::Mary:: Securities Regulation 101 ;)

Ragdolls

Here's the requested snooze fest.... 

So, I'm a mergers & acquisitions attorney - which means my clients buy and sell companies.  When a deal hits my desk it's still very much confidential - and it will stay that way until the agreement signs and becomes public knowledge.  While the transaction is still being negotiated there will be a price on the table for all of the stock of a company.  That price includes not just the value of the stock - but also an often very high premium for control.  A stock might be selling for $15 a share - but I might have a deal on my desk that says someone is almost definitely going to be buying all of that stock in the next several months for $25 a share.  Under the insider trading rules, I am not allowed to call up my broker and buy a million shares and make $10 million when my deal closes.  Because this would suck for Joe Shmoe down the street who sells his stock for $15 a share because he has no idea what's coming down the pipe.

My situation is just one example but there are countless others.  A company's CEO obviously knows when his stock is about to tank or skyrocket better than our friend Joe Schmoe.  And if insiders like us were allowed to trade on our inside knowledge of a company, the public trading market would crumble because no one not "in the know" would be able to compete in a way that could possibly bring them value.  Not to mention that stock values would begin to outpace the events making those values a reality - which would obviously undo a lot of transactions before they even happen.

So...not exactly 5 year old speak...but hopefully helpful?

Ragdolls

I should point out that the above is more or less the raison d'etre of the SEC.

xmaryrickx

Very interesting, and makes total sense. Now, how does this relate to what Martha did? Because I don't understand what landed her in camp cupcake.

KathrynMD

xmaryrickx:

Very interesting, and makes total sense. Now, how does this relate to what Martha did? Because I don't understand what landed her in camp cupcake.

Her guy was giving her advance notice about something that was going to happen - and she sold her stock ahead of the public knowledge, so she got an advantage.

I think there was some dispute about whether he did or didn't tell somethng specific, but regardless, she lied to investigators and was convicted on that.

Ragdolls

xmaryrickx:

Very interesting, and makes total sense. Now, how does this relate to what Martha did? Because I don't understand what landed her in camp cupcake.

Martha was good friends with Sam Waksal, who supposedly told her that ImClone's big cancer drug was rejected by the FDA before the news went public.  And then she dumped the stock.  Or so the story goes.

Regulation is difficult - and far from perfect - but you need rules or the whole market will just implode on itself.  Nobody in the general public will invest if the upper crust (and their lowly attorneys and bankers  are trading on inside information.  And we need the general public to invest.