An insider is one who has information about a company and makes a transaction based on privileged information. This undermines the faith that people have in the market and harms investors who do not have access to the same information.
The information is the value of the shares and it is illegal to trade if you have non-public information that affects the price or value of the share. Insider trading punishes the general business community, which speculates on a trend for company information without real knowledge. For example, if you, as a company employee, know that a new product will revolutionize the industry and raise your company’s stock prices and you buy as many shares as possible before the public offering, you would be guilty of insider trading.
Illegal actions take effect when buying or selling a security while you have non-public information or materials about the shares or securities. This includes trading by those who have a relationship of trust. The SEC has prosecuted internal trading cases against corporate employees, employees and directors who traded in the company’s securities after learning of significant events. Friends and business associates of these employees and directors have filed lawsuits against them for information provided by those they trust. If you are an employee of a law firm, bank or brokerage firm that has received information about the company and you have traded this information, you have just broken the law.
Insider trading destabilizes investors’ confidence in the integrity and fairness of securities markets. SEC agents view the detection and prosecution of domestic trade abuses as part of their high enforcement priorities. Investors should be aware of the dangers of trading on the advice of employees or employees who know personal information about a company. If you are considering trading inside information, be aware that this act imposes severe civil and criminal penalties. Prison time is an option and fines that can simply go bankrupt can be imposed.
Insider trading can also be legal. It is legal when corporate employees, directors, shareholders or employees buy and sell shares within their own companies. They report their transactions to the SEC and this information is used to identify companies with high investment potential. The premise: if insiders buy shares in their own company, they need to know that their company is growing.
You can trade in good faith using inside advice or information if you can provide evidence that the information you received was not relevant to your trading decision and that your trade was made in good faith. Keep in mind, however, that the burden of proof is on your shoulders and can be very difficult to verify. Keep good records of every conversation you have with brokers. Tips for documents and where they came from and when you received them.
If a regulatory officer contacts you about your transactions, hire a securities attorney before talking to regulators. Gather all your records and be prepared to justify your internal transactions.