Insider Trading, Its Ethical & Legal Implications

Case Summary

This paper reviews the applicability of ethical and legal principles in the case of insider trading involving Stephen Cohen in the case, Trading Charges Reach SAC, published in the 2021 Wall Street Journal. In the case, the founder of SAC Capital Advisor, Stephen Cohen, and the portfolio manager, Mathew Martoma were involved in what is considered as the most profitable insider trading in the history of the United States of America.

Initially, “the court had charged Mr. Martoma with a conspiracy to commit securities fraud and two counts of securities fraud” (Rothfeld & Pulliam, 2012, p. 4). He obtained secret data for trading the company from a university. Mr. Martoma and the co-accused bought shares from two companies that were involved in testing drugs for clinical use. Specifically, “Mr. Martoma, a portfolio manager at SAC’s CR Intrinsic Investors division, received secret data over 18 months from the professor about a trial for a drug being developed by Elan and Wyeth” (Rothfeld & Pulliam, 2012, p. 4).

The results of the trail of the drop were negative and the price of shares of the two companies flopped drastically. The two companies suffered serious losses. It is also reported that the profits generated by Mr. Martoma were paid to Mr. Cohen. “The Hedge fund gathered $276 million in profits and losses avoided based on the information obtained by Mr. Martoma “(Rothfeld & Pulliam, 2012, p. 4).

Ethical Review of the Case

The five common ethical principles are “independence, integrity, responsibilities and practices, competence and technical standards, responsibilities to clients, responsibilities to colleagues, and other responsibilities and practices” (Sher, 2012, p. 38). From the case, it is evident that the two defendants, Mr. Martoma and Stephen Cohen used information that was not known by the entire public to obtain undue benefits. In their actions, there is an outright breach of the professional ethical code of conduct such as integrity, confidentiality, professional due care, and professional behavior (Sher, 2012).

The act of the two individuals is regarded as white-collar crime. The case displays a scenario of classical insider trading where the insider passes on the material information to another party who in turn trades with it. This type of insider trading is less common and often very difficult to identify. From a psychological perspective, legal trade is not necessarily ethical. In this case, the transactions carried out by the two managers were legal but not ethical. This is as a result of the fact that the actions above were not conventional to “the principle tenet of trading at the security market, that is, no trader should have unjust gain when trading in the stock market” (Anthony, 2010, par. 9).

This implies that when a trader has material information that is not known to the rest of the public and he carries out a trade with it as was in the case, then the gains from the trade are unfair prima facie. However, no blanket court rule declares trading with material insider information as illegal. Therefore, the trading with material non-public information was unethical since the two defendants went against the code of conduct on trust, confidentiality, and professional due care in their decision to be involved in insider trading. This means that the defendants were culpable of unethical actions, which actually may not be illegal.


Anthony, P. (2010). Insider trading in financial markets: Legality, ethics, efficiency. Web.

Rothfeld, M., & Pulliam, S. (2012). Trading charges reach SAC. The Wall Street Journal 28(121), 4-5. Web.

Sher, G. (2012). Ethics: Essential readings in moral theory. New York, NY: Routledge.