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Insider trading is illegal. It occurs when someone knows important but secret information about a company and then trades that company's securities (e.g. stocks, bonds, call options) to gain an advantage when the stock price moves after the information is released. Insider tipping is also illegal. It means telling others about secret stock-price-moving information. Another FAQ explains why financial regulators oppose both trading on and tipping inside information.
The laws of insider trading and tipping apply to everybody. They do not apply only to company insiders or executives, though their positions tend to put them at more risk than ordinary employees. Pursuing insider-trading violations is a high priority of the Securities and Exchange Commission (SEC), which enforces US securities law.
Also, the SEC has agreements with many countries throughout the world, giving it access to people who violate US securities law outside the US.
Extensive Scope
The insider-trading laws apply to market-moving information not only about a company you work for but also about any company you may know through a special or personal relationship: e.g. through a family member who works for that company, or through a vendor, supplier, or client of your company.
Courts and the SEC continue to develop approaches to reach nonemployees, such as the misappropriation and temporary-insider theories. For example, in 2009 the SEC started aggressively scrutinizing hedge funds for evidence of insider trading. The SEC may pursue you for insider trading even if secret inside information did not influence your decision to trade.
Another risk for officers and directors is that they can be liable as "controlling persons" if they are reckless in not preventing insider trading by their employees.
Expanding Definitions
Insider-trading law has grown out of the general antifraud prohibition under Rule 10b-5 in the Securities Exchange Act of 1934. In addition to stocks and bonds, which are clearly securities covered by insider-trading law, the SEC has expanded the interpretation of the law to include more sophisticated financial instruments, such as credit default swaps.
Even the definition of confidential material information is expanding beyond just straightforward good news (e.g., mergers, dividend increases, new products) and bad news (e.g., poor earnings, dividend cuts). Recent cases have involved types of information that can move a company's stock price in less obvious ways, and the SEC often brings these cases to test the edges of the law's reach. See, for example, the insider-trading case that the SEC brought against Mark Cuban, owner of the Dallas Mavericks basketball team (SEC Litigation Release No. 20180). He sold stock in a public company when, allegedly, he knew that it was about to raise private financing. Eventually, a federal district court tossed out the case.
Corporate Rules & Prearranged Plans
In addition to the laws against insider trading and tipping, you should follow your company's rules about blackout and window periods.
Also, consider setting up a Rule 10b5-1 trading plan for prearranged sales if you know you want to sell stock in the future but may know secret inside information at those times. |
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Insider Trading
