Insider Trading. Jabil Circuit, Inc., is a publicly traded electronics and technology compan
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Insider Trading. Jabil Circuit, Inc., is a publicly traded electronics and technology company. A group of shareholders who owned Jabil stock from 2001 to 2007 sued the company and its auditors, directors, and officers for insider trading. Stock options were a part of Jabil’s compensation for executives. Sometimes, stock options were backdated to a point in time when the stock price was lower, so the options would be worth more to certain company executives. Backdating is not illegal so long as it is reported, but Jabil did not report the fact that backdating had occurred. Thus, expenses were underreported, and net income was overstated by millions of dollars. The shareholders claimed that by rigging the stock price through backdating, the executives had engaged in insider trading and could pick favorable purchase prices and that there was a general practice of selling stock before unfavorable news about the company was reported to the public. The shareholders, however, had no specific information about these stock trades or when (or even if) a particular executive was aware of any accounting errors during the time of any backdating purchases. Were the shareholders’ allegations sufficient to assert that insider trading had occurred under Rule 10b-5? Why or why not? [ Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc ., 594 F.3d 783 (11th Cir. 2010)] (See Securities Exchange Act of 1934 .) |
Explanation
Shareholders of JC Inc noticed that management did not record backdating of securities, resulting in an overstatement of net income. Shareholders later argued that by backdating the stock price, the executives were engaging in insider trading and that JC Inc was guilty of severe misrepresentation and concealment of material facts.
Because SEC Rule 10b-5 states that any relevant omission or representation of incorrect facts in connection with the sale or purchase of a security infringes the antifraud provision of the Securities Exchange Act 1934, shareholder accusations are sufficient to prove insider trading.
Answer
Insider trading is the act of selling and buying stocks based on confidential information that is not available to the general public. Rule 10(b) and Rule 10b-5 have the primary goal of prohibiting insider reporting. Inside information expands accountability to individuals who are engaged for their own personal gain, according to the SEC 1934.
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