It’s obvious to most people that insider trading is cheating and ought to be a crime, though it can be difficult to prove and prosecute. Ivan Boesky and hedge fund billionaire Raj Rajaratnam famously went to jail for doing it and George Soros paid a big fine. Still, the cases can be murky: You don’t need to actually trade to be guilty of insider trading, and not every trade on inside information is a crime. Still, prosecutors argue their famous cases — such as one filed in New York this year against UK billionaire Joe Lewis — build trust in the financial system and ultimately ensure a level playing field for all investors.
It needs two things to happen. First, to be considered an insider, you have to be in possession of information that isn’t public; Perhaps that’s advance notice of a company’s earnings, or results of a drug trial. If you take this information and trade on it or give it to others and they trade on it, you can expect prosecutors to take an interest. If no trade occurred, then don’t worry about insider trading, though the leak could still be a breach of other laws or an employer’s code of conduct. Prosecutors don’t have to show a motive but in the Lewis case, where he’s charged with passing tips to his personal pilots, among others, they came up with a novel explanation: the inside information was allegedly a substitute for a formal retirement plan. (Lewis’s lawyers say the charges are “ill-conceived.”)
FAQs
Insider trading is the purchase or sale of securities by someone with material information that is not public knowledge. Trading by insiders is legal when someone with significant privileged access to information makes a trade and reports it. The debate about insider trading is whether it should be legal or illegal.
What defines insider trading and when is it illegal? ›
Insider trading is the selling or purchase of stocks and other securities based on non-public, material insider information. People found guilty of Illegal insider trading can receive up to 20 years of jail time and a $5 million fine.
What is the meaning of insider trading? ›
Insider trading is buying or selling a publicly traded company's stock by someone with non-public, material information about that company. Non-public, material information is any information that could substantially impact an investor's decision to buy or sell a security that has not been made available to the public.
What is insider trading Quizlet? ›
Insider trading. the buying or selling of company stock or securities for a profit based upon information that is not readily available to the public.
How do they prove insider trading? ›
Key sources of evidence include trading records and communication records. Trading records are a cornerstone of insider trading cases. These documents establish a comprehensive trail of financial transactions, highlighting unusual patterns or timing that could indicate insider knowledge.
Why is insider trading illegal? ›
Laws against insider trading are in place to protect the equality and integrity of the marketplace, ensuring that no one has an unfair advantage.
When did insider trading become illegal? ›
The SEC adopted a civil procedure in 1942, but the first time that insider trading was really identified as an offense was in the 1960s, and prosecutions didn't really take off until the advent of the hostile takeover in the 1980s, with investigators focusing on suspicious trading ahead of a merger or sale.
What is an example of illegal insider trading? ›
Examples of IllegalInsider Trading Cases
For instance, if a CEO sells shares of their company before announcing a significant financial loss. Tipper-Tippee Insider Trading: This involves a person (the “tipper”) passing confidential information to another person (the “tippee”) who then trades on that information.
What is an example of insider trading? ›
Hypothetical Examples of Insider Trading
The CEO of a company divulges important information about the acquisition of his company to a friend who owns a substantial shareholding in the company. The friend acts upon the information and sells all his shares before the information is made public.
Is it insider trading if you overhear? ›
The individual charged with insider trading must have been aware that the information was material and nonpublic. For example, if you overhear a conversation on a train but have no knowledge that it is insider information, you cannot be convicted if you act on this information.
There are two types of insider trading, legal and illegal.
In the illegal kind, one breaches the company's trust by trading based on the inside information while others remain ignorant. In legal cases, an insider buys or sells securities of their corporation based on the inside information.
Is insider trading difficult to define? ›
Insider trading is an extraordinarily difficult crime to prove. The underlying act of buying or selling securities is, of course, perfectly legal activity. It is only what is in the mind of the trader that can make this legal activity a prohibited act of insider trading. Direct evidence of insider trading is rare.
Who commits insider trading? ›
Corporate insiders who traded the company's securities after learning of significant, confidential developments. Insiders' friends and family, as well as other recipients of tips who traded securities after receiving such information.
What are the 4 elements of insider trading? ›
The Supreme Court proscribed 4 elements to prove insider trading under the misappropriation theory, 1) a lie or deception 2) a transgression of a fiduciary obligation 3) the use of secret information in relation to a securities transaction 4) willfulness by the defendant.
What are the red flags of insider trading? ›
Recognize red flags of insider trading: There are several red flags that can indicate potential insider trading activity. These include unusual trading activity, sudden changes in a company's financial performance, and unusual behavior by company insiders such as selling a large amount of stock.
What are the three types of insider trading? ›
Insider Trader
Insiders can be categorized into three groups: (1) the traditional insider, (2) the quasi-insider, and (3) the intermediary insider (Doffou 2003). The traditional insiders are defined as people who are a part of management, can access nonpublic information, and trade that information for their sake.
Is it insider trading if you overhear a conversation? ›
The individual charged with insider trading must have been aware that the information was material and nonpublic. For example, if you overhear a conversation on a train but have no knowledge that it is insider information, you cannot be convicted if you act on this information.
