Read this then answer question 1

Question 1: Answer these 2 questions.

A) Were they insiders? If so, explain why. If not, does that imply that they cannot be guilty of insider trading or that what they did was morally permissible?

B) Putting legal technicalities aside, did Griffiths and Steffes act unethically? Explain the facts and moral principles that support your answer

Inside Traders or Astute Observers? IN 2009, FEDERAL AUTHORITIES BROKE UP THE and lawyers at several different companies who were biggest insider-trading ring ever. Originally focused on the engaged in a criminal conspiracy to buy insider information, Galleon Group hedge fund, the investigation soon unraveled usually about pending corporate acquisitions. Using throw- a complicated network of nearly two dozen traders, analysts, away cellphones to avoid detection, they had netted $20 Downloaded 1/05/2015 by Jennie Suggs, jennies.89@gmail.com CHAPTER TEN MORAL CHOICES FACING EMPLOYEES 385 million in illegal profits. Allegedly at the center of it all was company's stocks. That gave them the right to buy the stock ringmaster Zvi Goffer of the Schottenfeld Group and later at its current price at some future date. (Purchasers of call Galleon, nicknamed "Octopussy" because his arms reached options make money if the stock increases in value because out to so many sources of information. Among those caught they can then buy it at its earlier, lower price. If the stock up in the federal dragnet was a senior vice-president at IBM, decreases in value, then the buyers simply don't exercise Robert Moffat, who had been induced by his lover into divulg the options; they're out only whatever they paid for the ing confidential information, which she then passed on to the options. In this case, when Fortress Investment Group head of Galleon Group acquired Florida East Coast Railways, the value of the lat- Since that case, the Securities and Exchange Commission ter's stock shot up, and Griffiths, Steffes, and their families (SEC) has been pushing hard against securities fraud in gen were able to cash in big-time. eral and insider trading in particular, using informants, wire Critics of the SEC say that it is going beyond making taps, and sophisticated software tools to make a number of sure that insiders are not abusing their positions or violating prominent arrests. "Illegal insider trading is rampant and may their fiduciary duties. Joel M. Cohen, a partner at the law even be on the rise," says Preet Bharara, the U.S. attorney in firm of Gibson, Dunn & Crutcher, has written that the SEC is Manhattan. A main target of recent investigations has been moving from "deterring and punishing those who abuse the so-called "expert network firms" that arose in response to special relationships at the expense of shareholders into a an SEC rule in 2000 that banned companies from selectively murkier area ... [of] policing general financial unfairness." divulging significant information, such as upcoming earnings Other business observers agree with him that the SEC reports, to favored analysts. These firms purport to offer shouldn't focus on trying to make the markets "feel" fair to "independent investment research" but routinely deliver everyone. inside information on revenue numbers and sales forecasts. For its part, the SEC contends that Gary Griffiths and Cliff In Bharara's view, however, it's not just about the prosecuting Steffes were more than just observant. After the tours began, the big fish on Wall Street: "The people cheating the system they had heard "rail yard employees...expressing concerns include bad actors not only at Wall Street firms, but also at that [it] was being sold, and that their jobs could be affected Main Street companies." However, some think the SEC is now by the sale." It also claims that Griffiths was asked to make a pushing too hard and too far. list of all the locomotives, freight cars, trailers, and containers Take the case of Gary Griffiths and Cliff Steffes, who owned by the company, along with their current value, some- worked in a rail yard owned by Florida East Coast Railways thing he had never been asked to do before. "Is all of that in Jacksonville, Florida. The SEC has charged them with material information?" asks New York Times business col- making more than $1 million by trading on inside informa umnist Andrew Ross Sorkin. "Clearly, it is nonpublic. But tion, specifically, on the information that their company was without being told directly that a deal was in the works, did going to be sold. How did they do it? After all, one of them is the men actually have inside information? What would have a mechanical engineer, the other a trainmannot your happened if there had been no deal? Or if the company was usual corporate insiders. The answer is simply that they later sold for a price below its prevailing stock market value?" were observant. According to the SEC, the two noticed that And as Joel Gibson points out, in most cases, "if you overhear "there were an unusual number of daytime tours" of the rail something and divine from the conversation that Party A is yard with "people dressed in business attire." Although they about to buy Party B, and you buy Party B, that's fine. You can were not told anything, officially or unofficially, Griffiths and do that." Steffes had a hunch that something was up. Along with On the other hand, both Griffiths and Steffes had signed members of their families, they bet that a deal was in the the company's code of conduct, which states that employees works by buying tens of thousands of call options on the cannot trade on or disseminate material nonpublic information