Insider trading involves the trading of securities by someone who has information the market hasn’t been exposed to. As one of the underlying principles of the financial securities market, stocks move and prices fluctuate based on information as it becomes public. If an insider has information the rest of the market isn’t privy to and acts based on this information before it becomes public, they can gain an unfair advantage.
Can Insider Trading Be Legal?
Insider trading can be either illegal or legal based on the timing of the trade. Insider trading is illegal when a trade is executed before the information is made public. However, if the trade is made after the information has been made public, the trading isn’t illegal.
The most common insiders are executives, directors, and CEOs because they are usually privy to information before it becomes public. However, individuals, like stock brokers or even family members, can be convicted of insider trading. The Securities and Exchange Commission (SEC) defines an insider as:
- A person who has expressed and agreed to maintain confidentiality
- When a person has a mutual confidentiality based on their pattern, history, and/or practice
- When a person gains information from a parent, sibling, spouse, or child; the only exemption from this definition is if the relationship doesn’t give rise to confidentiality.
When Is Insider Trading Legal?
When the information is made public, insider trading can be legal. At this time, the insider conducting the trade doesn’t have an advantage over other investors. In any case, the SEC requires every insider to report their transactions. Considering insiders have insight into the inner workings of a company, it’s suggested for investors to monitor these reports to effectively understand and monitor how insiders are trading their stock.
What Constitutes Insider Trading “Information”?
The SEC adopted new laws regarding insider trading in August of 2000. The law defines information as any material that could affect the company’s stock if released. The most typical types of material are listed below:
- Announcements of a tender or buy offer
- The release of an adverse earnings statement
- The declaration of a merger
- The introduction of new information regarding a new discovery
- The announcement of a dividend
- An unpublished buy or sell recommendation by an analyst
- Any information that would constitute an exclusive in a financial column
Even though everyone should play fair, certain individuals are always looking to gain an unfair advantage. If you believe you have been wrongly accused of a federal crime, contact Stockard, Johnston, Brown, Netardus & Doyle, P.C. in Amarillo, Texas, to protect your rights.