Why Is Insider Trading Illegal?

Illegal insider trading is when a person uses non-public, material information about a publicly-traded company to influence the purchase or sale of that company's securities or stocks. In other words, insider trading occurs when someone has valuable information about a company that only a few people have access to. Armed with this information, they either buy or sell stocks of that company, allowing them to make significant gains or avoid major losses.

Non-public information is that only a few people have access to and has not been released to the investing public.

It can include, but is not limited to:

  • plans about future investments,
  • negotiations,
  • decisions affecting the company's products or services
  • acquisitions
  • management changes

Information is considered material when it has the potential to impact the market value of the company's stocks or securities.

Insider trading is illegal because it is considered a breach of fiduciary duty and decreases confidence in the financial markets.

Hypothetical Examples of Illegal Insider Trading

Insiders are typically people who have a significant interest in a company. Such individuals can include officers, directors, and employees. Because of their roles and involvement in the company, they are privy to information most others wouldn't have.

Although insiders may be a key group of people within a corporation, they are not the only ones who can commit insider trading. Anyone who makes a buying or selling decision based on material, non-public information may be accused of the offense.

A few examples of illegal insider trading include:

  • A CEO who purchases shares of their company because they know about a merger that's about to happen.
  • A friend of a high-level employee who, after being tipped off about a product defect that will decrease share prices, immediately sells their shares of the company.
  • A board member with access to a non-released economic report who buys additional shares.

Why Insider Trading Is Illegal

Insider trading is illegal because it introduces unfair practices into the market. The individual who buys or sells shares makes their decision based on information many others didn't have.

Additionally, insider trading is a breach of fiduciary duty. The people with access to material, non-public information are entrusted to do what is in the company's best interest. When they disclose important details about the company to others or use it for their own gain, they violate the terms of their position.

Legal Insider Trading Exists

Not all instances of insider trading are illegal. If a CEO or other employee of a company wishes to buy or sell shares based on publicly available information, they must report their transactions to the SEC. When insider trading is done this way, it's not considered illegal.

Cases involving insider trading are complex. Anyone accused of such conduct should speak with an attorney experienced in handling such matters.

At Martin G. Weinberg, Attorney at Law, we have more than 40 years of experience and are ready to put our knowledge and skills to work for you. For legal representation in Boston, call us at (617) 227-3700 or contact us online today.