Insider trading describes the actions of individuals who buy and sell shares of a public company while having information that’s not available to the public. When insider trading is done intentionally, it’s illegal in any scenario. However, if an employee buys or sells shares when there is a big announcement coming up for the company, this could just be coincidental if the employee wasn’t aware. 

As insider trading is illegal, this means that it has great consequences for companies and individuals. This is because people can greatly benefit from insider trading and create a huge profit for themselves while putting others in a difficult situation. It can also distort the operation of the market, causing traders to lose the trust which is essential to its operation. The consequences of insider trading vary depending on the severity of the crime, how many people have been affected, when it happened and how long it has been going on. 

Companies where a group of employees was responsible for insider trading will be more severely punished compared to one sole individual. In this scenario, the company will probably be fined as an entity because it didn’t manage to deter the crime from happening. 

Consequences of insider trading

The consequences of insider trading will vary by country, but they will also vary in terms of scale. The most common consequences are: 

  • Financial 
  • Negative publicity
  • Growth stall 
  • Productivity drop
  • Imprisonment

Financial 

Financial consequences can reach up to $450,000 for an individual and $1.1 million for a company in Australia. However, there are situations where fines can be higher than that. In the recent case, Westpac was ordered to pay a fine of $1.8 million and $8 million dollars to cover any litigation and investigation costs that were incurred for the case. This means that the bank lost almost $10 million dollars for insider trading that occurred 8 years ago. These funds could have been allocated in other areas, focusing on core tasks, which is why companies should try to prevent insider trading. 

Negative publicity 

“All publicity is good publicity” isn’t necessarily true, especially today when technology makes it easy for news to travel. People want to work with ethical companies and insider trading scandal can have a great impact on a company’s brand. It might lead to fewer customers, a smaller pool of skilled candidates applying and attract the wrong type of employees. 

Companies should ensure that no information is leaked during the investigation process as nothing has been proven yet. We understand that our clients value their brand and want to deal with issues quickly and effectively before they affect them publicly. 

That’s why Polonious helps them conduct a confidential investigation that will keep all details confidential while assisting their investigation team conduct a thorough and efficient process. The better the quality of the investigation is, the stronger the prevention strategies will be. 

Depending on the media coverage of an insider trading scandal, the reputational consequences may be short or long-term.

Growth stall 

People tend to focus on the financial, legal and public consequences of insider trading. But what does it mean for the business beyond that? If a case of insider trading becomes public, the company doesn’t only suffer from a worse reputation and financial fines, but from growth stall as well. 

Going back to the Westpac case, the $10 million the bank lost could have been allocated to new projects or services, to help the bank expand or hire new people. When such a large amount of money is lost to unnecessary costs, then the company’s growth will either stall or slow down as they don’t have as much funds to work on projects anymore. 

This places them at a disadvantage compared to their competitors as they are missing out on growth opportunities. Another consequence may be that certain employees will need to be let go, which can affect teams and employee workload. 

Productivity drop

As a result of insider trading, employee morale may drop due to them working for a perceived unethical company. As a result, productivity will also drop as employees won’t feel as motivated to contribute to the company since those with important information are usually in higher positions. This means that high-level employees are using company information for their own ahead of the company’s, in contrast to other employees who largely work with the company’s interests at heart.

People don’t feel motivated to work for individuals that take advantage of them. The teams of those who committed insider trading are usually the ones affected the most. When it comes to productivity, doing the right thing and driving ethical practices, leading by example is one of the best ways to motivate employees to give 100%. If that example isn’t there, employees won’t strive for the best possible outcome. Another reason why productivity may drop is if large amounts of funds have to be attributed to the insider trading case. Staff working in sales, marketing and finance work hard to achieve certain targets and large expenditures like these can affect their mental health since they worked hard for nothing. 

Imprisonment

The most severe consequence of insider trading is imprisonment, which could be up to 10 years for an individual. It’s important that these consequences are communicated to employees in the organisation’s policies, as they might not be aware that insider trading could lead to a prison sentence. The disadvantages of insider trading outweigh the short-term advantages. 

insider trading

Investigating insider trading

The consequences a company can suffer from differ depending on its target market.

For example, a company that is currently perceived as ethical may lose a greater customer base compared to a company that is already perceived as unethical. The expectations of their customer base are different. However, all organisations will be impacted in some way and this is why they need to act quickly to protect the future of the business. 

At Polonious we help companies in various industries, including banking and financial services, investigate insider trading. We help their investigation teams automate workflows, store important documents and evidence securely in our system and conduct online interviews confidentially. We have maintained our ISO 9001 and ISO 27001 certifications for many years, highlighting our continuous commitment to delivering a high-quality and secure case management system. 

If you want to know more about how we can help you, reach out and book a demo!