Securities Law

Insider Trading

Common Securities Violations

Insider Trading refers generally to the buying or selling of a corporate security while in possession of material information about that corporation that is not known to the public.

Insider trading is unlawful because trading while having special knowledge is unfair to other investors who don’t have access to such knowledge. Misuse of privileged information undermines investor confidence, threatens the fair functioning of the markets, and is considered a breach of fiduciary duty.

Often, this information is obtained by corporate insiders who have access to this material information based on their position inside the organization. That insider then buys or sells the securities based on that information. Insider trading may also occur when a corporate insider “tips” the nonpublic information to someone outside of the organization, and that person then buys or sells securities. In that case both the “tipper” of the information and the “tippee” (the person receiving the information) are liable for illegal insider trading. An example of illegal insider trading is when an executive at Company A learned, prior to a public announcement, that Company A will be taken over, and bought shares in Company A knowing that the share price would likely rise.

Misappropriation is another example of illegal insider trading, where an outsider trades on inside information received because of a confidential relationship or role with the company such as those of accounting, banking, brokerage, law, or printing firms. An example of misappropriation is when Company A consults with an accountant confidentially for tax advice in advance of a merger, and the accountant subsequently executes trades based on that merger information. Another examples of illegal insider trading is when government employees or political consultants trade on confidential information they learned in the course of their employment.

The SEC conducts market surveillance using sophisticated tools to detect suspicious trades and potential illegal insider trading. The Commission also receives numerous tips regarding potential illegal insider trading from wronged investors, rival traders, and whistleblowers.

6.3% of SEC whistleblower tips involved insider trading

In recent years, on average, 6.3% of all SEC whistleblower tips have involved this type of securities violation.

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