June 11, 2007	Monday	Jamadi-ul-Awwal 25, 1428

A senior Pakistani banker has been accused of being involved in an insider trading worth millions of dollars. And a country which is known for religious extremism, ethnic and sectarian violence and dictatorships, has now found one of its nationals at the centre of an investigation of a big financial scandal spanning across the globe. Insider trading is known throughout the world that includes several Wall Street scandals.

This particular case of a Pakistani banker who is a former head of investment of an Arab financial institution in Pakistan who had links with a banker at Credit Suisse, also of Pakistani origin, charged with 26 counts of conspiracy and securities fraud including leaking details about important deals within the bank, and allegedly earning around $7.5 million for himself. His arrest in early May was a whistle blower which led to global investigation involving the FBI.. These investigations will take a while before the nature of involvement of Pakistani bankers in this financial scam will be known.. Nevertheless it is important for us to understand what insider trading is and why it is considered a crime.

Insider trading is a term not so well known in Pakistan due to the lack of transparency in our capital markets, however it is a worldwide phenomenon with governments taking active measures to control it. “Insider trading” is usually associated with illegal conduct. But the term actually includes both legal and illegal conduct. Insider trading is considered legal when corporate insiders, officers, directors, and employees buy and sell stock in their own companies, for which they must report the trades to the regulatory authorities, like Security and Exchange Commission. This way insider trading is not kept a secret and anyone can find out a corporate insider’s opinion of his or her company. Insider trading is only illegal when a person bases the trade of stocks in a public company on information that the public does not know. It is illegal to trade your own stock in a company based on this information, and it is also illegal to give someone that information, a tip, so they can trade their stock.

In the corporate world insider trading occurs when corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential corporate developments, or in some cases friends, family members, and other tippees of such officers, directors, and employees, who traded the securities after receiving such information which is not available to public. It is treated as a criminal offence due to fact that insider trading undermines investor confidence in the fairness and integrity of the securities markets.

Currently, the financial world is witnessing a substantial increase in insider trading activities due to merger mania throughout the world involving millions of dollars. This is creating opportunity to inside traders to pass information about important deals which in return can reap huge personal gains. Interestingly there is an opinion that insider trading of all sorts should be legal, however their arguments lack soundness and do not carry much weight.

Some of them insist that profits from insider trading are a form of compensation to the employees who work hard for the organisation so it should be legal. That is a weak argument as employees not very often use the information for themselves but they pass it on to big investors acting as their informers and as a result receive huge commissions. Others argue that the whole concept of insider trading comes in a grey area as there is no comprehensive definition of insider trading and any punishment given can be unjust. This is not true as well because of the fact that any punishment given in an insider trading fraud is done after a criminal intent is proven.

Another argument presented in defence of insider trading is that strict regulation on insider trading can affect the quality of work of security analyst prohibiting healthy dialogue between analyst and company officials. There is not much evidence which proves this point.

Lastly, arguments defending insider trading have been made on the basis of cost effectiveness. Critic say that money recovered from investigation does not justify the cost of investigation. This argument may be true to an extent but from a broader perspective a country where insiders trading works loosely can deter investors from investing in the capital markets. One of the main reasons that capital is available in large quantities in United States is that investors trust US market to be fair..

The important question which concerns Pakistan is that to what extent it is equipped to deal with such white collar financial crimes. The events of 9/11 have helped attract investors in our financial markets but if investor’s loose confidence in our markets, an outflow of capital to other safer destinations will be witnessed. From past record, it appears unlikely that the government is serious in tackling financial frauds. Laws on paper do exist, but seldom anyone is punished. There have been several scandals at the KSE, a more recent was the stock market crash of 2005 in which within a week small and medium investors lost more than Rs750 billion.. Sadly, the national assembly is still debating on the findings of the report of that crash and no concrete steps have been taken to prevent any future stock market disasters. Now, a new global financial scandal which involves the FBI and a Pakistan national gives an idea of the gravity of the matter. This offers an opportunity for the government to give a strong message to the markets that anyone found involved in any financial fraud will be taken to task.