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This article is written by Priya Singh, pursuing Diploma in General Corporate Practice: Transactions, Governance and Disputes from Lawsikho.


I’m sure you have heard of some famous insider trading cases in India, such as Rakesh Agrawal vs. The Securities and Exchange Board of India (SEBI), Indiabulls insider trading case, Hindustan Lever Limited vs. SEBI, and others. In this article, I will be discussing Ivan Boesky, who became infamous for his role in an insider trading scandal that occurred in the United States during the mid-1980s. The U.S. Securities and Exchange Commission (SEC) was established in 1934, entrusted with protecting investors and overseeing that securities markets operate fairly and transparently. The SEC declared on November 14, 1986, that it had filed criminal and civil securities charges against Ivan Boesky, an investment banker who generated hundreds of millions of dollars by betting on corporate takeovers.

What is insider trading?

The Securities and Exchange Board of India, Prohibition Of Insider Trading Regulations, 1992 defines an insider as any person who is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of 11[a] company, or has received or has had access to such unpublished price sensitive information. 

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The SEC does not provide a definition of insider trading as it contains a wide range of activities. However, insider trading can be described as the purchase and sale of securities by individuals who, as a result of their work, have access to Material Nonpublic Information (MPI) regarding security. It occurs as a consequence of a breakdown of the fiduciary relationship of confidence and trust. MPI could be any information that, if released, has the potential to affect the company’s stock price.

Some important elements of insider trading are discussed below.

What exactly is “material” information?

Information could be material if; a reasonable investor would consider it important in deciding whether to buy or sell the company’s shares, or it may have the potential to affect the market price of the company’s securities.

The information may include projections of future revenues, earnings or losses, or changes in such estimates; changes in auditors; pending or proposed mergers, acquisitions, tender offers, joint ventures; potential litigation; changes in management or the Board of Directors; changes in operations or development in products, services, customers, suppliers, orders, contracts; changes in dividend policy; bankruptcies, etc.

What is referred to as “nonpublic” information?

If material information has not been communicated in a way that makes it available to all investors, it is considered “nonpublic.” 

To demonstrate an information public, it is essential to carry out the filing of a report with the Securities and Exchange Commission, the distribution of a press release via a widely circulated news or wire service, or any other reasonable means of ensuring widespread public access.

Who may be termed as an insider?

Corporate directors; officials; family and friends of insiders, as well as other tip recipients who traded shares after obtaining the information; employees of service firms such as law, banking, brokerage, who came across material nonpublic information on companies and traded on it.

Applicable legislation

Corporate officers, directors, and other insider personnel are prohibited by the U.S. Securities and Exchange Act of 1934, Rule 10b-5 from exploiting privileged corporate information to make a profit (or avoid a loss) by trading in the Company’s shares. The “tipping” of secret corporate information to third parties is also prohibited under this rule.

Who is Ivan Boesky?

Ivan Boesky, a prime figure in one of the stock market’s greatest insider trading frauds attended the University of Michigan but did not graduate, went to the Detroit School of Law, and received a Law degree (1964). In 1966, he went to work as a securities analyst on Wall Street after working as a law clerk and accountant. In 1975, Boesky began his arbitrage firm, Ivan F. Boesky & Company, with the aid of his father-in-law, real-estate giant Ben Silberstein.

Boesky was a stock arbitrage specialist, a word that refers to the practice of buying a stock, commodity, or currency in one market and simultaneously selling it in another at a higher premium. The situation presents a chance for a trader to make a risk-free profit by simultaneously buying and selling identical assets in separate markets while taking advantage of market inefficiencies.

When a stock’s price does not indicate its true value, it is known as a market inefficiency. This may occur due to various reasons.

How did Boesky become the individual levied with the highest punishment for insider stock trading in 1988?

In the 1980s, President Ronald Reagan’s relaxing of financial regulations allowed a surge of corporate mergers and acquisitions, providing fertile ground for traders to earn massive profits. Those companies that were about to be acquired would have large blocks of their shares being bought by arbitrage traders like Boesky in the hopes of seeing the prices rise. Boesky would put millions of dollars into these companies’ stocks, and if they were bought, their stock values would usually rise, after which he would cash out and make a sizable profit.

By 1986, as an arbitrageur, Boesky had accumulated a fortune of over US$ 200 million by speculating on business takeovers.

As the commencement speaker at the School of Business Administration at the University of California, Berkeley, Boesky went on to say that, ”Greed is all right, by the way. I want you to know that. I think greed is healthy. You can be greedy and still feel good about yourself.”

He wrote a book named “Merger Mania – Arbitrage: Wall Street’s Best-Kept Money-Making Secret.”

But everything came crumbling down for Boesky when an investigation began against Dennis Levine. Levine pleaded guilty to amassing about  $11.5 million profits from illicit insider trading over a span of five years. He agreed to cooperate with officials and provided material implicating Boesky in the illicit activities.

Dennis Levine was a managing director and Michael Milken was a finance officer at Drexel Burnham Lambert, a New York investment bank where Boesky colluded with both to establish a working relationship.

According to the SEC, Boesky acquired information from Levine about potential mergers of big firms, purchased stock at low prices before the news became public, and profited when the stock’s price rose.

After an estimated $60 million loss on a failed venture for Cities Services (a precursor to Citgo), Boesky struck a deal with Lavine where he (Boesky) would give Lavine a cut of his profits in exchange for insider information about forthcoming mergers and takeovers.

Boesky turned out to be a gainer of material inside information contrary to his image of a brilliant predictor of a firm’s impending takeover. Lavine and Boesky were charged with insider trading for making investments based on non-public information.

Boesky consented to the final judgment of the court prohibiting him from violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 thereunder.

In a plea bargain, Boesky was ordered to pay a $100 million punishment and also consented for gathering evidence against his associate, junk bond king Michael Milken. He worked with the investigators, providing crucial information that helped implicate other prominent figures, by tape-recording parts of their conversations. Boesky received a lifelong suspension from securities trading as part of his guilty plea.

Changes brought about after the fraud

Even with the U.S. Securities and Exchange Act of 1934 in force, the enforcement of the said statute was lacking. Following the amendment of The Securities Exchange Act of 1934, the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA) also known as the Insider Trading Act of 1988, broadened the scope of the SEC’s enforcement of the insider trading laws.

It authorized the SEC to impose harsh monetary penalties, usually in multiples of the profit gained through insider transactions, and the guilty parties could face up to five years in prison, depending on the severity of their violation. The maximum sanctions levied were either 300 percent of the money made on the trades or $1 million, whichever was greater. 

What is rule Rule 10b-5?

Enacted under the U.S. Securities and Exchange Act of 1934, Rule 10b-5 is aimed at preventing securities fraud. It is one of the important sections of legislation in determining whether or not a security fraud exists. It forbids corporate officials, directors, legal heirs, and other insider personnel from using private corporate information to profit. It also forbids tipping confidential corporate information to third parties.

The rule declares it unlawful, to carry out fraud using any device, scheme, or artifice; failure to state a material fact or making an erroneous statement of a material fact that could lead to misrepresentation; involvement in any act, practice, or business which has potential to deceit any person.

With the promulgation of Rule 10b5-1 and Rule 10b5-2, the SEC has further defined and clarified a myriad of issues relating to potential securities fraud.

How does the SEC track down insider trading activities?

  • Informants: Insider trading may be revealed through tips and complaints from sources or informants like 1. Anonymous calls 2. Market Professionals 3. Disgruntled employees 4. Competitors 5.unhappy investors or traders.
  • Self-Regulatory Organizations [SROs] provide the SEC with hundreds of reports of suspicious trading each year. In some instances, these reports are made by telephone on a virtually real-time basis. Frequently, SROs provide detailed written reports of their investigations including backup materials. An example of such an organization is the Financial Industry Regulatory Authority (FINRA).
  • Other SEC units, such as the Division of Trading and Markets, may also provide insider trading information. 
  • Market surveillance activities: This is one of the most crucial methods for detecting insider trading. The SEC employs advanced computer technologies to detect illicit insider trading, particularly around critical events like earnings announcements and major company developments.
  • Media reports are also an important source of information about possible securities law infractions.

Challenges in detecting insider trading 

With a market value of $24.5 trillion, the New York Stock Exchange (NYSE) is one of the world’s largest stock exchanges. Every day, on the NYSE alone more than nine million corporate stocks and securities are traded. With such a large volume of trades, it becomes difficult to keep a track of all such illegal activities.

Hence, A key problem of insider trading remains the identification of insider trades. However, the struggle does not end here, with identification another major problem faced by regulatory authorities becomes proving them.

The concept of insiders and insider information is clouded with ambiguity. Insider information can be misused by a wide range of people, including the firm’s management, members of its supervisory board, shareholders, and the firm’s internal audit personnel. Subjects outside the firm, such as employees of state institutions and government ministries, accountants, lawyers, and others, have access to confidential information about the firm. Rules and codes of conduct, on the other hand, are routinely flouted. 

Where is Boesky today?

Boesky, who is now 84, (as of August in 2021) and is still barred from trading securities, reportedly spent two years in prison and has been out of the spotlight since then. However, he is one of the subjects of the CNBC primetime limited series “Empires of New York,” and is said to have influenced director Oliver Stone when he was looking for inspiration for the character of Gordon Gekko in the film Wall Street, who represented corporate greed.


Even though the SEC has procedures to protect investors from insider trading, high-profile persons are occasionally discovered doing so, such as in the insider trading case involving R. Foster Winans, Martha Stuart and ImClone, Raj Rajaratnam, and others. Minimizing insider trading, or portraying the market as competitive, transparent, and free of illegal behaviours, is in the interest of not only regulatory and supervisory agencies, but also the government and traders, and the public at large. As a result, it is critical to ensure that such operations are well regulated and that adequate law is in place, with severe penalties. The enforcement of strict ethical trading rules and trader codes of behaviour is sorely needed. Ad hoc whistleblower methods, in addition to common securities trading screening, are helpful, but not sufficient, if regulators are to be effective and dependable in their pursuit of unlawful insider trading. To discover the most striking red signals, a scientific method as a supplement to more traditional approaches is also necessary.


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