INSIDE INFORMATION MISUSE: WHAT IT IS, EXAMPLES - CULTURE VOCABULARY - 2025

The improper use of privileged information refers to the use of knowledge, data, relevant events or any information that places the person who possesses it in a certain situation in an advantageous position, causing conditions of inequality and advantage over which not.

Its most frequent use can be found in the stock market and the listing of companies on the stock market (inside trading). In this, the shareholders or brokers make use of information of public ignorance of the companies to increase their profits.

The misuse of inside information can be considered a crime. Source: pixabay.com

Today, the legal framework regarding the use of such publicly unknown information is a matter of discussion between legislators and economists. And it is that although it breaks with the principles of equity and justice in front of the stock market practice, it generates some economic benefit in the system and the market itself.

What does it consist of?

The use of privileged information is a practice that has been carried out since the beginning of the trading activity.

It was not until 1990 that some countries decided to start proposing regulations and sanctions to begin to regularize and standardize their activity; in this way, a fair and transparent game was guaranteed between the owners of shares and securities.

In general, the practice of the use of privileged information occurs by people close to the company where they own their shares or securities, whether they are employees, partners, family members or people with other connections.

By being closer to the dynamics of the company, they can access some type of information that goes beyond what the company is forced to publish by law.

Examples

In practice we can evidence the use of privileged information in different ways. For example, when there are significant changes within the structure of a company or a merger. The prior knowledge of said situation can generate a variation within the price of the company's shares.

This information, which is not required to be shared, may benefit those who are aware of it before the particular event occurs. In this way, the person who has the information can make decisions about their actions and generate an economic benefit for themselves or for a third party.

Here are some real examples that have occurred over time on the US stock market:

Dr. Itri and treatment for melanoma

In this case, the misuse of the information was presented due to the prior knowledge of the ineffectiveness of a product by the head of the research team, Dr. Loretta Itri.

Itri was aware that experimentation with a new product to treat melanoma would not meet the stated goals.

For this reason, it sold its shares just before the publication of the results of the investigative process and thus avoided a 70% collapse of the value of the company's shares.

The O'Charley's Purchase

O'Charley's is a restaurant chain based in Nashville, Tennessee. In a financial meeting held by the chain's executives with their auditing firm, they revealed to their advisor and firm partner, Donald Toth, that another group called Fidelity National Financial would present an offer to buy the restaurant chain.

Considering this information, Toth decided to buy shares in the company. Months later, the company's shares and stocks rose 42%.

The executive who revealed to his relatives the purchase of eBay

Christopher Saridakis was the CEO of GSI Commerce, an e-commerce company based in Philadelphia (United States). Due to his position, Saridakis handled information about a possible purchase of the company by the e-commerce giant, eBay.

Saridakis shared this information with family and friends and advised them to buy shares. Days after the purchase was announced, the people involved made a profit of more than $ 300,000 and Saridakis was sent to prison.

Simpson Thacher & Bartlett

Steven Metro belonged to the New York City-based law firm Simpson Thacher & Bartlett. In this he had access to confidential information about some companies that his firm represented and that were listed on the stock market.

Metro and Vladimir Eydelman, a broker who worked for the Oppenheimer company, used this information to buy shares for four years; this left them earnings of $ 5.6 million. They were later convicted.

The husbands of female Silicon Valley executives

Tyrone Hawk and Ching Hwa Chen, both husbands of female executives who worked for Silicon Valley companies, used the inside information by listening to private conversations from their wives on the phone.

The first was made with great profits when hearing of the purchase of Acme Paket by Oracle. For his part, the latter took advantage of the sale of Informatica Corp titles after hearing that the company would achieve the proposed goals for the first time in a long period.

American Superconductor and the golf club

Eric McPhail profited greatly from information provided by his golf partner, an executive at the American Superconductor energy company based in Ayer, Massachusetts.

This information was shared in each game by the executive and McPhail later shared it with other colleagues from the golf club.

One million dollars thanks to press releases

Michael Dupré worked for a firm related to the stock market. Due to the dynamics of his position, he could have access to company information before anyone else, and among that information, press releases stand out.

Dupré used his position to learn the information in the press releases and bought or sold shares according to the information he received. He was able to achieve profits of over a million dollars using information from all the clients he handled.

Wells Fargo worker leaks

Gregory Bolan, a Wells Fargo company employee, used his duties as a securities analyst to filter the information he collected from his reports where he presented recommendations to the bank's clients regarding the purchase or sale of shares.

Bolan would leak this information to a colleague before making it public to the bank's clients, in order to anticipate the rest and obtain greater benefits.

Herbalife's stock market crash

Jordan Peixoto worked at Hedge Pershing Square as an analyst. In a routine meeting, Peixoto learned that the fund manager would post some comments that would damage the image of the nutrition company.

This he warned his roommate Filip Szy and both bought shares of other companies associated with the same sector to take advantage of the fall in the stock market that Herbalife would suffer.

GentTek and the owner of an Italian restaurant

William Redmon worked as a consultant at GenTek technology company in Manhattan and used to go to an Italian restaurant run by Stefano Sinorastri. The two became good friends, and Redmon occasionally spoke to Sinorastri about information about his work.

Sinorastri was able to use the information provided by Redmon and over time was buying and selling shares, thanks to which he made great profits.

References

1. The Economist. "Privileged information" In El Economista. Retrieved on July 10, 2019 from El Economista: eleconomista.com
2. Giesze, Craig. "The Economic Analysis of Insider Information in the Capital and Securities Market: Inefficient Justice?" (1999) In Chilean Journal of Law. Retrieved on July 10, 2019 in the Chilean Law Review: dialnet.unirioja.es
3. Bhattacharya, Uptal. "The World Price of Insider Trading" (2005). At Duke Fuqua School of Business. Retrieved on July 10, 2019 at Duke Fuqua School of Business: fuqua.duke.edu
4. Tapia, Alberto. "The regulation of privileged information in the stock market" (2002) In El País. Retrieved on July 10, 2019 in El País: elpais.com
5. Fernandez, David. "Cheats on Wall Street" (2015) In El País. Retrieved on July 10, 2019 in El País: elpais.com
6. O'Sullivan, Sean. "Delaware multimillionaire gets prison" (2014) In Delaware Journey. Retrieved on July 10, 2019 on Delaware Journey: eu.delawareonline.com