Question

Many years ago, a student in a consolidated financial statements class came to me and said that Grand Central (a multi-store grocery and variety chain in Salt Lake City and surrounding towns and cities) was going to be acquired and that I should try to buy the stock and make lots of money. I asked him how he knew and he told me that he worked part-time for Grand Central and heard that Fred Meyer was going to acquire it. I did not know whether the student worked in the accounting department at Grand Central or was a custodian at one of the stores. I thanked him for the information but did not buy the stock. Within a few weeks, the announcement was made that Fred Meyer was acquiring Grand Central and the stock price shot up, almost doubling. It was clear that I had missed an opportunity to make a lot of money . . . I don’t know to this day whether or not that would have been insider trading. However, I have never gone home at night and asked my wife if the SEC called. From “Don’t go to jail and other good advice for accountants,” by Ron Mano, Accounting Today, October 25, 1999.

Question: Do you think this individual would have been guilty of insider trading if he had purchased the stock in Grand Central based on this advice? Why or why not? Are there ever instances where you think it would be wise to miss out on an opportunity to reap benefits simply because the behavior necessitated would have been in a gray ethical area, though not strictly illegal? Defend your position.

Answer 1

Insider trading is illegal trading on public company stock on the basis of information which is material and not made publicly.

Material Information is an information which had a major impact on companies share price.

Publicly means where a company or assigned official of the company makes public disclosure of such material information and if the trade made on information which is not public is construed as insider trading.

In given case, Grand Central is going to be acquired by red Meyer is material information and had a significant amount of impact on its share price. If he makes trades based on such information then he Is guilty of making a trade based on information which is not made public.