Insider Trading Laws: Is Insider Trading Always Illegal?

In 2020 alone, the US Securities and Exchange Commission (SEC) committed $550 million in resources to investigate and prosecute illegal insider trading.

Insider trading is so common that you might violate the laws without knowing it. However, to avoid large civil and criminal penalties, it’s important to know the current insider trading laws, especially if you are an avid trader.

So, what is illegal insider trading, and is insider trading ever legal? Keep reading to find out.

Defining Insider Trading

First, let’s answer the question: what is insider trading?

Insider trading is often associated with illegal conduct, but that is not always the case. When defined by the courts, insider trading is purchasing and selling a security while in possession of material obtained from a breach or fiduciary of duty.

The key to the violation is obtaining the material through a breach of confidence or duty. Because these court rulings have been going on for decades, it is very hard to find that the duty was not breached.

An obvious example of a breach of duty is when a CEO and all other employees owe a fiduciary duty to their company. If they disclose any non-public information, they are liable for insider trading even without trading themselves.

Legal Insider Trading

Insider trading can include legal conduct and is not always a negative term. A legal version that anyone can understand involves the stock market.

Officers, corporate insiders, employees, directors, and large shareholders can buy and sell stock in their own companies. Corporate insiders who trade their own securities must report the trades to the SEC.

Investors and traders use this information to decide if the investment potential of a company is good or bad.

If you get caught insider trader without filing SEC forms, you could be arrested for insider trading. Breaking the law like this might lead to the need to hire a white collar crime attorney.

Illegal Insider Trading

Today, insider trading laws state that if material information about a company or its stock is obtained through a breach of duty and used to trade, that person is guilty of insider trading.

Illegal insider trading cases include the following:

• Employees who traded the corporation’s securities after learning confidential and significant developments
• Friends and family members (tippees) of employees who traded securities after learning such information
• Employees of brokerage, printing, and law firms who were given information about the securities of a company they traded
• Government employees who learned information about a company’s securities during their employment

Stated plainly, any person who took advantage of confidential information from their employer or someone else’s employer has done something illegal under insider trading laws.

Are You Following Insider Trading Laws?

Violating insider trading laws can lead to severe civil and criminal punishments. Although legal inside trading is a thing, illegal insider trading is more common and apt to get you in trouble.

If you are contacted by a regulatory agency about trades that you have made before, hire an attorney right away. You can also learn more about insider trading laws through SEC.

For more interesting reads like this one, check out the other posts on our blog.