Financial group Cash Converters International (ASX: CCV) saw its share price fall over 6% in early trading this morning, before going into a trading halt pending the announcement of a potential capital raising. More than 1 million shares changed hands, almost double the stock’s recent average daily volume, in just an hour and a half.

A capital raising usually means new shares will be issued at a discount to the current price, so did somebody get wind of the capital raising, and sell down their shares, before the price falls? Who knows, but maybe the Australian Securities and Investment Commission (ASIC) and the owner of the stock exchange, ASX Limited (ASX: ASX), should be taking a closer look.

We’ve come across a number of situations in the past where shares have traded higher before a positive announcement for the company.

In July, Gerard Lighting Group’s (ASX: GLG) shares jumped 7.3% before trading in the stock was halted, as the company came out and announced that it had received a takeover proposal. Then, on October 4, Discovery Metals Limited (ASX: DML) announced to the market, that it had received a takeover offer from Cathay Fortune Corporation and China Africa Development Fund, despite the proposal letter being sent to the company on September 21. In that period shares in Discovery Metals rallied 24% higher.

While we are not suggesting anything improper has taken place, it seems that some people may have had access to privileged information before the market, and were able to take advantage of that fact.

For individual investors, having insider knowledge and using it can be dangerous to your health. The High Court of Australia says that even if the information you have is ‘dodgy’, you can still be charged with insider trading.

The Foolish bottom line

While we don’t expect the market to be perfect, the corporate watchdog, ASIC and the ASX may want to take a closer look at the trading in these companies – if they haven’t already.

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Motley Fool writer/analyst Mike King owns shares in Discovery Metals. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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