insider trading

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Who Is Guilty Of Insider Trading?

What Is Insider Trading?

When most people hear about insider trading they usually think of illegal activity; but insider trading can also be legal. Confused? You’re not alone, many people think that all insider trading activity is illegal. Let’s first define insider trading.

Insider trading occurs when a person has access to non-public corporate information and uses that confidential information to profit from a stock trade (buying or selling). You will notice that based on that insider trading definition, the key concept here is “non-public information”. In other words, to be consider illegal insider trading the information used to make a stock trade has to be unknown by the public.

When It’s Illegal

The most current and well known example of insider trading is the Martha Stewart case. Back in 2001, Martha Stewart held stock in the ImClone Company. She sold her stock just before ImClone announced to the public that their cancer treatment drug had been rejected by the FDA. By selling her stock she avoided a loss because after the announcement ImClone’s stock dropped.

Stewart was not charged with insider trading because the government could not prove that she used any non-public information to make her decision to sell her ImClone stock. However, Sam Waksal, the CEO of ImClone was charged because he also sold his stock holdings before the announcement, avoiding a loss.

The Securities and Exchange Commission takes insider trading laws very, very seriously. Stewart only spent several months in a federal prison for lying to the government; Waksal got several years for insider trading activity.

 When It’s Legal

Officers, directors, owners and even employees of a company are technically insiders, right? Well when any of these individuals buy or sell stock of their own company, it is legal and not considered insider trading only if they properly register their activity with the SEC (Securities and Exchange Commission).

The SEC monitors stock trades and has warning signs that they use to catch inappropriate trades. Some red flags used by the SEC are obvious, some more discreet, but regardless, the SEC is watching; so why anyone would want to make illegal stock trades goes beyond common sense.