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Week 4 – Discussion 1

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Insider Trading

In one paragraph supported by your text and other research, describe a recent example of insider trading. Determine whether the case met the elements of insider trading established by the Supreme Court in U.S. vs. O’Hagen, described in the article, Fair to all people: The SEC and the regulation of insider trading (Links to an external site.)Links to an external site.. Respond to at least two of your classmates’ postings.

#1Libbee McFall

Jul 26, 2017Jul 26 at 8:04pm

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In 2004 Martha Stewart served five months in federal prison at Alderson in West Virginia.  The conviction was for the sale of all her shares in a biotech company, IMClone in 2001.  Reportedly ImClone’s stock fell 16% two days later.  The cause being that the FDA did not approve the pharmaceutical product Erbitux.  Martha avoided a loss of $45,673 by selling her shares. She was not the only person who benefited a major stockholder in the company also sold his share of stock for $5 million.  This man was Sam Waskal the CEO of the company.  His knowledge of the impending failure for the company was passed to a Merrill Lynch broker Peter Bacanovic who tipped off Martha Stewart.  The case against Stewart was not strong she did not have knowledge of the FDA decision.  She was not affiliated with ImClone.  To find her guilty they had to prove she acted on the tip that she knew breached her brokers duty. The prosecution directed the focus on lies she told to cover up her actions, proving at the least she knew what she was doing was wrong.  The result was a sentence for obstruction of justice and conspiracy.  The insider trading charges were dropped and securities fraud charges were dismissed  She settled with the SEC and paid a fine four times the amount of the loss. She had to step down as CEO from her own company for five years. 

It could have been worse for Stewart. The SEC and the regulation of insider trading would apply in this case. Insider trading applies to people who have confidential information even if they do not have any connection to the company. “The SEC’s job is to make sure that all investors are making decisions based on the same information. Most simply put, illegal insider trading is believed to destroy this level playing field”. (Mofat, 2017) This case met all the elements of insider trading established by the Supreme Court in U.S. vs. O’Hagen

Moffat, Mike (2017) ThoughtCo Martha Stewart’s Insider Trading Case retrieved from https://www.thoughtco.com/martha-stewarts-insider-trading-case-1146196

#2Crystal Fiedler

Jul 30, 2017Jul 30 at 12:51pm

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Overview of an interesting case I read about, involving a young 31-year-old Chinese postdoctoral associate, named Fei Yan (U.S. v. Yan, U.S. District Court, Southern District of New York, No. 17-mj-1073).  Mr. Yan was working at MIT’s Research Laboratory of Electronics and his wife was a corporate lawyer working on a company merger involving Stillwater Mining Co. and Sibanye Gold Ltd.. 

Federal prosecutors say, Mr. Yan knew secret details of the merger from his wife and “made more than $100,000 trading in options of Stillwater Mining Co…. ahead of its acquisition by South African miner Sibanye Gold Ltd.” (FOX Business). To make matters worse, the Securities and Exchange Commission alleged “Mr. Yan also made profits from illegal trades tied to the acquisition of Mattress Firm Holding Corp”, another client being represented by his wife’s law firm.

Prosecutors searched Mr. Yan’s computer and found online searches for, “how SEC detects unusual trade”, “insider trading with international account”, “Want to Commit Insider Trading? Here’s How Not to Do It.”, “insider trading cases” and “insider trading options”.

Fei Yan was arrested and accused of, “engaging in insider trading, based on information he received from his wife”.  Federal Prosecutors in Manhattan charged him with securities fraud and wire fraud. “Following a hearing in federal court in Boston, Yan was released on a $500,000 unsecured bond.” (CNBC). He has yet to go to trial, so the outcome is unknown at this time.

After reading the article US. vs. O’Hagen, it makes the above case more convoluted for me. Rule 14e-3 prohibits insiders of the bidder and the target from divulging confidential information about a tender offer.  Is Mr. Yan considered an insider of the bidder?  Not really in my mind and he doesn’t technically owe a duty to the Stillwater Mining Co.  On the other hand, Rule14e-3 prohibits any person who possesses material information relating to a tender offer by another person from trading in target company securities, if the bidder has commenced to taken substantial steps towards commencement of the bid. Considering this rule, I think Mr. Yan would be guilty of insider trading. I am interested to see how this case plays out and if the judge’s ruling is published.

In the article by FOX Business, I found it interesting they point out, “Tips gleaned from law firm assignments have been used as the basis of several insider trading cases in recent years.” Seems like this issues is becoming more prominent and additional Rules by the SEC may need to be implemented to clarify what constitutes insider trading and what the punishment would be.


Insider-Trading Charge For Lawyer’s Husband — WSJ. (2017, July 13). Retrieved July 30, 2017, fromhttp://www.foxbusiness.com/features/2017/07/13/insider-trading-charge-for-lawyers-husband-wsj.htmlLinks to an external site.

Raymond, N. (2017, July 12). UPDATE 2-MIT research scientist arrested for insider trading. Retrieved July 30, 2017, from https://www.cnbc.com/2017/07/12/reuters-america-update-2-mit-research-scientist-arrested-for-insider-trading.htmlLinks to an external site.

Society, S. H. (n.d.). Securities and Exchange Commission Historical Society. Retrieved July 30, 2017, fromhttp://www.sechistorical.org/museum/galleries/it/resilience_b.phpLinks to an external site.


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