Inside trading violates law, also punishable

This is in connection with Den Somera’s column titled “Manipulative practices” (Business, 5/26/15). In that column, under the subhead “Arguments,” he cited the following: “Profits realized through insider trading should be allowable as a reward for entrepreneurship.” In support of this quote, he stated further that while insider trading causes losses to those who bet against “the insider trades,” it benefits the broader community of investors because insider trading “keeps prices more closely aligned with the underlying determinants of share value.”

We find the above statement misleading as it may create the idea that “insider trading” should be encouraged and rewarded, when in fact, it is a violation of Section 27.1 of the Securities Regulation Code (SRC). Such violation is punishable, upon conviction, with a fine or imprisonment of seven to 21 years, or both, in the discretion of the court, as provided under Section 73 of the SRC.

For the benefit of Somera’s readers, insider trading is best exemplified by a director of a company who, knowing that the company has suffered a serious financial setback and is about to go bankrupt, sells his shares in the company in the open market, without disclosing the company’s looming bankruptcy. If such information is not available to the public, the director commits insider trading.

To reward insider trading by allowing insiders to profit therefrom is to reward and encourage dishonest trading. Investors sell and buy stocks based on what they know about a company and its securities. Their knowledge however is derived from what is publicly available. It is thus grossly unfair for an insider having knowledge of inside information likely to affect the market price of shares to buy or sell shares when such information is not publicly available. The law imposes upon the insider the duty to disclose such information when trading and its nondisclosure would amount to fraud.

The mandate of the Securities and Exchange Commission (SEC) is to protect investors and ensure that the capital market does not deteriorate into a gambling den for unscrupulous opportunists out to exploit and entrap unwary investors for profit. Hence, the SEC will investigate, go after and prosecute to the full extent of the law those involved in insider trading.

We would highly appreciate it if Somera would write a follow-up to his May 26 column to set the record straight on the nature of insider trading and the consequences facing those who would engage in such activities.

—JOSE P. AQUINO, director,

Enforcement and Investor

Protection Department,

Securities and Exchange Commission