SCAM 3

Insider Trading

Rajat Gupta, alumni of IIT Delhi and Harvard Business School was in the news lately because of the allegations of “Insider trading”. All he did was, pass the information to his friend Raj Rajaratnam that Warren Buffett would be investing $ 5 billion in Goldman Sachs even before this information was made public and this tip made Rajaratnam $17 million richer.

Insider trading is trading (buying or selling) of securities (stocks) by the person who has access to the material or non-public information. The company’s top officials, executives, accountants, obviously have material and non-public information about company’s financial position, sales, revenue, etc. For example: A company’s accountant knows how much company has sold in the current financial year even before the results are made available to the public by the company. So if Sales results are not good then company’s stock would fall down. And if the accountant leaks information to his friend or any other investor then that person would sell the stock and will be saved from the losses he would have otherwise incurred. But common investor is unaware of this and thus loss out in the market.

Insider trading is difficult to prove as he may not trade from his own account and flow of information is difficult to trace. That’s why a wise public company should limit the number of “insiders” who have access to sensitive information.