Tag: insider trading

Study Question of the Week: August 27, 2014 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 6, 7, 24, 26, 55, 62, 79, and 82. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Study ? of the Week

Question (Relevant to the Series 6, Series 7, Series 24, Series 26, Series 55, Series 62, Series 79, and Series 82): 

What is the maximum civil penalty that can be imposed on a firm when an employee engages in insider trading?

Answers:

A. The greater of $1,000,000, or three times the amount of the profit gained or loss avoided as a result of the violation

B. The lesser of $1,000,000, or three times the amount of the profit gained or loss avoided as a result of the violation

C. Three times the amount of the profit gained or loss avoided as a result of the violation

D. $0

Correct Answer: A. The greater of $1,000,000, or three times the amount of the profit gained or loss avoided as a result of the violation

Rationale: The maximum civil penalty that can be imposed on a firm when an employee engages in insider trading is the greater of $1,000,000, or three times the amount of the profit gained or loss avoided as a result of the violation.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.

Options Trading Before Merger and Acquisition Announcements Indicate Pervasive Insider Trading

Professors at McGill University and New York University released a study investigating unusual trading activity that occurs before mergers and acquisitions announcements. Equity options in approximately 25% of target firms had abnormal trading volumes on a level that was statistically significant. Continue reading

Professors at McGill University and New York University released a study investigating unusual trading activity that occurs before mergers and acquisitions (M&A) announcements. The study looked at trading activity in equity options for the 30 day period prior to M&A announcements. Equity options in approximately 25% of target firms had abnormal trading volumes on a level that was statistically significant, showing that insider trading likely occurred. Abnormal trading was especially common in call options and out-of-the-money options.

The study’s results suggest that insider trading is pervasive. The study states that the odds of observing such unusual trading activity by chance is extremely low – “about three in a trillion.”

The study indicates that the SEC only investigates a fraction of the instances of insider trading occurring in the markets. The SEC tends to focus on cases with large target companies and cases with foreign acquiring companies. The SEC brings litigation much more frequently when the deals are actually seen through to completion – “a withdrawn or rumored deal is about 22 times less likely to be investigated.”

Sources:

Informed Options Trading prior to M&A Announcements: Insider Trading?

“Study Asserts Startling Numbers of Insider Trading Rogues”