CHAPTER-1

INSIDER TRADING

What is insider trading?

Insider trading:

Insider trading is nothing but trading in securities listed in various stock markets
by individuals or financial institutions with potential access of non-public information about
companies related to corporate. By accessing the non-public information which is price sensitive
information for their own benefit to get advantage is illegal in most of the countries in the world
to protect the interest of investors.

Ex: A CFO of company sells his shares in open market because of accessing non-public
information i.e., accessing price sensitive is insider trading.

Now let us know what are securities and price sensitive information.

Who is an insider?

Insider is a person, who has access to price sensitive information. Let us know the types of
insiders:

Types of Insiders

Primary Insiders Secondary Insiders

Classic Constructive Tipee Accidental

Corporate insider insiders
insider

Primary insiders

1. Classic corporate insiders are

a) Directors
b) Officers
c) Share holders of substantial share holding(10%)
2. Constructive insider:
Constructive insiders are persons who are not employed by the organization but receive
confidential information from a corporation while providing services to the organization.
Ex: professional advisors, investment bankers, lawyers.
 Secondary insiders:
1) Accidental insiders:
Not liable for insider trading unless their behavior proves.
2) Tipee:
While talking about Tippee we also come across another word i.e. Tipper

TIPPEE TIPPER

Tipeee assumes a fiduciary duty to the share holders of a corporation not to trade in securities. If
the tippee knows or should have known that the tipper has breached fiduciary duty.

What is the meaning of securities?

Securities are the negotiable instruments representing financial value and securities like bonds,
dentures, shares etc.

What is price sensitive information?

'Price Sensitive Information' means any information, which relates directly or indirectly to a
company and which if published, is likely to materially affect the price of securities of company.
That is what insider trading, securities and price sensitive information.

Price sensitive information defined by SEBI:

 Periodical financial results of a company .Intended declaration of dividends (both interim

and final)
 Issue of securities or buy back of securities any major expansion plans or execution of
new projects.
 Amalgamation, mergers or takeovers and disposal of whole or substantial part of the
business.
 Any significant change in the policies, plans or operations of the Company.

Price sensitive information in US:

Information of such a nature that someone who has inside knowledge of it could be expected to
trade successfully in the securities in question and make a profit or avoid loses

1) http://en.wikipedia.org/wiki/Insider_trading ,19/12/2009 ,16.05pm.

2) http://www.cochinstockexchange.com/cse/Amendment.pdf,19/12/2009,16:55pm
How insider trading defined by India and USA regulators?

Insider trading is defined by two stock market regulators are as follows:

SEBI on insider trading:

According to Sec.2(e),2(e)(i), 2(e)(ii) of SEBI act 1992.

“Insider” means any person who,

(i) is or was connected with the company or is deemed to have been connected with the company
and who is reasonably expected to have access to unpublished price sensitive information in
respect of securities of a company, or
(ii) has received or has had access to such unpublished price sensitive information.”
According to the view of SEBI the person related to a company in present or in past got the
benefit by accessing unpublished price sensitive information in respect of trading in stock
markets.

SEC on insider trading:

SEC defines both legal and illegal insider trading. Let us know what is trading according to SEC.

Insider Trading

"Insider trading" is a term that most investors have heard and usually associate with illegal
conduct. But the term actually includes both legal and illegal conduct.

LEGAL INSIDER TRADING:

The legal version is when corporate insiders—officers, directors, and employees—buy and sell
stock in their own companies. And a corporate insider means not only companies officers and
directors and also the beneficial persons. When corporate insiders trade in their own securities,
they must report their trades to the SEC.

1) http://www.cochinstockexchange.com/cse/Amendment.pdf,19/12/2009,16:55pm

2)http://www.sec.gov/answers/insider.htm, visited on 19/12/2009,20:10pm

3)http://www.sec.gov/answers/form345.htm,visited on 19/12/2009,20:15pm
ILLEGAL INSIDER TRADING:

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary
duty or other relationship of trust and confidence, while in possession of material, nonpublic
information about the security. Insider trading violations may also include "tipping" such
information, securities trading by the person "tipped," and securities trading by those who
misappropriate such information.

Examples:

 Corporate officers, directors, and employees who traded the corporation's securities after
learning of significant, confidential corporate developments;
 Friends, business associates, family members, and other "tippees" of such officers,
directors, and employees, who traded the securities after receiving such information;
 Employees of law, banking, brokerage and printing firms who were given such
information to provide services to the corporation whose securities they traded;
 Government employees who learned of such information because of their employment by
the government; and
 Other persons who misappropriated, and took advantage of, confidential information
from their employers.

The above are some of examples by SEC taken from various cases.

Most of the countries banned insider trading to make investors feel secure to carry their trades.

Let us know prohibition of insider trading in two countries those are:

1) INDIA
2) USA

Before that let us know when insider trading mainly identified:

U.S. insider trading prohibitions are based on English and American common law prohibitions
against fraud. In 1909, well before the Securities Exchange Act was passed, the United States
Supreme Court ruled that a corporate director who bought that company’s stock when he knew it
was about to jump up in price committed fraud by buying while not disclosing his inside
information.

And USA is the first country which enacted regulations on insider trading. And also most of the
developed countries recognized insider trading few decades back.

1) http://www.sec.gov/answers/insider.htm, visited on 19/12/2009,20:10pm

2) http://www.sec.gov/answers/form345.htm,visited on 19/12/2009,20:15pm
 CHAPTER-2

PROHIBITION ON INSIDER TRADERING

Now let us know the prohibition on insider trading in INDIA and USA.

Prohibition on insider trading in INDIA by SEBI:

Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations,

1992, does not directly define the term "insider trading". But it defines the terms-

 "insider" or who is an "insider;

 who is a "connected person";
 What are "price sensitive information"

Obviously an insider, who has deep insight into the affairs of the corporate body and holding
knowledge about "price sensitive information" relating to the performance of the corporate body
that could have a decided impact on the movement of the price of its equity, is at a vantage
position with regards to a prospective trading in the shares of the company to the detriment of the
common investors. Taking this fact into account the Regulation prescribes several "do-s" and
"don'ts" with reference to these "insiders". The effect of the regulatory measure is to prevent the
insider trading in the shares of the company to earn an unjustified benefit for him and to the
disadvantage of the bonafide common shareholders.

According to the Regulations "insider" means any person who, is or was connected with the
company or is deemed to have been connected with the company, and who is reasonably
expected to have access, connection, to unpublished price sensitive information in respect of
securities of a company, or who has received or has had access to such unpublished price
sensitive information;

The above definition in turn introduces a new term "connected person". The Regulation defines
that a "connected person" means any person who-
1. (i) is a director, as defined in clause (13) of section 2 of the Companies Act, 1956
(1 of 1956) of a company, or is deemed to be a director of that company by virtue of sub-clause
(10) of section 307 of that Act or

2. (ii) occupies the position as an officer or an employee of the company or holds a position
involving a professional or business relationship between himself and the company whether
temporary or permanent and who may reasonably be expected to have an access to unpublished
price sensitive information in relation to that company;

.
 SEBI INSIDER DEFINATION:

CONNECTED PERSON DEEMED TO BE CONNECTED PERSON

1) Director 1) Companies under the same
management

2) officer 2)specified officers

3) professional related to company 3)Director/Employee of public

financial institution.
4) Official employee of an SRO

5) Banker to the company

6) Relatives of the above and also

relatives of connected persons

7) Entities where connected

persons/deemed to be connected
persons > 10% stake in company.

SEBI PROHIBITION ON INSIDER TRADING:

SEBI has imposed prohibition on insider trading according to sec.12A which says prohibition of
manipulative and deceptive devices, insider trading and substantial acquisition of securities
control.

Sec.12A says about persons who can be directly and indirectly involve to insider trading.

Sec.12A (d) says engage in insider trading.

Before prohibition on insider trading:

The law of insider trading is one way society allocates the property rights to information
produced by a firm. In the United States, early common law permitted insiders to trade in a
firm’s stock without disclosure of inside information. Over the last three decades, however, a
complex federal prohibition of insider trading emerged as a central feature of modern US
securities regulation. Other countries have gradually followed the US trend, although
enforcement levels continue to vary substantially from country to country. Prohibiting insider
trading is usually justified on fairness or equity grounds. Predictably, these arguments have had
little traction in the law and economics community. At the same time, however, that community
has not coalesced around a single view of the prohibition; instead, competing economic
arguments produced an extensive debate that is still active. Those law and economics scholars
who favor deregulation of insider trading typically argue that efficiency is the sole basis for
analyzing a legal regime, and that the prohibition lacks any rational economic basis. Those who
favor regulating insider trading typically respond either by rejecting the claim that efficiency is
the controlling criterion or by attempting to show that the prohibition is justifiable on efficiency
grounds. Most observers of the literature likely would conclude that neither side has carried the
field, but that the argument in favor of regulation probably is winning at the moment.

Now let us discuss the prohibition on insider trading in USA by SEC:

Because the vast bulk of law and economics scholarship on insider trading refers to United States
law, a brief overview of the current state of that law seems appropriate. Insider trading, generally
speaking, is trading in securities while in possession of material nonpublic information. Under
current United States law, three basic theories under which trading on inside information
becomes unlawful. Disclose or abstain rule and the misappropriation theory were created by the
courts under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 there under.
Pursuant to its rule-making authority under Exchange Act Section 14(e), the Securities and
Exchange Commission (SEC) adopted Rule 14e-3 to proscribe insider trading involving
information relating to tender offers. (Insider trading may also violate other statutes, such as the
mail and wire fraud laws, which are beyond the scope of this chapter.)
 CHAPTER-3

IMPOSING LIABILITY

Now let us know the liability for insider trading:

Liability for insider trading violations cannot be avoided by passing on the information in an "I
scratch your back, you scratch mine", as long as the person receiving the information knew or
should have known that the information was company property.

Penalty by SEBI:

Sec.11 describes the powers of SEBI board

a) Regulating the business in stock exchanges and any other securities markets:

Prohibiting fraudulent and unfair trade practices relating to securities markets by

sec.11(e)

SEBI prohibiting insider trading in securities according to 11(g).

Sec.11A gives Board to regulate or prohibit issue of offer document or advertisement

soliciting for issue of securities.

Sec.11B gives to powers to issue to directions

Sec.11C gives powers to investigate. In order to protect investors.

Sec.11D ceases and desist proceedings.

SEBI’s regulations apply to listed companies, SEBI-regulated entities such as asset management
companies, self regulatory organizations and stock exchanges. Current laws specify that if SEBI
finds a person or entity guilty of insider trading, it can impose a fine of Rs25 crore or three times
the gains made from the insider trading. It can also initiate criminal action against the person or
entity, resulting in imprisonment up to 10 years. The circular says that these penalties, including
imprisonment, will stay.

The above words reflect the amendment to the 1992 insider trading and amendment was passed
in 2008.
There regulator investigate and impose civil penalities:

In USA

Section 21A(e) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. 78u-
l(e)] authorizes the Securities and Exchange Commission ("Commission") to award a bounty
to a person who provides information leading to the recovery of a civil penalty from an
insider trader, from a person who "tipped" information to an insider trader, or from a person
who directly or indirectly controlled an insider trader. This pamphlet is designed to provide
interested persons with information on bounties and the Commission's rules for making a
bounty application. Section 21A(e) of the Exchange Act and the Commission's bounty rules
are set out at the end of this pamphlet.

How Much May be Paid as a Bounty?

Insider trading may result in enforcement action by the Commission or in criminal prosecution
by the Department of Justice. The Exchange Act permits the Commission to bring suit against
insider traders to seek injunctions, which are court orders that prohibit violations of the law
under threat of fines and imprisonment. The Commission may also seek other relief against
insider traders, including recovery of any illegal gains (or losses avoided) and payment of a civil
penalty. The amount of a civil penalty can be up to three times the profit gained (or loss avoided)
as a result of insider trading.

The Commission is permitted to make bounty awards from the civil penalties that are actually
recovered from violators. With minor exceptions, any person who provides information leading
to the imposition of a civil penalty may be paid a bounty. However the total amount of bounties
that may be paid from a civil penalty may not exceed ten percent of that penalty.

How Will the Commission Make Bounty Determinations?

All Commission determinations regarding bounties including whether to make a payment, to

whom a payment shall be made, and the amount of a payment (if any), are in the sole discretion
of the Commission. Any such determination is final and not subject to judicial review. Nothing
in the Commission's rules or in this pamphlet is intended to limit the Commission's discretion
with respect to bounties.

In making determinations regarding bounty applications the Commission will be guided by the
purposes of the bounty provisions. These purposes include the intent of the United States
Congress to encourage persons with information about possible insider trading to come forward.
The Commission will also consider other factors that it deems relevant. Examples of other
factors that may be relevant are: the importance of the information provided by an applicant;
whether the information was provided voluntarily; the existence of other applications in the
matter; and the amount of the penalty from which bounties may be paid.

Normally, the Commission will not make any determination on a bounty application until a
payment of a penalty is both ordered by a court and recovered. A person who files an application
meeting the requirements of the Commission's rules will be notified of the Commission's
determination on the application.

How and When Do You Apply for a Bounty?

An application must be clearly marked as an "Application for Award of a Bounty," and must
contain the information required by the Commission's rules. The application must give a detailed
statement of the information that the applicant has about the suspected insider trading.

Any person who desires to provide information to the Commission that may result in the
payment of a bounty may do so by any means desired. The Commission encourages persons
having information regarding insider trading to provide that information in writing, either at the
time they initially provide the information to the Commission or as soon as possible afterwards.
Providing information in writing reduces the possibility of error, helps assure that appropriate
action will be taken, and minimizes subsequent burdens and the possibility of factual disputes. In
any event, a written application for a bounty must be filed within 180 days after the day on
which the court orders payment of the civil penalty.
 CHAPTER-4

CORPORATE GOVERNANCE

Before getting to know malady in corporate. Let us know about Corporate Governance

1. Schedule regular meetings of the non-executive board members from which you and the
other executives are excluded. Non-executives are there to exercise “constructive
dissatisfaction” with the management team. They need to discuss collectively and frankly their
views about the performance of the executives, the strategic direction of the company and
worries about areas where they feel inadequately briefed.
2. Explain fully how discretion has been exercised in compiling the earnings and profit
Figures. These are not as cut and dried as many would imagine. Assets such as brands are
intangible and with financial practices such as leasing common, a lot of subtle judgments must
be made about what goes on or off the balance sheet. Don’t hide these, but use disclosure to win
trust.
3. Initiate a risk-appetite review among non-executives. At the root of most company failures
are ill-judged management decisions on risk. Non-executives need not be risk experts. But it is
paramount that they understand what the company’s appetite for risk is—and accept, or reject,
any radical shifts.
4. Check that non-executive directors are independent. Weed out members of the controlling
family or former employees who still have links to people in the company. Also raise awareness
of “soft” conflicts. Are there payments or privileges such as consultancy contracts, payments to
favourite charities or sponsorship of arts events that impair non-executives’ ability to rock the
boat?
5. Audit non-executives’ performance and that of the board. The attendance record of
nonexecutives needs to be discussed and an appraisal made of the range of specialist skills. The
board should discuss annually how well it has performed.
6. Broaden and deepen disclosure on corporate websites and in annual reports. Websites
should have a corporate governance section containing information such as procedures for
getting a motion into a proxy ballot. The level of detail should ideally include the attendance
record of non-executives at board meetings. If you have global aspirations, an English-language
version must be available.
7. Lead by example, reining in a company culture that excuses cheating. Don’t indulge in
sharp practice yourself—others will take this as a green light for them to follow suit. If the
company culture has been compromised, or if you are in an industry where loose practices on
booking revenues and expenditure are sometimes tolerated, take a few high-profile decisions that
signal change.
8. Find a place for the grey and cautious employee alongside the youthful and visionary
one.
Hiring thrusting MBAs will skew the culture towards an aggressive, individualist outlook.
Balance this with some wiser, if duller heads—people who have seen booms and busts before,
value probity and are not in so much of a hurry.
9. Make compensation committees independent. Corporate bosses should be prevented from
selling shares in their firms while they head them. Share options should be expensed in
established companies—cash-starved start-ups may need to be more flexible.
10. Don’t avoid risk. No doubt corporate governance would be a lot simpler if companies were
totally risk averse. But in the words of Helmut Maucher, honorary chairman of Nestlé, “You
have to accept risks. Those who avoid them are taking the biggest risk of all.”

The above things should be taken care of CEO.

 CHAPTER-5

EXAMPLES OF INSIDER TRADING AND DECSIONS BY REGULATORS AND

SIGNIFICANCE OF MALADY IN CORPORATES:

DECISION ON INSIDER TRADING BY SEBI:

The Case of insider trading (HLL-BBLIL Merger)

CASE DETAILS:

Case Code : FINC014

Case Length : 8 Pages

Period : 1995 - 1998

Pub. Date : 2002

Teaching Note: Available

Organization : HLL, BBLIL, SEBI, UTI

Industry : Diversified

Countries : India

The case study analyses the issues related to the insider trading charges against HLL with regard
to its merger with Brooke Bond Lipton India Ltd. The case focuses on the legal controversy
surrounding these charges. The controversy involved HLL's purchase of 8 lakh shares of BBLIL
two weeks prior to the public announcement of the merger of the two companies (HLL and
BBLIL). SEBI, suspecting insider trading, conducted enquiries, and after about 15 months, in
August 1997, SEBI issued a show cause notice to the Chairman, all Executive Directors, the
Company Secretary and the then Chairman of HLL. Later in March 1998 SEBI passed an order
charging HLL with insider trading.

SEBI directed HLL to pay UTI compensation, and also initiated criminal proceedings against the
five common directors of HLL and BBLIL. Later HLL filed an appeal with the appellate
authority, which ruled in its favor. Through a description of the legal causes surrounding the
SEBI's charges against HLL, this case, is designed to enable students to understand and
appreciate the role of the legal framework under organizations function. 

It also stimulates the students to understand the legal implications of decisions made by an
organization and provides an insight into how a typical legal case proceeds. At the end of the
case-discussion, students should have grasped the following issues: A general understanding of
the legal framework covering the securities market in India. An understanding of the role and
importance of a regulating agency in checking financial crimes such as insider trading. An
understanding of the responsibilities of organizations. And also SEBI announced criminal
prosecution of five HLL directors for insider trading and asked it to pay Rs. 3.04 crores to UTI as
compensation. 

And let us know a recent case, where SEBI issued to notice:

This notice include under which sections of SEBI Act has

“Reliance Industries has always abided by all rules and regulations of SEBI and hence, has
neither violated any provisions of insider trading nor has acted in any manner so as to attract
provisions under Section 11(i), 11 (B) and 11(4) of SEBI Act 1992." 

Under the above sections RIL (reliance industries limited) received notice from SEBI.

Now let us an example from USA:

Texas Gulf Sulphur Company, a Texas Corporation, and Charlesf. Fogarty, Petitioners, v.
the Honorable Willis W. Ritter, Chief Judge of the Unitedstates District Court for the
District of Utah,and George Gordon Reynolds, Respondents

United States Court of Appeals Tenth Circuit. - 371 F.2d 145

Jan. 3, 1967

This original action was filed pursuant to our Rule 28, seeking to prohibit respondent from
proceeding to try an action pending in the District of Utah, and to compel him to transfer the case
to the Southern District of New York under 28 U.S.C. Section 1404(a); and, to either dismiss the
action as to a named defendant, Charles F. Fogarty and to quash the service of summons as to
him or to transfer the case, as to him, to the above named district under either of sections 1406(a)
or 1404(a) of 28 U.S.C.

2) A brief summary of the uncontroverted facts of the pending action is necessary for a proper
consideration of questions presented here.

3) George Gordon Reynolds filed the action under the provisions of section 27 of the Securities
Exchange Act (15 U.S.C. 78aa) alleging violations of 15 U.S.C. 78i(a) and (e) and 78j and Rule
10b-5 of the Securities Exchange Act. He also alleges residence in Utah; that he is a former
stockholder of defendant company, Texas Gulf Sulphur Company; that defendant company is a
Texas Corporation qualified to do business in Utah, with its principal business office at Mohab,
Utah; that defendant Fogarty is a resident of Rye, New York, and a director and executive vice
president of defendant company; that he sold his stock in the company through a local Utah
brokerage house on April 16, 1964, after reading a press release dated April 12, 1964, which was
released to the news media by the defendants in New York and appeared in an issue of the Wall
Street Journal received by him in Salt Lake City; that statements contained in the press release
misrepresented relevant facts concerning mineral prospecting activities of the company near
Timmons, Ontario, Canada; and that such misrepresentations were violations of the S.E.C. Act.

4) Writs of mandamus and prohibition are drastic and extraordinary remedies and should be
issued sparingly by appellate courts. When used against a trial court, there must be a clear
showing of abuse of discretion by the trial court and the right to such relief must appear clear and
undisputable.1 It may fairly be stated that this court has 'been extremely reluctant to find an abuse
of discretion by the district court' and we are not convinced this is an appropriate case for the
granting of such extraordinary relief.

5)The transfer of pending civil cases from one district to another is governed by 28 U.S.C.
1404(a) which provides '(a) for the convenience of parties and witnesses, in the interest of
justice, a district court may transfer any civil action to any other district or division where it
might have been brought.' The burden of establishing that the suit should be transferred is upon
the movant and unless the evidence and the circumstances of the case are strongly in favor of the
transfer the plaintiff's choice of forum should not be disturbed. The transfer lies within the sound
judicial discretion of the trial judge and his determination should not be rejected unless the
appellate court can say there has been a clear abuse of discretion. The circumstances of each
particular case must be examined by the trial judge in the exercise of his discretionary power
under section 1404(a) to order a transfer. Among the factors he should consider is the plaintiff's
choice of forum; the accessibility of witnesses and other sources of proof, including the
availability of compulsory process to insure attendance of witnesses; the cost of making the
necessary proof; questions as to the enforceability of a judgment if one is obtained; relative
advantages and obstacles to a fair trial; difficulties that may arise from congested dockets; the
possibility of the existence of questions arising in the area of conflict of laws; the advantage of
having a local court determine questions of local law; and, all other considerations of a practical
nature that make a trial easy, expeditious and economical.

6) Petitioners point out that nearly 100 cases arising from the same factual background from
which Reynolds' case arose are now pending in the state and federal courts in New York City;
that more than half of that number are in the federal district court in the Southern District of New
York, some having been originally filed there and others having been transferred there from
other federal courts; all of these cases in that court have been assigned to a single judge for
discovery and trial; the principal office of Texas Gulf is in New York City and its officers reside
there; the files and records of the company are kept there; and Texas Gulf and the anticipated
witnesses in its behalf would suffer great inconvenience and unnecessary expense if the action is
tried in Utah.

7)On the other side of the scale the facts show that Reynolds, a man seventy years of age, is a
resident of Utah and selected that forum; Texas Gulf has substantial operations in Utah,
including a plant where the Canadian minerals taken from core drills were assayed; the expert
witnesses for Reynolds and other witnesses to be used by him to prove many of the
circumstances surrounding his sale of stock reside in Utah; the receipt in interstate commerce of
the press release and the publication of it relied upon by Reynolds were in Utah; New York City,
as a place of trial, would be inconvenient and expensive to Reynolds and his witnesses; and,
from the record it is apparent to us that this case is not a complicated case likely to result in a
prolonged trial involving new or novel legal theories or requiring any unusual or extensive
discovery procedures.

8) Some discussion is appropriate here concerning the sufficiency of the affidavit of William D.
Conwell filed in the trial court in support of the motion to transfer. In view of the heavy burden
imposed upon the movant, the factual content of a supporting affidavit is very important. In
Chicago, Rock Island & Pacific Ry. Co. v. Hugh Breeding, Inc., 10 Cir., 232 F.2d 584, this court
held such an affidavit insufficient because it contained only conclusions about the inconvenience
to witnesses and did not fully set out the testimony of the proposed witnesses so as to enable the
trial judge to pass on the materiality of such proposed testimony. A careful reading of the
affidavit filed in this case reveals the same defect with respect to the testimony of proposed
witnesses who, it is alleged, would have to be brought to Utah for the trial. The same is true as to
documents referred to in the affidavit. It also refers to the numerous pending actions in New
York to support the transfer and contains only the bare conclusion that such actions are similar to
this case. We believe before the trial judge should be required to give credence to the affidavit's
allegation of similarity of cases the facts alleged and relied upon and the legal theories espoused
in the so-called similar cases should be before him. The affidavit also makes much of the
importance of discovery, with all of the cases in one forum. Likewise, we are not impressed with
this portion of the affidavit. It does not reveal the nature or extent of the present discovery
procedure in New York or any benefit that might flow from it to Reynolds. As we view the
lawsuit there will be little discovery necessary on the part of the plaintiff, as well as the
defendants.

9) We are convinced the trial judge carefully weighed all the proper factors in ruling upon the
motion and did not abuse his judicial discretion in denying the transfer. The record shows he
gave consideration to the convenience of both the parties and the witnesses; the resulting
consequences if the plaintiff was deprived of his choice of forum and compelled to travel nearly
across the continent to pursue his litigation; and, properly balanced those considerations against
all of the other relevant factors favorable to the defendants' desire to have the litigation carried on
at their own doorstep. Even if we could say the Conwell affidavit is factually sufficient to justify
consideration by the trial court, we would not be persuaded that there has been an abuse of
discretion.

10) We pass now to the attack by Fogarty upon venue in the District of Utah and his attempt to
quash the service of summons.

11) The cause of action below is founded on acts of the defendants alleged to be violations of 15
U.S.C. 78j and venue of such civil suits must be determined in accordance with 15 U.S.C. 78aa.
Such an action may be brought in the district where any act or transaction which constitutes the
alleged violation occurred or in any district where the defendant is found or is an inhabitant or
transacts business. In addition, service may be had upon the defendant in any district where he is
an inhabitant or may be found.

12) Applying those legal conclusions to this case, venue as to both defendants will lie in the Utah
District if any of the acts or transactions complained of took place in that district. If venue lies in
Utah for that reason, valid process may be had on Fogarty personally 'in any other district of
which the defendant is an inhabitant or wherever the defendant may be found.'5Venue and
process are good as to the corporate defendant because, without dispute, it transacts business in
Utah.

13) At the present stage of the case in the trial court, we must look first to the allegations of the
complaint concerning venue of the action. The plaintiff alleges there 'Venue of this action lies
with this court because various acts, or transactions constituting the offense herein, including the
publication of news releases and acts incident to the sale of the stock referred to herein, occurred
within the State and District of Utah.' The plaintiff also alleges the release of a false and
fraudulent press release, upon which he relied after reading the same in the Wall Street Journal in
Salt Lake City, which newspaper had been transmitted to him through the United States mails. In
addition the plaintiff contends this press release came to Salt Lake City on the Dow-Jones broad
tape. The case has not reached the evidentiary and fact-finding stage and we do not here make
any final determination of the facts necessary to prove venue, but we believe the trial court, upon
the allegations of the complaint and the statements of counsel in open court, was justified in
overruling the motion attacking venue.

14 ) In conclusion, it should be recited that petitioners have moved to strike the affidavit attached
to respondents' answer and the appendix to respondents' brief filed herein. We have not found it
necessary to give consideration to either the affidavit or appendix, therefore, the motions to strike
are granted.
15) Issuance of either a Writ of Prohibition or Mandamus, as prayed for, is denied, and the action
is dismissed.

The above case says about how SEC Act 1934 has prominence.
Now let us know a new case where it says SEC Act 1934 should need much clarity:

 A federal district court in the Northern District of Texas dismissed the SEC’s insider trading
case against Dallas Mavericks owner Mark Cuban. While the celebrity of the defendant has
undoubtedly contributed to the widespread publicity of the dismissal, the real news is that the
SEC has, for the moment at least, lost a case on what might seem to have been slam-dunk facts:

 Company shares material nonpublic information with its largest shareholder, who agrees
to keep the information confidential.

 The shareholder, upon learning the information, says  “Well, now I’m screwed. I can’t
sell”.

 Shareholder nonetheless turns around and dumps all of his shares, sparing himself a
$750,000 loss when the material nonpublic information is later disclosed.

What’s missing here?  Mr. Cuban, abetted by a group of law professor amici, argued that Rule
10b-5 liability requires a fiduciary or fiduciary-like relationship with the provider of the
information, and that a mere agreement cannot provide a basis for liability.  The court rejected
this view, but it also rejected the SEC’s long-held view, reflected in its adoption of Regulation
FD and Rule 10b5-2, that third parties who accept material nonpublic information from a
company on a confidential basis are precluded from trading on the information.  The court held
that Mr. Cuban’s oral agreement to maintain confidentiality, without an agreement not to trade,
was not enough.
 
What does this decision mean for potential providers and recipients of material nonpublic
information?
 
For  providers—for example, companies interested in sharing information with potential
investors or acquirers—the case says that if you want the recipient not to trade, you had better be
specific.  The safest approach, of course, is to seek a written contractual standstill from
recipients.  But agreements of this sort are often difficult to get parties to agree to, especially
where, as in this case, the recipient would be asked to sign the agreement “blind”, without
knowing the nature of the information.  As a practical matter, providers may have to content
themselves with a “sole use” provision, along the lines of “recipient agrees to use the information
solely for the purpose of considering an investment”.  Had such a provision been in place, the
result in this case might well have been different.
 
For recipients of material nonpublic information, our advice is not to rely on this decision.  The
case was decided at the trial court level, is not binding on other courts, and the SEC has been
given the right to file an amended complaint.  Whether or not the SEC chooses to replead the
case or to appeal the decision, we are certain that it will not accept the case as the final word and
will continue to seek enforcement action on facts like these.  Thus, while the decision will
provide comfort to parties who have to defend themselves for what they have done, we would
not use it as a basis for deciding what you should do.  The prudent judgment continues to be that
if you have agreed to keep information confidential, you should not use it as a basis for trading.
 
Lastly, the case highlights the curious fact that, 75 years after the enactment of the Securities
Exchange Act and the creation of the SEC, and after decades of judicial exegesis of the Delphic
text of Section 10(b), we still don’t quite know when insider trading is illegal.
 
See S.E.C. v. Cuban, No. 3:08-CV-2050-D (N.D. Tex. July 17, 2009)

The above examples from INDIA and USA say about the decisions taken by regulators and how
people in corporate companies having a malady.
 CHAPTER-6

CONCLUSION

1) The regulations should be more stringent and need amend the regulations in order to
make more effective.
2) The latest example from USA states that, there is a need to amend the SEC Act 1934.
3) From Indian point of view, the maximum penalty should be capped to a certain amount.
4) The ethical values of the corporate should be on par
5) For that corporate governance should be maintained in an effective way.
BIBOLOGRAPHY

1) TAXMANN’S CORPORATE LAWS

WEB:
1) WWW.SEBI.GOV.IN
2) WWW.SEC.GOV
3) http://cases.justia.com/us-court-of-appeals
4) http://www.davispolk.com
5) http://www.icmrindia.org
6) http://www.livemint.com/Home.aspx
7) http://www.wikipedia.org/
 INDEX

1) INSIDER TRADING
2) PROHIBITION ON INSIDER TRADERING
3) IMPOSING LIABILITY
4) CORPORATE GOVERNANCE
5) EXAMPLES OF INSIDER TRADING AND DECSIONS BY REGULATORS AND
SIGNIFICANCE OF MALADY IN CORPORATES:
6) CONCLUSION