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Insider Trading

*****Disclaimer: This is not legal advice and is for educational purposes only. This does not create an attorney-client privilege.


Insider trading is a term referring to when someone trades public stock in a company while operating with knowledge about non-public information pertaining to values of stocks or shifts in the market. The U.S. Securities and Exchange Commission, or SEC, defines it as;


“the buying or selling of a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.”



The legality of insider trading is dependent on when the “insider” actually trades or buys the stocks. If the material knowledge they have about the stocks they intend to trade is still not publicly available, then they would be committing a crime.


So why exactly does this make a difference? Well, the reason the timeline is so important for these stock dealings is because the idea is for everyone to be operating on a level playing field. If certain individuals have access to additional information that would give them an insight into which stocks will be shooting up in value, or when they will take a plummet, then they have an advantage that allows them to make a lot of money and play the game perfectly. However, for the public who has shares in these stocks, it is really more of a gambling game and based on their own educated guesses informed by public information. Essentially, everyone needs to be trading based on the same information and their own judgments, otherwise the deck gets significantly stacked in favor of the insider.


Access to material, non-public information is the defining thing here. This is a somewhat vague sounding term, but what it really means is any information not on the public record that could significantly impact the decision of whether or not to buy/sell. For example, it could be considered insider trading if say, the President or his cronies, decided to buy stocks in mask manufacturing companies back in January or December because they knew due to secret briefings that corona was airborne and masks would be a defense against it, while the public still did not. You do not need to be a member of the company in question to be considered guilty of insider trading. For example, if someone in the company told a family member and they made the investments based on that information, they could still be convicted.


The penalties for insider trading can be severe, though you will find our justice system often shows more leniency to perpetrators of white collar crime such as this. Even though crimes such as this could cost much more in the damages than say a drugstore holdup, on the scale of millions, the privilege of the individuals committing them often means they face less harsh penalties. The maximum possible prison sentence for insider trading is 20 years, and the maximum fine possible is $5,000,000.


Sources:

https://www.investopedia.com/terms/i/insidertrading.asp

https://www.sec.gov/Archives/edgar/data/25743/000138713113000737/ex14_02.htm#:~:text=Criminal%20Penalties.,Civil%20Sanctions.

https://www.bbc.com/news/world-us-canada-47477754

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