Insider tipping is illegal, and is closely related to insider trading. It means telling someone secret stock-price-moving information about a public company that may motivate the recipient to trade that company's securities (e.g. stocks or call options). This is illegal because the tipped-off trader gains an unfair advantage over other investors from the movement of the stock price that will occur when the information is made public. Insider tipping can occur in person, by phone, through mail, by email, or on the internet. The tipping is illegal if:
- the person who receives the inside information knows, or has a reason to believe, that the tipper is breaching a fiduciary duty
- the tipper gets some tangible or indirect benefit from the tipping
- the tipper passes on the tip with the expectation that the recipient will try to profit from it
Courts and the SEC have liberally interpreted these guidelines.
Even if you merely pass on the details and do not trade for yourself, you can still be accused of insider tipping. In November 2010, the SEC launched criminal and civil proceedings against a French doctor living in Paris, who was arrested in the US after tipping an American hedge fund about confidential impending bad news for a pharmaceutical company where the hedge fund held shares.
When you tip someone—e.g. a relative, a friend, an acquaintance—who then trades securities according to the inside information, you may be held accountable for up to three times the profit gained or loss avoided, plus disgorgement of the trading gains if your tippee cannot pay.
Another FAQ explains why trading on inside information is opposed by financial regulators. |
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Insider Trading
