What is insider trading?
Insider trading is buying or selling stock using material, confidential information to gain an unfair advantage.
Who is an “insider”?
An insider is someone who has access to confidential information about the corporation. These individuals cannot disclose this information or gain profit from it, though they can legally buy and sell stock in the company like everyone else. If they buy or sell stocks, they must register their transactions with the Securities and Exchange Commission (SEC).
Is insider trading always illegal?
Not necessarily. Insiders can buy and sell stocks if they do not use confidential information for profit and if they disclose all information about the transaction to the SEC. For example, company executives can buy and sell stock in their own companies. However, they cannot use material, confidential information to profit from those transactions.
When is insider trading illegal?
Insider trading is illegal when an individual uses material, confidential information to buy or sell securities. The SEC monitors insider trading by looking at the market using specialized systems built to identify suspicious transactions.
What are the penalties for insider trading?
On paper, penalties for insider trading include criminal convictions with lengthy prison sentences and expensive fines. The penalties can vary depending on the case.
What are defenses against allegations of insider trading?
Individuals accused of the crime can argue that no one shared confidential information and, if that was the case, that it did not rise to the level of material information. Another defense is that the actions did not lead to buying or selling securities.