doing this already by routinely seizing digital devices using maximum surprise. Compulsory notices to produce devices on the spot are being used at airports when suspects travel and at work places when suspects come in to work. Searches of home addresses may then follow. Digital technology can provide companies with a multitude of means of securing and protecting sensitive, non-public information. Companies should ensure that they are up to date and constantly assessing how they can use technology to keep their information safe.”
More must also be done to help staff members identify wrongdoing. Employees must be given the tools and training they need to make a difference. “In order to assist your employees, first, take time to understand the information flows in your company, which will help identify the most high risk areas for potential information leaks and allow you to tailor your policies and procedures accordingly,” suggests Ms Cross. “Secondly, provide proper training and education, from the top to the bottom of your organisation. Try to offer face-to-face learning where possible and use real life examples so that individuals can understand, in the context of their individual roles, what ‘inside information’ is, how they may come across it and what they should and should not do. This should be repeated on a yearly basis. People’s memories are short. Thirdly, put in place clear, simple and strict rules governing trading. For example, if any member of your organisation wants to deal in your securities, enforce a rule that they must always ask for pre-clearance to do so. If there is any ambiguity, there is a risk that the rules will be exploited.”
“Despite protestations to the contrary, regulators and law enforcement agencies do not accept that insider dealing is a victimless crime,” says Ms Cross. “These bodies state that insider dealing clearly damages both companies and investors, creating an uneven playing field that allows small groups of people to profit at the expense of others, which, in turn, undermines the public’s confidence in the operation of clean and fair markets.”
Read the full article in Financier Worldwide here.