Trading Places (TP): Understanding Insider Trading in Today’s Economy Teaching Note

Introduction Managers are regularly exposed to nonpublic company information but not all managers choose to use nonpublic information for personal gain. This case explores the experiences of a day trader who was a member of a 17-year insider trading ring that resulted in profits in excess of $37 million. Recommended Course Adoption Plan It is recommended that instructors assign the TP e-case as an out-of-class assignment in which students are required to read and view the components of the case. Although instructors can show video segments during class lectures, it is recommended that students view and read the e-case outside of class to fully gain an understanding of the case issues. In addition to the e-case text, the TP e-case includes eighteen minutes of video. Instructors can choose to break up the chapters over the course of two class periods or use all chapters at once. Primarily, instructors choose to use TP during one class period. The most effective way to use TUS is as follows: 1. Assign the TUS e-case during a class meeting and choose one of the suggested homework assignments (see p. 3). 2. Discuss the TP e-case with your class during the class meeting following student completion of one of the suggested homework assignments. Your class discussion can be enhanced by using either: a. Helios Digital e-case PowerPoint slides b. Helios Digital suggested discussion questions 3. Grade and incorporate into your course accordingly. TP e-case Chapter Overview The following section provides a brief overview of the TP chapters. 

Chapter 1: Meet Garrett Bauer This chapter introduces the reader to Garret Bauer and discusses his career progression.

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Chapter 2: Understanding Insider Trading This brief chapter reviews the definition of insider trading.

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Chapter 3: A Historical Overview of Insider Trading This chapter offers an historical perspective of insider trading dating back to 1792 with the story of William Duer, the first person to make an insider trader transaction.

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Chapter 4: The Scheme is Born This chapter discusses how Bauer, Kluger and Robinson devised their insider trading scheme.

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Chapter 5: Quit While You Are Ahead This chapter discusses how the team was concerned that their scheme would be discovered.

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Chapter 6: The Beginning of the End This chapter discussed the transaction that led to the discovery of the 17-year trading scheme.

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Chapter 7: The End This chapter reviews the fate of Bauer, Kluger and Robinson.

Optional Instructor Reading to accompany e-case Garrett Bauer SEC Complaint http://www.sec.gov/litigation/complaints/2011/comp21917.pdf Recommended Student Reading to accompany e-case Garrett Bauer SEC Complaint http://www.sec.gov/litigation/complaints/2011/comp21917.pdf Confessions of An Insider Trader http://online.wsj.com/news/articles/SB10001424052748703983104576262921972017168

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Recommended TP Assignments The following assignments are recommended: 1. 2. 3. 4.

Would You Cross the Line? student classroom exercise TP Reflection Research Paper In-class discussion questions Embedded e-case multiple choice questions

Would You Cross the Line? Student Classroom Exercise This is designed to be a 10-minute classroom exercise where students are asked to evaluate Garrett’s decision-making process. It is recommended that instructors utilize an anonymous polling toll (such as Poll Everywhere www.polleverywhere.com) when soliciting open feedback in order to increase class participation. The following questions could be asked to the class: 1. Do you think Garrett’s loyalty to his friend (Ken Robinson) was the driving force behind his decision to commit insider trading? 2. Do you believe that Garret thought insider trading was illegal? 3. Since Mathew Kluger was an employee, do you think he was wrong to steal confidential information from his employer? a. Do you think Mathew Kluger believed his actions were wrong? 4. Yes or No---Insider trading is a crime? 5. If you were faced with the same opportunities as Mathew Kluger by having access to confidential information, would you engage in insider trading? This classroom exercise seeks to help students develop and share their own professional moral compass and think deeper about the role of the management accountant in fraud detection. Depending on class size, this could be a class exercise or small group exercise. We believe it is important to offer students opportunities to define and refine their levels of personal and professional integrity. TP Reflection Research Paper It is recommended that instructors assign a 2 to 3 page reflection paper writing assignment which could account for 10 to 15% of the course grade. Suggested Paper Topics:   

Decision making is a critical skill for today’s manager. In your opinion, what factors impacted Garrett’s decision to commit fraud? If you were Garrett, how would you have responded? Do you believe that Ken Robinson, Garrett’s friend, violated their friendship by wearing a wiring and implicating Garrett in the scheme? Do you think regulation can deter insider trading? Why or why not?

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In order for students to write a strong reflection paper, they will need to read the supplemental readings and do minimal outside research depending on the previous topics covered in your course. We have received positive feedback from instructors who have incorporated the reflection paper assignment into their course curriculum. In-Class Discussion Questions The following questions (found at the end of the e-case) can be used for an in-class discussion: 1. Define insider trading. 2. Discuss market efficiency (or inefficiency) with respect to insider trading. 3. Based on your understanding of Garret’s dilemma, how would you describe his personal value compared to his professional values? 4. The table above list Garrett’s profits made from his illegal trades. Based on your research, how does the SEC monitor trading activity? Are you surprised that this scheme went undetected for 17 years?

Source: http://www.sec.gov/litigation/complaints/2011/comp21917.pdf

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Embedded Multiple Choice Questions The following questions can be embedded within TP. If an instructor would like to include (or remove) questions, we can customize these questions as needed.

1. What was Garrett’s profession? a) Attorney b) Stock trader c) Accountant d) Financial analyst 2. Insider trading is defined as the buying or selling of company stock or securities for a profit based upon information that is not readily available to the public. a) True b) False 3. What characterizes a non-aligned employee workplace crime? a) There is a direct victim. b) The sole intention is for the individual’s personal gain. c) The individual has no co-conspirators. d) The crimes are likely to be committed by lower-level employees. 4. Who is infamous for making the first insider trading transaction in the U.S.? a) Captain John Smith b) William Duer c) John Rolfe d) Alexander Hamilton 5. Besides Garrett, how many other people were involved in his insider trading scheme? a) 1 b) 2 c) 3 d) 4 6. What caused Garrett to start his insider trading scheme once he had already stopped? a) A sense of loyalty to a friend. b) Ken threatened to turn him in to the FBI. c) Garrett was pressured by his wife. d) Garrett needed to pay for family medical bills. 7. How was Garrett finally caught by the FBI? a) The FBI found suspicious transactions that he made. b) Ken wore a wire and recorded an incriminating phone conversation with Garrett. c) Matt confessed that Garrett was involved in the scheme. d) Garrett’s boss reported him.

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8. Between Ken, Mathew and Garrett, Garrett was given the longest prison sentence. a) True b) False 9. How long did Garrett’s insider trading fraud scheme last? a) 5 years b) 11 years c) 17 years d) 28 years 10. How much money in illegal trades did Garrett, Mathew and Ken make? a) $10 million b) $20 million c) $25 million d) $37 million

The Story Matters! This e-case offers an innovative method to teach several important concepts to both undergraduate and graduate business students. We are always interested in your feedback. If you have any questions or concerns, we would love to hear from you! Contact [email protected] or [email protected] and let us know your name, area of expertise, and where you are located. We will get back to you within 24-48 hours.

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