Business Law - Corporations

Business Law - Corporations
Student:
Professor:
Course title:
Date:
Question 1
Did Switzer trade illegally in this matter?
Please discuss all of the issues contained within this essay. Discuss insider information, the ramifications, the reliance issues, etc.
According to Gu and Li (2012), insider information refers to the non-public confidential fact about the condition or plans of a publicly traded company, which might provide a financial advantage when it is used in selling or buying shares of the company’s stock. Mr. Platt, a director of the Phoenix Corporation, reveals confidential information regarding his plans to liquidate or sell the Corporation. Moreover, he goes ahead and even talks about a number of companies that are bidding to buy the Corporation. Apparently, Mr. Platt failed in his duty to maintain confidentiality about his knowledge of the company’s critical information by speaking too loud about it. Barry Switzer had overheard Mr. Platt’s statements on liquidating the company, and he clearly used that information in his decision to purchase the Phoenix Corporation shares even though the information had not been publicly disclosed. Therefore, Barry Switzer was using insider information in deciding to buy Phoenix shares with the hope of gaining financial advantage in the future. Mr. Switzer traded illegally concerning that matter, and this compromises the vital conditions of a capital market. Philip (2001), points out that an individual is liable of insider trading when acting on privileged knowledge in order to make a profit.
Philip states that a corporate insider is a person who has access to information that has not yet been released to the public, and that person is expected to uphold a fiduciary duty not only to the corporation, but to its shareholders as well. Moreover, the insider has the obligation to preserve in confidence the possession of the nonpublic material information (2001). Although there are various forms of legal insider trading, what Mr. Switzer was doing constitutes an illegal insider trading activity. This is because it affects other investors of Phoenix Corporation. Mr. Switzer’s decision was influenced by the possession of the company’s confidential information that had not yet been publicly disclosed. He relied upon this information in deciding to buy the company shares. His actions amount to insider trading which is illegal. What makes this kind of trade unlawful is that the knowledge Mr. Switzer possesses is not available to other investors of the corporation, and he relies on that knowledge to try to obtain an unfair advantage over the other investors.
Gu and Li report that the use of non-public information to make a trade violates transparency, since transparency is the basis of a capital market. In a transparent capital market, information is always disseminated in a way such that, every market participant receives it at a more or less the same time (2012). I...