What is so bad about insider trading?
The main argument against insider trading is that it is unfair and discourages ordinary people from participating in markets, making it more difficult for companies to raise capital. Insider trading based on material nonpublic information is illegal.
The effects of insider trading are: Insiders receive an unfair edge, which causes unjust market circ*mstances. Investor's loss of faith in the integrity and fairness of the financial markets. Stock price manipulation and potential harm to investors without access to confidential information.
Insider trading is deemed illegal when the material information is still non-public and comes with harsh consequences, including potential fines and jail time. Material non-public information is defined as any information that could substantially impact that company's stock price.
Essentially, when an insider in a publicly traded company decides to use their privileged insight into its confidential information to buy or sell its stock -- and advises another person (or a handful of others) to do the same -- they are artificially altering that company's operations, global reputation, and financial ...
Insider sales should only be viewed as negative if it is a large chunk of stock that is a significant percentage of their overall holdings. On the flip side insiders sometimes buy shares of the company they work for. This doesn't mean that is always a good opportunity to put your money to work.
Modern American insider trading law began in the 1960's, when the SEC promulgated Rule 10b-5. The SEC wrote 10b-5 as an anti-fraud statute. Federal courts interpreted Rule 10b-5 to impose a duty on company insiders to disclose material corporate information or refrain from trading on it.
Whistleblowers serve as an invaluable layer of detection in identifying and combating insider trading. These individuals, who often work within the organization where illegal activities are taking place, come forward to report misconduct to regulatory bodies like the SEC.
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.
Insider trading charges (usual charged Federally as Securities Fraud under Title 18, United States Code, Section 1348) involve the intentional trade (sale or purchase) of any security based upon material, non-public information.
Congress passed the Stop Trading on Congressional Knowledge Act (STOCK Act) in 2012, following more than 10 years of allegations of insider trading by members of Congress and staff.
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.
It adds that leaked IRS data covering two decades, exposes at least three instances where Buffett traded stocks in his personal account just before or during the same quarter as Berkshire's transactions, potentially violating the company's ethics policies, authored by Buffett himself.
Cases of insider trading often capture the attention of the media, particularly if the accused party is a public figure. Four cases that captured a significant amount of media coverage in the U.S. are the cases of Albert H. Wiggin, Ivan Boesky, R. Foster Winans, and Martha Stewart.
Insider trading occurs when a person or entity makes a profitable trade based on information that is not available to the general public. The lack of clear legal definitions of what counts as insider trading can complicate prosecution.
This latter qualification categorizes a company's C-suite executives and directors as insiders. However, this does not mean that these individuals are prohibited from buying and selling shares. They are permitted to do so, but their transactions must be above board and conducted via processes overseen by the SEC.
The US Securities and Exchange Commission prosecutes approximately 50 insider trading cases per year, and there are harsh penalties of up to 20 years in prison.
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.
If you're found guilty of insider trading, you could get up to 20 years in federal prison. This is why it's so important to hire a lawyer, so you can improve your chance at winning the case or keeping your insider trading jail time to a minimum.
You might have an opportunity to buy or receive shares in your company either as part of your company's retirement plan, or through an employee stock purchase plan (ESPP) or employee stock ownership program (ESOP).
In some cases, individuals involved in insider trading may engage in money laundering activities to conceal the proceeds of their illegal trades.
What makes someone an insider?
An insider at a publicly traded company is a person who, either directly or indirectly, has access to material nonpublic information about the company. This includes directors, officers, significant shareholders, and employees with access to confidential information.
It is considered a criminal offense in most cases under the theory that it is not fair to investors who do not have the benefit of āinsideā information. Unlike many types of investment fraud, insider trading does not target individual investors as victims.
A blackout period in financial markets is a period of time when certain peopleāeither executives, employees, or bothāare prohibited from buying or selling shares in their company or making changes to their pension plan investments. With company stock, a blackout period usually comes before earnings announcements.
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.
Burden of Proof in Insider Trading Cases
The government must prove that a defendant bought or sold one or more securities āon the basis of material nonpublic information about that security or issuer,ā according to the SEC's Rule 10b5-1, 17 C.F.R. Ā§ 240.10b5-1.
