Insider trading and tipping in United States v. Bhagat

¶ … Trading on the stock market is supposed to be fair and the risks involved applied equally to everyone involved. However, when a person is in possession of material, nonpublic information that allows them to profit by trading in stocks, this is considered to be "insider trading" and illegal. In addition, if a person possesses material, nonpublic information and passes that information on to another individual who then profits by making stock trades based on the information, then this is considered "tipping" and is also illegal. In the case of United States v. Bhagat, while the government failed to prove that Mr. Bhagat made his purchases on Nvidia stock based on the material, nonpublic information he received about Nvidia's contract with Microsoft, the fact that he made his purchases approximately twenty minutes after the information was sent in an email made it likely that he was involved in insider trading. (United States v. Bhagat, 2006) As for the charge of tipping, again the fact that Mr. Bhagat's friend Mamat Gill purchased a large quantity of Nvidia stock within a half hour of Mr. Bhagat's purchase also makes it likely that Mr. Bhagat "tipped" his friend. However, Mr. Bhagat claimed that he did not receive the email until after he had made his purchase and informed his friend. In his defense there would have been nothing illegal or inappropriate had this been the case and Mr. Bhagat was fully within his rights to purchase stock as long as he had not received the email. Unfortunately, for Mr. Bhagat's defense to be true, both men would have had to happen to purchase the stock just after the company announced to its employees that it had obtained the contract but before they announced it to the public. Any reasonable person would have to conclude that this was too much of a coincidence. Finally, it is also reasonable that with so much information and the ease of communication, it is likely that only a small percentage of insider trading is uncovered by the government.

Briefing Paper 2

Insider trading involves the trading of stock based on material information not available to the general public. In the case of the Securities and Exchange Commission v. Texas Gulf Sulfur Company, and the purchase of TGS stock by Coates in particular, Coates attempted to purchase the stock twenty minutes after the company's announcement hoping to avoid a violation of the law. Coates knew that he had material information that, when released to the public at 10:00 A.M. On the day in question, would increase the price of TGS stock. (Securities and Exchange Commission v. Texas Gulf Sulfur Company, 1968) In an attempt to remain within the law, Coates waited until twenty minutes after the announcement to contact his broker with the intention that it was enough time for the general public to digest the information and be able to make an informed decision as to whether or not to purchase TGS stock. In his defense, Coates followed the law and did not contact his broker before the announcement but waited until after the announcement before making his purchase. Unfortunately for Mr. Coates, while waiting twenty minutes would, technically, make his trades occur after the public announcement, it was adjudicated to be before the information could be reasonable disseminated to the general public. Therefore even waiting twenty minutes to make it appear as if there was no insider trading was not enough to avoid being in violation of the Securities Exchange Act of 1934.

Briefing Paper 4

The "misappropriation theory" can be defined as the act of appropriating information from an employer so that an individual can then use that information to trade stocks based on that information. In the past the information had to involve the company from which the information came from and would affect, however, the United States v O'Hagan case expanded the boundary to any company that the stolen information could affect. When James O'Hagan purchased stock in a company that his client was interested in buying, he claimed that he had not acted illegally or unethically because he was not purchasing stock in the company owned by his client. At the time it was not entirely clear that purchasing stock in a secondary company that his client was interested in purchasing was wrong. In fact, it was not until this case that the legal precedent was established. Therefore, is had been established that Mr. O'Hagan acted inappropriately, not only by using secret information to personally gain, but in possibly adversely affecting his client's proposed purchase of Pillsbury. It was unethical for O'Hagan to profit at the expense and possible detrimental affect of his client and he also acted illegally when he misappropriated confidential information and personally profited from it. He illegally purchased stock in Pillsbury based on information misappropriated from his client and even though it was not his client's company that he purchased stock from, his purchasing stock from a company that would be affected by the information was found to in violation of the misappropriation clause. (United States v O'Hagan, 1997)