Insider trading problem is the most provocative and baffling aspect of the securities field. In ordinary usage, insider trading is said to occur when a person buys and sells securities of a corporation on the basis of material information. the prohibition against insider trading-the rule that certain persons with knowledge of material, nonpublic information about a company’s stock must either disclose that information or refrain from trading is now a tenet of antifraud ideologe under the federal validity has been accepted as a matter of by the courts and the Securities and Exchange Commission in the United States.
Persons in a position to have special access to confidential information bearing on the value of a security are perceived as being unjustly enriched when they trade with others who are unable to discover that information. U.S. section 10(b) of the 1934 Act and SEC Rule 10 (bー5) thereunder have evolved into the principal limitations on trading on the basis of material, nonpublic information.
Under rule 10 (b-5), the gravemen of the violation is not the trading but the failure a duty to disclose when there is such a duty in connection with the trading. In the leading case of SEC v. Texas Gulf Sulphur Co., the Second Circuit articated the rule as follows: Anyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it, or he chooses not do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed. The Second Circuit subsequently held that persons in possession of material, nonpublic outside, or market, information were also subject the same duty to disclose or abstain.
Conclusionally, it is necessary to establish the securities ombusman system,incentive system, timely fair disclosure policy, etc.