The regulators are not only enacting new laws but they are also looking for way to better enforce existing ones.
The New York Times published an article at the end of May about possible new steps in the U.S. government fight against Wall Street uses of non public information to trade.
From an investor due diligence stand point, identifying insider trading is certainly an issue for several reasons. First, you need to have transparency into the fund’s portfolio at the position level, something that is usually possible only with several months lag. Once you get the portfolio from a trusted and independent source you need to analyze the positions the transactions in order to identify an unusual move or gain. In the case, you are able to spot a questionable investment you are not done because the investment manager may have had a good theory behind buying or selling the specific investment. At the end of the day, you spent a lot of time negotiating access to the portfolio, analyzing the data, questioning the investment manager on probable misconduct and finally you will usually end up with a very weak case to prove insider trading and the investment manager will be angry at you.
Investors need to make their best effort to identify misconduct as part of their due diligence but they also have to be conscious of their limits. If the regulators are able to give a hand in identifying insider trading practices it will certainly be welcomed by investors.
The Next Step in Catching Insider Trading?
The arrest of an assistant to a Walt Disney Company executive and her companion on insider trading charges reflects what seems to be a common perception about the ethics of these investors – even if most ply their trade legally…
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