The Complete Guide to Spotting Accounting Fraud & Cover-Ups: Everything You Need to Know Explained Simply by Unknown

Author:Unknown
Language: eng
Format: epub
Tags: fraud, accountingl turnover, manipulation, assets, liabilities, recognize, suspect
Publisher: Atlantic Publishing
Published: 2012-12-19T00:00:00+00:00

Insider Trading

Insider trading occurs when an individual buys or sells shares of a company’s stock based on information not available to the public. For example, a person who knows a company will soon announce a merger that will raise the price of its stock might buy up a large number of shares several days before the announcement is made public. After the announcement, when the price of the company’s stock goes up, he or she sells those shares and reaps a large profit. The opposite occurs when a person, knowing some future event will cause the share price of a company’s stock to drop, quickly dumps shares on the market. One of the most egregious examples of insider trading is the Enron executives who sold large quantities of Enron shares in 2001, days before the public learned Enron had used fraudulent financial statements to hide millions of dollars in losses. Enron stock prices plummeted from a high of $90 to less than $15 a share.

The Securities Act of 1933 and Sections 10(b) and 16(a) of the Securities Exchange Act of 1934 made insider trading illegal and extended the definition of illegal trading to include buying or selling a company’s stock while in possession of secret information about the company; tipping off others to such information; buying and selling of stock by a person who has received such a tip; and securities trading by any person who has stolen secret information. The SEC made the detection and prosecution of insider trading violations a priority because insider trading weakens investor confidence in the integrity and fairness of the U.S. capital markets.

STRAIGHT FROM THE HEADLINES

ImClone Founder Warned Family to Sell Stock Before Price Fell

On December 29, 2001, the share price of ImClone, a biopharmaceutical company, dropped sharply when it announced an experimental drug made by the company had failed to get the expected approval from the Food and Drug Administration (FDA). In June 2002, the SEC filed insider trading charges against the company’s founder, Samuel D. Waksal, for telling friends and family to sell their ImClone stock and attempting to sell his own before the announcement was made. The SEC revealed six other ImClone executives and several members of Waksal’s family sold their stock before the announcement was made on December 28 and before the price of ImClone stock fell 16 percent. On June 10, 2003, Waksal was sentenced to seven years and three months in prison.

In 2004, Martha Stewart, founder of Martha Stewart Living Omnimedia, was sentenced to five months in jail for giving false information to investigators regarding her sale of ImClone shares. She received a tip from her broker, a former employee at ImClone, that Sam Waksal, the president of ImClone, was selling all of his shares in the company in anticipation of the announcement. She avoided a loss of over $45,000 by selling her shares on December 27, the day before the FDA announcement was made public.

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