Investigating insider trading
October 25, 2012

At the height of his career, Rajat Gupta, the former Goldman Sachs Group Inc. director and McKinsey & Co. managing director, was sentenced to two years in prison for passing insider information to his friend and business partner, Galleon Group LLC co-founder Raj Rajaratnam. Mr. Gupta leaked information about a US$5 billion investment in Goldman Sachs by Warren Buffett’s Berkshire Hathaway Inc.  on Sept. 23, 2008, and a tip on a quarterly loss.

A crime difficult to detect and prove, insider information is becoming a huge threat in both India and China, where millions invest in the stock markets for quick profits. A crime highly difficult to trace and track, insider trading is proving to be one of the authorities biggest handicaps. While neither India nor China have proper regulations in place for insider trading, both nations have been working on defining, detecting and defaming the person responsible.

According to experts,  these investigations have to establish three basic elements. First of all, one has to have evidence of action in the market, whether a buy or sell. This is the easier part. Then, one has to prove that the insider had a particular information that others did not have. And then the investigator has to establish one caused the other. The key frustration for investigators often comes in establishing the cause and the effect.

In the past, all cases of insider trading which were detected and proved guilty have fined the criminal with a fee proportionate to the profit ponced. Yet a mechanism to detect and bring the crime to book still isn’t in place. in India, the Securities and Exchange Board of India has stepped up its efforts in enforcement. Recently, Reliance Infrastructure and Reliance Natural Resources settled charges of breaching securities laws by paying Rs 25 crore each in 2011. Sebi also fined a former independent director of Ranbaxy Laboratories, V K Kaul, and his wife Rs 60 lakh in early 2012 for insider trading of shares in Orchid Chemicals and Pharmaceuticals based on unpublished price-sensitive information.

Similarly, in China too, China Securities Regulatory Commission (CSRC) announced it would start publishing information on the proceedings of restructuring plans as well as mergers and acquisitions (M&A) proposed by mainland-listed companies on a weekly basis in order to curb insider trading. Recently Hong Kong based  Well Advantage, a private company controlled by a Chinese billionaire Zhang Zhirong, agreed to pay US$14m to settle insider trading allegations with the US Securities and Exchange Commission. In July, the SEC sued Well Advantage, for buying shares of Canadian oil group Nexen days before it agreed to be acquired by China’s Cnooc. The settlement, which is twice the profits made on the trades, is subject to court approval.

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