Sunday, August 19, 2007
iPod Involved in Insider Trading Scandal
Executives at Inventec Appliances Corp. (IVAPF.PK), are accused of insider trading of their company's stock. Inventec is the Taiwan company that manufactured many of the iPods, but Apple Inc. (AAPL) decided to switch its orders to other Chinese factories, and the executives were accused of taking advantage of that information by selling the stock before disclosing it to the public.
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Here is the abstract of an article (http://ssrn.com/abstract=1019425) on insider trading on negative information (selling) as opposed to insider trading on positive information:
"Twenty-first century's corporate scandals have put the traditional debate on insider trading in a new perspective. A small number of corporate law scholars have started to distinguish between insider trading on positive information and insider trading on negative information (or non-whistleblower information and whistleblower information, respectively). They essentially argue that cases like Enron would not have happened if insider trading were allowed. Insiders would have started to trade on bad news and thereby disclose information that was concealed. The fact that managers were able to keep negative information secret was due to a prohibition on insider trading which allowed them to agree not to trade on that information. Anyone who did could be reported to the SEC, thereby deterring the distribution of negative information through market mechanisms. The distinction between positive and negative information was long recognized by the Supreme Court of the United States, most prominently in Dirks v. SEC. The article seeks to consolidate the recent reinterpretations of this important case according to economic analysis. It argues that the law distinguishes between positive and negative information and highlights the efficiencies of this distinction. It furthermore shows how the production of information can be separated from the distribution of information, in order to avoid potential distortions."
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