Insider Trading Definition

Insider trading is the practice of trading stock or securities held by a company by high-ranking members within the company. Insider trading is illegal when parties trade based upon material non-public information concerning a company that the party has explicit knowledge of. Generally, insider trading involves people who are tipped off by high level corporate officials about their company's non-public status and performance giving them an advantage in regards to selling or buying stock before the stock is affected. Such activity raises the cost of capital for securities issuers and decreases overall economic growth.

Insider trading cases are most often brought against:

  • Corporate officers, directors, and employees who trade a company's securities after learning of significant and confidential information about their company
  • Friends, business associates, acquaintances, and family members of corporate employees who traded the securities after receiving confidential corporate information
  • Employees of law, banking, brokerage and printing firms who were given corporate secrets in exchange for services to the corporation whose securities they traded
  • Government employees who learned of confidential information due to their employment by the government
  • Others who took advantage of confidential information from their employers

The US Securities and Exchange Commission is particularly vigilant against the practice of insider trading. Since the practice lowers investor confidence in the integrity of the securities market, the SEC has made it a priority to detect and prosecute all violations of this sort. Recently, the SEC has adopted new rules to further resolve the issue of this sort of trading practice. Rule 10b5-1 permits that, in specific circumstances, people can trade on material non-public information if it is shown that the information they were made aware of is not a factor in the decision to trade, such as pre-existing plans, contracts, or instructions made in good faith.

Rule 10b5-2 illustrates how the misappropriation theory applies to specific non-business relationships. The rule states that a person who receives confidential information under circumstances outlined in the rule would owe a duty of trust or confidence and therefore could be held liable under the misappropriation theory. These rules were designed by the SEC to help clear up disagreements between the courts regarding insider trading. If you have been involved in issues associated with this trading practice, our securities lawyers can help.

Have you or someone you know become a victime of insider training? If so, contact one of our securities fraud attorneys in your area today!

Updated: LW

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Have you or someone you know become a victime of insider training? If so, contact one of our securities fraud attorneys in your area today!