Running head: INSIDER INFORMATION 1

Insider Information on North Manufacturing

University of the People

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Abstract

This paper will analyze a case study on insider information obtained form an employee at a

manufacturing firm. Relevant facts of the case and key stakeholders will be identified. The

ethical issues presented will be articulated and practical constraints will be identified. Finally, the

author will recommend a specific action to be taken by the employee.

Keywords: insider information, business ethics

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Insider Information on North Manufacturing

In the case study being considered for this paper, Kathy Ryan, a credit officer for

Diversified Consolidated Company (DCC) is responsible for $1 million in credits to North

Manufacturing. While North has an impeccable history, Kathy follows up in person on rumors

they might be financially unstable. After befriending Scott Bradley, the treasurer for North, and

getting drinks with him, Scott discloses that North is indeed on the verge of bankruptcy. Scott

assures Kathy that if DCC gives North good credit references, North will pay DCC back and

place an order with Basic Products instead of DCC before declaring bankruptcy. If North

survives, they will come back and make sure DCC gets North’s business.

After this meeting, Kathy’s friend from Basic products, Mike Walman, calls her to ask

about North’s credit information. Kathy shares the facts of DCC’s relationship with North, which

includes a prompt payment history. Mike is relieved because North has just placed a huge order

with Basic Products and Mike assumes that Kathy’s feedback implies that this order would be a

good thing to fulfil. Kathy must decide whether or not to let Mike know the truth, or to allow

Basic Products to take the risk so that DCC can regain its credits from North.

Method

Relevant Facts

Insider information is nonpublic information about a company that gives a person an

unfair advantage over the public, and anyone using this information to place trades or advise

third parties based on that information can be guilty of insider trading (Kenton, 2020). Insider

information tends to be defined in regards to the trading of a company’s public stock, but this

case contemplates insider information that could prevent another company from making a bad

sale based on credit to a soon to be bankrupt company.

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Relevant facts of this case include the already $1 million in credit extended from DCC to

North Manufacturing, secured by DCC employee Kathy Ryan. North Manufacturing, on paper,

has a good history of prompt payments and has an excellent credit history from DCC because of

this. However, North treasurer, Scott Bradley, has disclosed nonpublic information that North is

in danger of going bankrupt. Scott assures Kathy that if they can secure a large order on credit

from Basic Products, the $1 million owed to DCC will be paid back before North declares

bankruptcy. If they fail, Kathy could lose her bonus, could lose out on a promotion, and

ultimately could be fired. Mike Walman, Basic Product’s credit manager, calls Kathy and gets a

factually correct positive credit history of DCC’s dealings with North, which he assumes means

that it would be good business for Basic Products to also lend North credit on a large order.

Kathy knows North intends to go bankrupt before paying Basic Products and could advise Mike

to get other opinions on North without betraying Scott’s trust, or could say nothing and let Mike

go with his incorrect assumption.

Stakeholders and Ethical Issues

A stakeholder is anyone that can impact or be impacted by a business (Grimsley, n.d.). In

this case study, there are several stakeholders to consider. There is of course Kathy, who is the

one facing an ethical dilemma, and DCC, the company Kathy works for that has $1 million of

credit tied up in North. In addition, there is the North’s treasurer, Scott, who has disclosed

private information about North, and North Manufacturing itself, whose survival may depend on

getting one more large order. Mike, Basic Product’s credit manager, is doing his due diligence

and is about to make a decision based on advice he is getting from Kathy. If Basic Product

extends credit to North for an order and then North defaults on that credit, Basic products could
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suffer a large financial loss. All companies have employees and investors as stakeholders in this

decision.

The utilitarian approach to ethics requires achieving the greatest good over harm, and the

common good approach urges compassion for others, especially the most vulnerable (“A

framework,” 2015). With the utilitarian approach, Kathy must consider the effect on not only

DCC, but all companies involved in order to determine the greatest good that can be achieved

(Brusseau, 2012). Kathy has an obligation to her own company’s employees and shareholders to

be profitable and sustainable (Brusseau, 2012). Kathy may also feel an obligation to Scott, who

disclosed North’s financial in confidence thinking Kathy would help him and North survive in

return for North’s future commitment to pay back and ultimately use DCC as a supplier when

North is healthy. However, Kathy may feel that by allowing Mike to assume North is financially

viable she is committing a sin of omission.

Alternatives and Practical Constraints

Kathy has a few alternatives to consider in this case. The first would be for Kathy to say

nothing to Mike and let him draw his own conclusion based on his own assumption of the facts

as they are publically available. From a utilitarian perspective, DCC and North would both

potentially benefit from this silence, with DCC getting their $1 million credit repaid and North

Manufacturing being able to survive a bit longer, paying employees up until they need to file

bankruptcy. Kathy may retain her bonus and career potential, but Mike and Basic Products

would suffer from North’s defaulted credit. From a rights perspective, DCC’s shareholders may

have the right to profitability and Kathy’s bad judgment to extend $1 million in credit to North

should not adversely affect them. Scott may also assume a right to privacy based on the informal

and friendly nature of his and Kathy’s conversation. To that end, though, Mike should have the
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right to have accurate information from Kathy when he asks for it. Considering the justice

perspective, all equals should be treated equally (“A framework,” 2015). Eliminating insider

information, North still was in good standing with DCC and records did show they were making

prompt payments. All parties involved are operating on that public information. However, Kathy

now knows more information than other suppliers, including Mike and Basic Products, which no

longer puts them on equal footing.

Another alternative would be for Kathy to at least imply to Mike that he should check

alternative sources before making a final decision to extend credit to North. From a utilitarian

approach, this seems to be the worst approach. DCC would be out $1 million in credit, Kathy’s

career would be ruined, and North would be in even worse financial shape. While Basic

Products, its employees, like Mike, and shareholders would win, most other stakeholders in this

case would lose out. In this alternative, Mike and Basic Products may have a right to the truth,

while DCC and North may not have the right to deceive others for their own benefit. From the

justice perspective, all parties seem to be treated equally, all sharing accurate information and

making decisions based on it. However, DCC employees and shareholders would have to bear

the burden of Kathy’s poor decisions.

Practical constraints exist that may prevent some of these alternatives from being acted

upon (Hamilton, 2000). Kathy has to consider the impact on her career and reputation if North

defaults on the $1 million in credit she has extended to them. In addition, the Supreme Court

case Dirks vs. SEC held that if someone is tipped information about an alleged fraud, the person

being tipped was not liable if the person giving the tip did not profit from disclosing the

information (Newkirk, 1998). In this case, North and Scott would profit if Kathy went along with

Scott’s plan, so Kathy could be held liable if the fraud is exposed.

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Conclusion

Kathy has been given unsolicited information from Scott about North’s financial status,

putting her at an advantage over other suppliers. It would be unethical for her to use this

nonpublic information to profit or avoid loss, and possibly illegal, as well (Newkirk, 1998). The

decisions to lend credit to North in the past were based on previous good payment history and

public information. Therefore it is a risk of doing business to suffer a loss for that decision

making and follows the justice perspective very closely (“A framework,” 2015). It would be

ethical and professional for Kathy to recommend to Mike that he check other sources, a decision

one would hope Mike would arrive at even if Kathy said nothing. This decision follows

Immanuel Kant’s categorical imperatives where hiding the truth could not survive if everyone

did it, as well as treating people as ends, not just means (Brusseau, 2012).
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References

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3.0 license

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quiz.html

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from http://ruby.fgcu.edu/courses/Hrogers/BusEthics/files/Reading%20-

%20BUSINESS%20ETHICS%20DECISION%20MAKING%208-2003.pdf

Kenton, W. (2020, March 21). Insider information. Retrieved from

https://www.investopedia.com/terms/i/insiderinformation.asp

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http://www.sec.gov/news/speech/speecharchive/1998/spch221.htm