Insider Trading

You can’t hear the term “insider trading” without thinking about poor Martha Stewart, locked up on house arrest. But what area of corporate law did Martha break that put her at the mercy of the Securities and Exchange Commission? Insider trading deals with the legal and illegal trading of stock by those inside a corporation.

When is it illegal?

If you’re part of a company, whether your are an executive or a small shareholder, you have the freedom to sell or buy that company’s stock. That is the definition of insider trading---it is not necessarily an illegal act. It becomes illegal when those inside the corporation use knowledge that the public isn’t privy to, in order to make their trading decision. Insider trading can also happen when someone not necessarily inside the company is tipped off on this insider info, and chooses to act on it buy buying or selling securities.

It’s easy to see why such conduct would be illegal—it undermines the markets, and doesn’t provide a fair or ethical playing field for all owners of that particular stock. From a financial standpoint, insider trading has been known to depress economic growth. The Securities and Exchange Commission is the branch of the government who investigates and persecutes allegations of insider trading.

Examples of insider trading

While the spirit of the law banning insider trading is pretty straightforward, people are always thinking up new ways to use their special knowledge to make a buck. Here are some types of insider trading cases the SEC has prosecuted:

  • Financial officers, bankers, brokers, or others who knew of sensitive financial information through their work for the company
  • Employees of the federal and state government who knew information about a company through their position in the government
  • Shareholders, officers, or other employees of a company who traded securities after learning information before its release to the public
  • Associates, family members, and friends of employees, officers, or shareholders in a company who acted on a tip provided by that insider

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