Ethics
Ethics can be applied in any profession. Basically, ethics denote set of laws or moral systems that provide a basis for discerning whether an action is correct or erroneous. Therefore, members of a profession can come up with ethical principles that guide them when carrying out their duties.
The five common ethical principles are “independence, integrity, responsibilities and practices, competence and technical standards, responsibilities to clients, responsibilities to colleagues, and other responsibilities and practices” (Anthony 10). This paper reviews the applicability of ethical and legal principles in the case of insider trading involving Stephen Cohen.
Case
The founder of SAC Capital Advisor, Stephen Cohen and the portfolio manager, Mathew Martoma were involved in what is considered as the most profitable insider trading in the history of the United States of America.
Initially, “the court had charged Mr. Martoma with conspiracy to commit securities fraud and two counts of securities fraud” (The Wall Street Journal 2).
He obtained secret data for trading the company from a university. “The two bought shares for their funds in two drug companies involved in the clinical trial, and then bet on the companies’ shares to fall when Mr. Martoma learned of negative news in 2008” (The Wall Street Journal 1).
“Mr. Martoma, a portfolio manager at SAC’s CR Intrinsic Investors division, received secret data over an 18-month period from the professor about a trial for a drug being developed by Elan and Wyeth” (The Wall Street Journal 1).
The results of the trail of the drop were negative and the price of shares of the two companies flopped drastically. The two companies suffered serious losses. It is also reported that the profits generated by Mr. Martoma were paid to Mr. Cohen.
“The Hedge fund gathered $276 million in profits and losses avoided based on the information obtained by Mr. Martoma “(The Wall Street Journal 1). From the case, it is evident that the two parties used information that was not known by the entire public to obtain undue benefits.
In their actions, there is an outright breach of the professional ethical code of conduct such as integrity, confidentiality, professional due care, and professional behavior. The act of the two individuals is regarded as white collar crime.
Ethical and Legal Implication
The case displays a scenario of classical insider trading where the insider passes on the material information to another party who in turn trades with it. This type of insider trading is less common and often very difficult to identify. A legal trade is not necessarily ethical.
The transactions carried out by the two managers were legal but not ethical. This is as a result of the fact that the actions above were not conventional to “the principle tenet of trading at the security market, that is, no trader should have unjust gain when trading in the stock market” (Anthony 11).
This implies that when a trader has material information that is not known to the rest of the public and he carries out trade with it as was in the case, then the gains from the trade are unfair prima facie. However, there is no blanket court rule that declares trading with material insider information as illegal.
The court handles cases arising from unfair trade in isolation. In some cases, businesses advocate for insider trading since it promotes competition but with outlined policies to give directions. Therefore, it emerges that trading with material nonpublic information is unethical but may not be essentially against the law (Anthony 1).
Works Cited
Anthony, Phillip 2010, Insider Trading in Financial Markets: Legality, Ethics, Efficiency. Web.
The Wall Street Journal 2012. Trading Charges Reach SAC. Web.