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Insider trading is the trading of a
public company A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange ( ...
's stock or other securities (such as bonds or stock options) based on material, nonpublic information about the company. In various countries, some kinds of trading based on insider information is illegal. This is because it is seen as unfair to other investors who do not have access to the information, as the investor with insider information could potentially make larger profits than a typical investor could make. The rules governing insider trading are complex and vary significantly from country to country. The extent of enforcement also varies from one country to another. The definition of insider in one jurisdiction can be broad, and may cover not only insiders themselves but also any persons related to them, such as brokers, associates, and even family members. A person who becomes aware of non-public information and trades on that basis may be guilty of a crime. Trading by specific insiders, such as employees, is commonly permitted as long as it does not rely on material information not in the
public domain The public domain (PD) consists of all the creative work to which no exclusive intellectual property rights apply. Those rights may have expired, been forfeited, expressly waived, or may be inapplicable. Because those rights have expired ...
. Many jurisdictions require that such trading be reported so that the transactions can be monitored. In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. In these cases, insiders in the United States are required to file a Form 4 with the U.S. Securities and Exchange Commission (SEC) when buying or selling shares of their own companies. The authors of one study claim that illegal insider trading raises the cost of capital for securities issuers, thus decreasing overall economic growth. However, some economists, such as
Henry Manne Henry G. Manne (May 10, 1928 – January 17, 2015) was an American writer and academic, considered a founder of the law and economics discipline. He was Dean Emeritus of the George Mason University School of Law. Born in New Orleans, Louisiana, M ...
, have argued that insider trading should be allowed and could, in fact, benefit markets. There has long been "considerable academic debate" among business and legal scholars over whether or not insider trading should be illegal. Several arguments against outlawing insider trading have been identified: for example, although insider trading is illegal, most insider trading is never detected by law enforcement, and thus the illegality of insider trading might give the public the potentially misleading impression that "stock market trading is an unrigged game that anyone can play." Some legal analysis has questioned whether insider trading actually harms anyone in the legal sense, since some have questioned whether insider trading causes anyone to suffer an actual "loss", and whether anyone who suffers a loss is owed an actual legal duty by the insiders in question.


Illegal

Rules prohibiting or criminalizing insider trading on material non-public information exist in most jurisdictions around the world (Bhattacharya and Daouk, 2002), but the details and the efforts to enforce them vary considerably. In the United States, Sections 16(b) and 10(b) of the Securities Exchange Act of 1934 directly and indirectly address insider trading. The U.S. Congress enacted this law after the stock market crash of 1929. While the United States is generally viewed as making the most serious efforts to enforce its insider trading laws, the broader scope of the European model legislation provides a stricter framework against illegal insider trading. In the European Union and the United Kingdom all trading on non-public information is, under the rubric of
market abuse In economics and finance, market abuse may arise in circumstances where investors in a financial market have been unreasonably disadvantaged, directly or indirectly, by others who: * have used information which is not publicly available ( insid ...
, subject at a minimum to civil penalties and to possible criminal penalties as well. UK's Financial Conduct Authority has the responsibility to investigate and prosecute insider dealing, defined by the Criminal Justice Act 1993.


Definition of "insider"

In the United States, Canada, Australia, Germany and Romania for mandatory reporting purposes, corporate insiders are defined as a company's officers, directors and any beneficial owners of more than 10% of a class of the company's equity securities. Trades made by these types of insiders in the company's own stock, based on material non-public information, are considered fraudulent since the insiders are violating the fiduciary duty that they owe to the shareholders. The corporate insider, simply by accepting employment, has undertaken a legal obligation to the shareholders to put the shareholders' interests before their own, in matters related to the corporation. When insiders buy or sell based upon company-owned information, they are said to be violating their obligation to the shareholders. For example, illegal insider trading would occur if the
chief executive officer A chief executive officer (CEO), also known as a central executive officer (CEO), chief administrator officer (CAO) or just chief executive (CE), is one of a number of corporate executives charged with the management of an organization especiall ...
of Company A learned (prior to a public announcement) that Company A will be taken over and then bought shares in Company A while knowing that the share price would likely rise. In the United States and many other jurisdictions, however, "insiders" are not just limited to corporate officials and major shareholders where illegal insider trading is concerned but can include any individual who trades shares based on material non-public information in violation of some duty of trust. This duty may be imputed; for example, in many jurisdictions, in cases of where a corporate insider "tips" a friend about non-public information likely to have an effect on the company's share price, the duty the corporate insider owes the company is now imputed to the friend and the friend violates a duty to the company if he trades on the basis of this information.


Liability

Liability for inside trading violations generally cannot be avoided by passing on the information in an "I scratch your back; you scratch mine" or '' quid pro quo'' arrangement if the person receiving the information knew or should have known that the information was material non-public information. In the United States, at least one court has indicated that the insider who releases the non-public information must have done so for an improper purpose. In the case of a person who receives the insider information (called the "tippee"), the tippee must also have been aware that the insider released the information for an improper purpose.''United States v. Newman'', 773 F.3d 438 (2d Cir. 2014). One commentator has argued that if Company A's CEO did not trade on undisclosed
takeover In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to ...
news, but instead passed the information on to his brother-in-law who traded on it, illegal insider trading would still have occurred (albeit by proxy, by passing it on to a "non-insider" so Company A's CEO would not get his hands dirty).Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading"


Misappropriation theory

A newer view of insider trading, the misappropriation theory, is now accepted in U.S. law. It states that anyone who misappropriates material non-public information and trades on that information in any stock may be guilty of insider trading. This can include elucidating material non-public information from an insider with the intention of trading on it, or passing it on to someone who will.


Proof of responsibility

Proving that someone has been responsible for a trade can be difficult because traders may try to hide behind nominees, offshore companies, and other proxies. The
Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
(SEC) prosecutes over 50 cases each year, with many being settled administratively out of court. The SEC and several stock exchanges actively monitor trading, looking for suspicious activity. The SEC does not have criminal enforcement authority, but can refer serious matters to the U.S. Attorney's Office for further investigation and prosecution.


Trading on information in general

In the United States and most non-European jurisdictions not all trading on non-public information is illegal insider trading. For example, a person in a restaurant who hears the CEO of Company A at the next table tell the CFO that the company's profits will be higher than expected and then buys the stock is not guilty of insider trading—unless he or she had some closer connection to the company or company officers. However, even where the tippee is not himself an insider, where the tippee knows that the information is non-public and the information is paid for, or the tipper receives a benefit for giving it, then in the broader-scope jurisdictions the subsequent trading is illegal. Notwithstanding, information about a tender offer (usually regarding a merger or acquisition) is held to a higher standard. If this type of information is obtained (directly or indirectly) and there is reason to believe it is nonpublic, there is a duty to disclose it or abstain from trading. In the United States in addition to civil penalties, the trader may also be subject to criminal prosecution for fraud or where SEC regulations have been broken, the U.S. Department of Justice (DOJ) may be called to conduct an independent parallel investigation. If the DOJ finds criminal wrongdoing, the department may file criminal charges.


Legal

Legal trades by insiders are common,Thomas Newkirk. (1998)
Speech by SEC Staff: Insider Trading – A U.S. Perspective
. 16th International Symposium on Economic Crime at Jesus College, Cambridge, England on September 19, 1998
as employees of
publicly traded A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange ( ...
corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and ...
s often have stock or stock options. These trades are made public in the United States through Securities and Exchange Commission filings, mainly Form 4. U.S.
SEC Rule 10b5-1 SEC Rule 10b5-1, codified at , is a regulation enacted by the United States Securities and Exchange Commission (SEC) in 2000. The SEC states that Rule 10b5-1 was enacted in order to resolve an unsettled issue over the definition of insider tradin ...
clarified that the prohibition against insider trading does not require proof that an insider actually used material nonpublic information when conducting a trade; possession of such information alone is sufficient to violate the provision, and the SEC would infer that an insider in possession of material nonpublic information used this information when conducting a trade. However, SEC Rule 10b5-1 also created for insiders an affirmative defense if the insider can demonstrate that the trades conducted on behalf of the insider were conducted as part of a pre-existing
contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...
or written binding plan for trading in the future. For example, if an insider expects to retire after a specific period of time and, as part of retirement planning, the insider has adopted a written binding plan to sell a specific amount of the company's stock every month for two years, and the insider later comes into possession of material nonpublic information about the company, trades based on the original plan might not constitute prohibited insider trading.


United States law

Until the 21st century and the European Union's
market abuse In economics and finance, market abuse may arise in circumstances where investors in a financial market have been unreasonably disadvantaged, directly or indirectly, by others who: * have used information which is not publicly available ( insid ...
laws, the United States was the leading country in prohibiting insider trading made on the basis of material non-public information. Thomas Newkirk and Melissa Robertson of the SEC summarize the development of US insider trading laws. Insider trading has a base offense level of 8, which puts it in Zone A under the U.S. Sentencing Guidelines. This means that first-time offenders are eligible to receive probation rather than incarceration.


Statutory

U.S. insider trading prohibitions are based on English and American common law prohibitions against fraud. In 1909, well before the Securities Exchange Act was passed, the
United States Supreme Court The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point o ...
ruled that a corporate director who bought that company's stock when he knew the stock's price was about to increase committed fraud by buying but not disclosing his inside information. Section 15 of the Securities Act of 1933 contained prohibitions of fraud in the sale of securities, later greatly strengthened by the
Securities Exchange Act of 1934 The Securities Exchange Act of 1934 (also called the Exchange Act, '34 Act, or 1934 Act) (, codified at et seq.) is a law governing the secondary trading of securities ( stocks, bonds, and debentures) in the United States of America. A land ...
. Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits (from any purchases and sales within any six-month period) made by corporate directors, officers, or stockholders owning more than 10% of a firm's shares. Under Section 10(b) of the 1934 Act, SEC Rule 10b-5, prohibits fraud related to securities trading. The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 place penalties for illegal insider trading as high as three times the amount of profit gained or loss avoided from the illegal trading.


SEC regulations

SEC regulation FD ("Fair Disclosure") requires that if a company intentionally discloses material non-public information to one person, it must simultaneously disclose that information to the public at large. In the case of an unintentional disclosure of material non-public information to one person, the company must make a public disclosure "promptly". Insider trading, or similar practices, are also regulated by the SEC under its rules on takeovers and tender offers under the Williams Act.


Court decisions

Much of the development of insider trading law has resulted from court decisions. In 1909, the Supreme Court of the United States ruled in ''Strong v. Repide'' that a director who expects to act in a way that affects the value of shares cannot use that knowledge to acquire shares from those who do not know of the expected action. Even though, in general, ordinary relations between directors and shareholders in a business corporation are not of such a fiduciary nature as to make it the duty of a director to disclose to a shareholder general knowledge regarding the value of the shares of the company before he purchases any from a shareholder, some cases involve special facts that impose such duty. In 1968, the Second Circuit Court of Appeals advanced a "level playing field" theory of insider trading in '' SEC v. Texas Gulf Sulphur Co.'' The court stated that anyone in possession of inside information must either disclose the information or refrain from trading. Officers of the Texas Gulf Sulphur Company had used inside information about the discovery of the Kidd Mine to make profits by buying shares and call options on company stock. In 1984, the Supreme Court of the United States ruled in the case of ''Dirks v. Securities and Exchange Commission'' that tippees (receivers of second-hand information) are liable if they had reason to believe that the tipper had breached a fiduciary duty in disclosing confidential information. One such example would be if the tipper received any personal benefit from the disclosure, thereby breaching his or her duty of loyalty to the company. In ''Dirks'', the "tippee" received confidential information from an insider, a former employee of a company. The reason the insider disclosed the information to the tippee, and the reason the tippee disclosed the information to third parties, was to blow the whistle on massive fraud at the company. As a result of the tippee's efforts the fraud was uncovered, and the company went into bankruptcy. But, while the tippee had given the "inside" information to clients who made profits from the information, the U.S. Supreme Court ruled that the tippee could not be held liable under the federal securities laws—for the simple reason that the insider from whom he received the information was not releasing the information for an improper purpose (a personal benefit), but rather for the purpose of exposing the fraud. The Supreme Court ruled that the tippee could not have been aiding and abetting a securities law violation committed by the insider—for the simple reason that no securities law violation had been committed by the insider. In ''Dirks'', the Supreme Court also defined the concept of "constructive insiders", who are lawyers, investment bankers, and others who receive confidential information from a corporation while providing services to the corporation. Constructive insiders are also liable for insider trading violations if the corporation expects the information to remain confidential, since they acquire the fiduciary duties of the true insider. The next expansion of insider trading liability came in ''SEC vs. Materia'' 745 F.2d 197 (2d Cir. 1984), the case that first introduced the misappropriation theory of liability for insider trading. Materia, a financial printing firm proofreader, and clearly not an insider by any definition, was found to have determined the identity of takeover targets based on proofreading tender offer documents in the course of his employment. After a two-week trial, the district court found him liable for insider trading, and the Second Circuit Court of Appeals affirmed holding that the theft of information from an employer, and the use of that information to purchase or sell securities in another entity, constituted a fraud in connection with the purchase or sale of a securities. The misappropriation theory of insider trading was born, and liability further expanded to encompass a larger group of outsiders. In ''United States v. Carpenter'' (1986) the U.S. Supreme Court cited an earlier ruling while unanimously upholding mail and wire fraud convictions for a defendant who received his information from a journalist rather than from the company itself. The journalist
R. Foster Winans RobertWinans Family Genealogy', published 1987 by Alice Winans Egy Woolley, page 96 of the Conrad Winans section, available from the LDS church's Family History Library on microfiche #6088122, or online at Foster Winans (born August 5, 1948) is a ...
was also convicted, on the grounds that he had misappropriated information belonging to his employer, the ''
Wall Street Journal ''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...
''. In that widely publicized case, Winans traded in advance of "Heard on the Street" columns appearing in the Journal. The Court stated in ''Carpenter'': "It is well established, as a general proposition, that a person who acquires special knowledge or information by virtue of a confidential or fiduciary relationship with another is not free to exploit that knowledge or information for his own personal benefit but must account to his principal for any profits derived therefrom." However, in upholding the securities fraud (insider trading) convictions, the justices were evenly split. In 1997, the U.S. Supreme Court adopted the misappropriation theory of insider trading in ''United States v. O'Hagan'', 521 U.S. 642, 655 (1997). O'Hagan was a partner in a law firm representing Grand Metropolitan, while it was considering a tender offer for Pillsbury Company. O'Hagan used this inside information by buying call options on Pillsbury stock, resulting in profits of over $4.3 million. O'Hagan claimed that neither he nor his firm owed a fiduciary duty to Pillsbury, so he did not commit fraud by purchasing Pillsbury options. The Court rejected O'Hagan's arguments and upheld his conviction. The "misappropriation theory" holds that a person commits fraud "in connection with" a securities transaction and thereby violates 10(b) and Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. Under this theory, a fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of the information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company's stock, the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those who entrusted him with access to confidential information. The Court specifically recognized that a corporation's information is its property: "A company's confidential information ... qualifies as property to which the company has a right of exclusive use. The undisclosed misappropriation of such information in violation of a fiduciary duty ... constitutes fraud akin to embezzlement – the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another." In 2000, the SEC enacted
SEC Rule 10b5-1 SEC Rule 10b5-1, codified at , is a regulation enacted by the United States Securities and Exchange Commission (SEC) in 2000. The SEC states that Rule 10b5-1 was enacted in order to resolve an unsettled issue over the definition of insider tradin ...
, which defined trading "on the basis of" inside information as any time a person trades while aware of material nonpublic information. It is no longer a defense for one to say that one would have made the trade anyway. The rule also created an affirmative defense for pre-planned trades. In '' Morgan Stanley v. Skowron'', 989 F. Supp. 2d 356 (S.D.N.Y. 2013), applying New York's faithless servant doctrine, the court held that a hedge fund's portfolio manager engaging in insider trading in violation of his company's code of conduct, which also required him to report his misconduct, must repay his employer the full $31 million his employer paid him as compensation during his period of faithlessness. The court called the insider trading the "ultimate abuse of a portfolio manager's position". The judge also wrote: "In addition to exposing Morgan Stanley to government investigations and direct financial losses, Skowron's behavior damaged the firm's reputation, a valuable corporate asset." In 2014, in the case of ''United States v. Newman'', the United States Court of Appeals for the Second Circuit cited the Supreme Court's decision in ''Dirks'', and ruled that for a "tippee" (a person who used information they received from an insider) to be guilty of insider trading, the tippee must have been aware not only that the information was insider information, but must also have been aware that the insider released the information for an improper purpose (such as a personal benefit). The Court concluded that the insider's breach of a fiduciary duty not to release confidential information—in the absence of an improper purpose on the part of the insider—is not enough to impose criminal liability on either the insider or the tippee. In 2016, in the case of '' Salman v. United States'', the U.S. Supreme Court held that the benefit a tipper must receive as predicate for an insider-trader prosecution of a tippee need not be pecuniary, and that giving a 'gift' of a tip to a family member is presumptively an act for the personal though intangible benefit of the tipper. In 2019, in the case of ''United States v. Blaszczak'', the U.S. Court of Appeals for the Second Circuit ruled that the “personal-benefit” test announced in ''Dirks'' does not apply to Title 18 fraud statutes, such as 18 USC 1348.


By members of Congress

Members of the
US Congress The United States Congress is the legislature of the federal government of the United States. It is bicameral, composed of a lower body, the House of Representatives, and an upper body, the Senate. It meets in the U.S. Capitol in Washin ...
are exempt from the laws that ban insider trading. Because they generally do not have a confidential relationship with the source of the information they receive, however, they do not meet the usual definition of an "insider". House of Representatives rules may however consider congressional insider trading unethical. A 2004 study found that stock sales and purchases by senators outperformed the market by 12.3% per year.
Peter Schweizer Peter Franz Schweizer (born November 24, 1964) is an American political consultant and writer. He is the president of the Government Accountability Institute (GAI), senior editor-at-large of far-right media organization Breitbart News, and a fo ...
points out several examples of insider trading by members of Congress, including action taken by
Spencer Bachus Spencer Thomas Bachus III (born December 28, 1947) is an American politician. He is a former U.S. Representative for the state of Alabama, serving from 1993 to 2015. A member of the Republican Party, he served as ranking member (2007–2011) a ...
following a private, behind-the-doors meeting on the evening of September 18, 2008 when Hank Paulson and
Ben Bernanke Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Duri ...
informed members of Congress about the issues due to the
financial crisis of 2007–2008 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of ...
, Bachus then shorted stocks the next morning and cashed in his profits within a week. Also attending the same meeting were Senator Dick Durbin and John Boehner; the same day (trade effective the next day), Durbin sold mutual-fund shares worth $42,696, and reinvested it all with Warren Buffett. Also the same day (trade effective the next day), Congressman Boehner cashed out of an equity mutual fund. In May 2007, a bill entitled the Stop Trading on Congressional Knowledge Act, or
STOCK Act The Stop Trading on Congressional Knowledge (STOCK) Act of 2012 () is an Act of Congress designed to combat insider trading. It was signed into law by President Barack Obama on April 4, 2012. The law prohibits the use of non-public information for ...
was introduced that would hold congressional and federal employees liable for stock trades they made using information they gained through their jobs and also regulate analysts or political intelligence firms that research government activities. The
STOCK Act The Stop Trading on Congressional Knowledge (STOCK) Act of 2012 () is an Act of Congress designed to combat insider trading. It was signed into law by President Barack Obama on April 4, 2012. The law prohibits the use of non-public information for ...
was enacted on April 4, 2012. As of 2021, in the approximately nine month period up to September 2021, Senate and House members disclosed 4,000 trades worth at least $315 million of stocks and bonds.


Arguments for legalizing

Some economists and legal scholars (such as
Henry Manne Henry G. Manne (May 10, 1928 – January 17, 2015) was an American writer and academic, considered a founder of the law and economics discipline. He was Dean Emeritus of the George Mason University School of Law. Born in New Orleans, Louisiana, M ...
,
Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
, Thomas Sowell, Daniel Fischel, and Frank H. Easterbrook) have argued that laws against insider trading should be repealed. They claim that insider trading based on material nonpublic information benefits investors, in general, by more quickly introducing new information into the market. Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that." Friedman did not believe that the trader should be required to make his trade known to the public, because the buying or selling pressure itself is information for the market. Other critics argue that insider trading is a victimless act: a willing buyer and a willing seller agree to trade property that the seller rightfully owns, with no prior contract (according to this view) having been made between the parties to refrain from trading if there is asymmetric information. ''
The Atlantic ''The Atlantic'' is an American magazine and multi-platform publisher. It features articles in the fields of politics, foreign affairs, business and the economy, culture and the arts, technology, and science. It was founded in 1857 in Boston, ...
'' has described the process as "arguably the closest thing that modern finance has to a victimless crime". Legalization advocates also question why "trading" where one party has more information than the other is legal in other markets, such as
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...
, but not in the stock market. For example, if a
geologist A geologist is a scientist who studies the solid, liquid, and gaseous matter that constitutes Earth and other terrestrial planets, as well as the processes that shape them. Geologists usually study geology, earth science, or geophysics, althou ...
knows there is a high likelihood of the discovery of petroleum under Farmer Smith's land, he may be entitled to make Smith an offer for the land, and buy it, without first telling Farmer Smith of the geological data. Advocates of legalization make
free speech Freedom of speech is a principle that supports the freedom of an individual or a community to articulate their opinions and ideas without fear of retaliation, censorship, or legal sanction. The right to freedom of expression has been recog ...
arguments. Punishment for communicating about a development pertinent to the next day's stock price might seem an act of censorship. If the information being conveyed is proprietary information and the corporate insider has contracted to not expose it, he has no more right to communicate it than he would to tell others about the company's confidential new product designs, formulas, or bank account passwords. Some authors have used these arguments to propose legalizing insider trading on negative information (but not on positive information). Since negative information is often withheld from the market, trading on such information has a higher value for the market than trading on positive information. There are very limited laws against "insider trading" in the commodities markets if, for no other reason than that the concept of an "insider" is not immediately analogous to commodities themselves (corn, wheat, steel, etc.). However, analogous activities such as front running are illegal under US commodity and futures trading laws. For example, a commodity broker can be charged with fraud for receiving a large purchase order from a client (one likely to affect the price of that commodity) and then purchasing that commodity before executing the client's order to benefit from the anticipated price increase.


Commercialisation

The advent of the Internet has provided a forum for the commercialisation of trading on insider information. In 2016 a number of
dark web The dark web is the World Wide Web content that exists on ''darknets'': overlay networks that use the Internet but require specific software, configurations, or authorization to access. Through the dark web, private computer networks can comm ...
sites were identified as marketplaces where such non-public information was bought and sold. At least one such site used
bitcoin Bitcoin (abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...
s to avoid currency restrictions and to impede tracking. Such sites also provide a place for soliciting for corporate informants, where non-public information may be used for purposes other than stock trading.


Legal differences among jurisdictions

The US and the UK vary in the way the law is interpreted and applied with regard to insider trading. In the UK, the relevant laws are the Criminal Justice Act 1993, Part V, Schedule 1; the Financial Services and Markets Act 2000, which defines an offence of "
market abuse In economics and finance, market abuse may arise in circumstances where investors in a financial market have been unreasonably disadvantaged, directly or indirectly, by others who: * have used information which is not publicly available ( insid ...
"; and the European Union Regulation No 596/2014. The principle is that it is illegal to trade on the basis of market-sensitive information that is not generally known. This is a much broader scope that under U.S. law. The key differences from U.S. law are that no relationship to either the issuer of the security or the tipster is required; all that is required is that the guilty party traded (or caused trading) whilst having inside information, and there is no '' scienter'' requirement under UK law. Japan enacted its first law against insider trading in 1988. Roderick Seeman said, "Even today many Japanese do not understand why this is illegal. Indeed, previously it was regarded as common sense to make a profit from your knowledge." In
Malta Malta ( , , ), officially the Republic of Malta ( mt, Repubblika ta' Malta ), is an island country in the Mediterranean Sea. It consists of an archipelago, between Italy and Libya, and is often considered a part of Southern Europe. It lies ...
the law follows the European broader scope model. The relevant statute is the Prevention of Financial Markets Abuse Act of 2005, as amended. Earlier acts included the Financial Markets Abuse Act in 2002, and the Insider Dealing and Market Abuse Act of 1994. The
International Organization of Securities Commissions The International Organization of Securities Commissions (IOSCO) is an association of organizations that regulate the world's securities and futures markets. Members are typically primary securities and/or futures regulators in a national jurisdi ...
(IOSCO) paper on the "Objectives and Principles of Securities Regulation" (updated to 2003) states that the three objectives of good securities market regulation are investor protection, ensuring that markets are fair, efficient and transparent, and reducing systemic risk. The discussion of these "Core Principles" state that "investor protection" in this context means "Investors should be protected from misleading, manipulative or fraudulent practices, including insider trading, front running or trading ahead of customers and the misuse of client assets." More than 85 percent of the world's securities and commodities market regulators are members of IOSCO and have signed on to these Core Principles. The
World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
and
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
now use the IOSCO Core Principles in reviewing the financial health of different country's regulatory systems as part of these organization's financial sector assessment program, so laws against insider trading based on non-public information are now expected by the international community. Enforcement of insider trading laws varies widely from country to country, but the vast majority of jurisdictions now outlaw the practice, at least in principle. Larry Harris claims that differences in the effectiveness with which countries restrict insider trading help to explain the differences in executive compensation among those countries. The US, for example, has much higher CEO salaries than have Japan or Germany, where insider trading is less effectively restrained.


By nation


European Union

In 2014, the European Union (EU) adopted legislation (Criminal Sanctions for Market Abuse Directive) that harmonised criminal sanctions for insider dealing. All EU Member States agreed to introduce maximum prison sentences of at least four years for serious cases of market manipulation and insider dealing, and at least two years for improper disclosure of insider information.


Australia

The current Australian legislation arose out of the report of a 1989 parliamentary committee report which recommended removal of the requirement that the trader be ‘connected’ with the body corporate. This may have weakened the importance of the fiduciary duty rationale and possibly brought new potential offenders within its ambit. In Australia if a person possesses inside information and knows, or ought reasonably to know, that the information is not generally available and is materially price sensitive then the insider must not trade. Nor must she or he procure another to trade and must not tip another. Information will be considered generally available if it consists of readily observable matter or it has been made known to common investors and a reasonable period for it to be disseminated among such investors has elapsed.


Norway

In 2009, a journalist in Nettavisen (Thomas Gulbrandsen) was sentenced to 4 months in prison for insider trading. The longest prison sentence in a Norwegian trial where the main charge was insider trading, was for eight years (two suspended) when Alain Angelil was convicted in a district court on December 9, 2011.


United Kingdom

Although insider trading in the UK has been illegal since 1980, it proved difficult to successfully prosecute individuals accused of insider trading. There were a number of notorious cases where individuals were able to escape prosecution. Instead the UK regulators relied on a series of fines to punish market abuses. These fines were widely perceived as an ineffective deterrent, and there was a statement of intent by the UK regulator (the Financial Services Authority) to use its powers to enforce the legislation (specifically the Financial Services and Markets Act 2000). Between 2009 and 2012 the FSA secured 14 convictions in relation to insider dealing.


United States

Anil Kumar Anil Kumar (born 1958) is an Indian-American former senior partner and director at management consulting firm McKinsey & Company, where he co-founded McKinsey's offices in Silicon Valley and India and created its Internet practice (representi ...
, a senior partner at management consulting firm
McKinsey & Company McKinsey & Company is a global management consulting firm founded in 1926 by University of Chicago professor James O. McKinsey, that offers professional services to corporations, governments, and other organizations. McKinsey is the oldest and ...
, pleaded guilty in 2010 to insider trading in a "descent from the pinnacle of the business world".Pulliam, Susan and Michael Rothfeld
"Motive for Stock Leak Can Be Respect, Love"
. ''The Wall Street Journal.'' 14 March 2011.
Chip Skowron, a
hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as ...
co- portfolio manager of FrontPoint Partners LLC's
health care Health care or healthcare is the improvement of health via the prevention, diagnosis, treatment, amelioration or cure of disease, illness, injury, and other physical and mental impairments in people. Health care is delivered by health pr ...
funds, was convicted of insider trading in 2011, for which he served five years in prison. He had been tipped off by a consultant to a company that the company was about to make a negative announcement regarding its
clinical trial Clinical trials are prospective biomedical or behavioral research studies on human participants designed to answer specific questions about biomedical or behavioral interventions, including new treatments (such as novel vaccines, drugs, diet ...
for a drug.Taub, Stephen (13 April 2011)
"Ex-FrontPoint Manager Charged With Securities Fraud,"
''Institutional Investor''.
At first Skowron denied the charges against him, and his defense attorney said he would plead not guilty, saying "We look forward to responding to the allegations more fully in court at the appropriate time".Neumeister, Larry (13 April 2011)

''Deseret News''.
However, after the consultant charged with tipping him off pleaded guilty, he changed his position, and admitted his guilt.
Rajat Gupta Rajat Kumar Gupta (; born ) is an Indian-American businessman and convicted felon who, as CEO, was the first foreign-born managing director of management consultancy firm McKinsey & Company from 1994 to 2003. In 2012, he was convicted for insider ...
, who had been managing partner of McKinsey & Co. and a director at
Goldman Sachs Goldman Sachs () is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Warsaw, Bangalore, Ho ...
Group Inc. and
Procter & Gamble The Procter & Gamble Company (P&G) is an American multinational consumer goods corporation headquartered in Cincinnati, Ohio, founded in 1837 by William Procter and James Gamble. It specializes in a wide range of personal health/consumer he ...
Co., was convicted by a federal jury in 2012 and sentence to two years in prison for leaking inside information to
hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as ...
manager
Raj Rajaratnam Rajakumaran Rajaratnam (born June 15, 1957) is a Sri Lankan-American former hedge fund manager and founder of the Galleon Group, a New York-based hedge fund management firm. On October 16, 2009, he was arrested by the FBI for insider trading ...
who was sentenced to 11 years in prison. The case was prosecuted by the office of United States Attorney for the Southern District of New York Preet Bharara. Mathew Martoma, former hedge fund trader and portfolio manager at
S.A.C. Capital Advisors SAC Capital Advisors was a group of hedge funds founded by Steven A. Cohen in 1992. The firm employed approximately 800 people
, was accused of generating possibly the largest single insider trading transaction profit in history at a value of $276 million. He was convicted in February 2014, and is serving a nine-year prison sentence. With the guilty plea by Perkins Hixon in 2014 for insider trading from 2010 to 2013 while at Evercore Partners, Bharara said in a press release that 250 defendants whom his office had charged since August 2009 had now been convicted. On December 10, 2014, a federal appeals court overturned the insider trading convictions of two former hedge fund traders, Todd Newman and
Anthony Chiasson Anthony R. Chiasson (born August 27, 1973) is an American hedge fund manager and co-founder of Level Global Investors LP, a Greenwich, Connecticut-based hedge fund management firm. Level Global was launched in 2003 with about $500 million in asset ...
, based on the "erroneous" instructions given to jurors by the trial judge. The decision was expected to affect the appeal of the separate insider-trading conviction of former SAC Capital portfolio manager Michael Steinberg and the U.S. Attorney and the SEC in 2015 did drop their cases against Steinberg and others. In 2016, Sean Stewart, a former managing director at Perella Weinberg Partners LP and vice president at
JPMorgan Chase JPMorgan Chase & Co. is an American multinational investment bank and financial services holding company headquartered in New York City and incorporated in Delaware. As of 2022, JPMorgan Chase is the largest bank in the United States, t ...
, was convicted on allegations he tipped his father on pending health-care deals. The father, Robert Stewart, previously had pleaded guilty but didn't testify during his son's trial. It was argued that by way of compensation for the tip, the father had paid more than $10,000 for Sean's wedding photographer. In 2017, Billy Walters,
Las Vegas Las Vegas (; Spanish for "The Meadows"), often known simply as Vegas, is the 25th-most populous city in the United States, the most populous city in the state of Nevada, and the county seat of Clark County. The city anchors the Las Veg ...
sports bettor, was convicted of making $40 million on private information of Dallas-based dairy processing company
Dean Foods Dean Foods was an American food and beverage company and the largest dairy company in the United States. Headquartered in Dallas, Texas, the company maintained plants and distributors in the United States. Dean Foods had 66 manufacturing faciliti ...
, and sentenced to five years in prison. Walters's source, company director Thomas C. Davis employing a prepaid cell phone and sometimes the code words "Dallas Cowboys" for Dean Foods, helped him from 2008 to 2014 realize profits and avoid losses in the stock, the federal jury found. Golfer Phil Mickelson "was also mentioned during the trial as someone who had traded in Dean Foods shares and once owed nearly $2 million in gambling debts to" Walters. Mickelson "made roughly $1 million trading Dean Foods shares; he agreed to forfeit those profits in a related civil case brought by the Securities and Exchange Commission". Walters appealed the verdict, but in December 2018 his conviction was upheld by the 2nd U.S. Circuit Court of Appeals in Manhattan. In 2018, David Blaszczak, the "king of political intelligence," Theodore Huber and Robert Olan, two partners at hedge fund Deerfield Management, and Christopher Worrall, an employee at the Centers for Medicare and Medicaid Services (CMS), were convicted for insider trading by the U.S. Attorney's Office in the Southern District of New York. Worrall leaked confidential government information that he stole from CMS to Blaszczak, and Blaszczak passed that information to Huber and Olan, who made $7 million trading securities. The convictions were upheld in 2019 by the Second Circuit, U.S. Court of Appeals in Manhattan; that opinion was vacated by the Supreme Court in 2021, and the Second Circuit is now reconsidering its decision. In 2021, Puneet Dikshit, a partner at
McKinsey McKinsey & Company is a global management consulting firm founded in 1926 by University of Chicago professor James O. McKinsey, that offers professional services to corporations, governments, and other organizations. McKinsey is the oldest a ...
, pled guilty to trading on inside information that he had access to while advising
Goldman Sachs Goldman Sachs () is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Warsaw, Bangalore, Ho ...
on its acquisition of GreenSky, Inc. Dikshit was the third McKinsey partner to be convicted of insider trading in the Southern District of New York.


Canada

In 2008, police uncovered an insider trading conspiracy involving Bay Street and Wall Street lawyer Gil Cornblum who had worked at
Sullivan & Cromwell Sullivan & Cromwell LLP is an American multinational law firm headquartered in New York City. Known as a white-shoe firm, Sullivan & Cromwell is recognized as a leader in business law, and is known for its impact on international affairs, such ...
and was working at Dorsey & Whitney, and a former lawyer, Stan Grmovsek, who were found to have gained over $10 million in illegal profits over a 14-year span. Cornblum committed suicide by jumping from a bridge as he was under investigation and shortly before he was to be arrested but before criminal charges were laid against him, one day before his alleged co-conspirator Grmovsek pled guilty. Grmovsek pleaded guilty to insider trading and was sentenced to 39 months in prison. This was the longest term ever imposed for insider trading in Canada. These crimes were explored in Mark Coakley's 2011 non-fiction book, '' Tip and Trade''.


Kuwait

The U.S. SEC alleged that in 2009 Kuwaiti trader Hazem Al-Braikan engaged in insider trading after misleading the public about possible takeover bids for two companies. Three days after Al-Braikan was sued by the SEC, he was found dead of a gunshot wound to the head in his home in Kuwait City on July 26, 2009, in what Kuwaiti police called a suicide. The SEC later reached a $6.5 million settlement of civil insider trading charges, with his estate and others.


China

The majority of shares in China before 2005 were non-tradeable shares that were not sold on the stock exchange publicly but privately. To make shares more accessible, the China Securities Regulation Commission (CSRC) required the companies to convert the non-tradeable shares into tradeable shares. There was a deadline for companies to convert their shares and the deadline was short, due to this there was a massive amount of exchanges and in the midst of these exchanges many people committed insider trading knowing that the selling of these shares would affect prices. Chinese people did not fear insider trading as much as one may in the United States because there is no possibility of imprisonment. Punishment may include monetary fees or temporary relieving from a position in the company. The Chinese do not view insider trading as a crime worth prison time because generally the person has a clean record and a path of success with references to deter them from being viewed as a criminal. On October 1, 2015, Chinese fund manager Xu Xiang was arrested due to insider trading.


India

Insider trading in India is an offense according to Sections 12A, 15G of the
Securities and Exchange Board of India Act, 1992 The Securities and Exchange Board of India Act, 1992 is an act that was enacted for regulation and development of securities market in India. It was amended in the years 1995, 1999, and 2002 to meet the requirements of changing needs of the s ...
. Insider trading is when one with access to non-public, price-sensitive information about the securities of the company subscribes, buys, sells, or deals, or agrees to do so or counsels another to do so as principal or agent. Price-sensitive information is information that materially affects the value of the securities. The penalty for insider trading is imprisonment, which may extend to five years, and a minimum of five
lakh A lakh (; abbreviated L; sometimes written lac) is a unit in the Indian numbering system equal to one hundred thousand (100,000; scientific notation: 105). In the Indian 2,2,3 convention of digit grouping, it is written as 1,00,000. For e ...
rupee Rupee is the common name for the currencies of India, Mauritius, Nepal, Pakistan, Seychelles, and Sri Lanka, and of former currencies of Afghanistan, Bahrain, Kuwait, Oman, the United Arab Emirates (as the Gulf rupee), British East Africa, ...
s (500,000) to 25 crore rupees (250 million) or three times the profit made, whichever is higher. ''The Wall Street Journal'', in a 2014 article entitled "Why It’s Hard to Catch India’s Insider Trading", said that despite a widespread belief that insider trading takes place on a regular basis in India, there were few examples of insider traders being prosecuted in India. One former top regulator said that in India insider trading is deeply rooted and especially rampant because regulators don't have the tools to address it. In the few cases where prosecution has taken place, cases have sometimes taken more than a decade to reach trial, and punishments have been light; and despite SEBI by law having the ability to demand penalties of up to $4 million, the few fines that were levied for insider trading have usually been under $200,000.


Philippines

Under Republic Act 8799 or the Securities Regulation Code, insider trading in the Philippines is illegal.


Brazil

The practice of insider trading is an illegal act under Brazilian law, since it constitutes unfair behavior that threatens the security and equality of legal conditions in the market. Since 2001, the practice is also considered a crime. Law 6,385/1976, as amended by Law 10,303/2001, provided for Article 27-D, which typifies the conduct of "Using relevant information not yet disclosed to the market, of which he is aware and from which he must maintain secrecy, capable of providing, for himself or for others, undue advantage, through trading, on his own behalf or on behalf of a third party, with securities: Penalty - imprisonment, from 1 (one) to 5 (five) years, and a fine of up to 3 (three) times the amount of the illicit advantage obtained as a result of the crime." The first conviction handed down in Brazil for the practice of the offense of "misuse of privileged information" occurred in 2011, by federal judge Marcelo Costenaro Cavali, of the Sixth Criminal Court of São Paulo.http://www.jfsp.jus.br/assets/Uploads/administrativo/NUCS/decisoes/2011/110221insidersadia.pdf It is the case of the
Sadia Sadia S.A. is a major Brazilian food producer that has been a subsidiary of BRF S.A. since 2009. It is among the world's leading producers of frozen foods Freezing food preserves it from the time it is prepared to the time it is eaten. Sin ...
- Perdigão merger. The former Director of Finance and Investor Relations, Luiz Gonzaga Murat Júnior, was sentenced to one year and nine months in prison in an open regime, replaceable by community service, and the inability to exercise the position of administrator or fiscal councilor of a publicly traded company for the time he serves his sentence, in addition to a fine of R$349,711.53. The then member of the board of directors Romano Ancelmo Fontana Filho was sentenced to prison for one year and five months in an open regime, also replaceable by community service, in addition to not being able to exercise the position of administrator or fiscal councilor of a publicly-held company. He was also fined R$374,940.52.


See also


Notes


References

* Mark J. Astarita, Insider Trading: Legal vs. Illega
Insider trading: Legal vs. Illegal
* Stephen M. Bainbridge, Securities Law: Insider Trading (1999) . * M. Duffy, Insider Trading: Addressing the Continuing Problems of Proof (2009) 23(2) ''Australian Journal of Corporate Law'' 149
(link)
* Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" . * Grechenig, The Marginal Incentive of Insider Trading: an Economics Reinterpretation of the Case Law, 37 The University of Memphis Law Review 75-148 (2006
(link)
* * ''
Review of Financial Studies ''The Review of Financial Studies'' is a peer-reviewed academic journal covering the field of finance. It is published by Oxford University Press on behalf of the Society for Financial Studies. It was established following discussions at the 19 ...
''; May2009, Vol. 22 Issue 5, pp. 1845–1887
Grechenig, Positive and Negative Information – Insider Trading Rethought

Pierre Hauck, Europe’s commitment to countering insider dealing and market manipulation on the basis of Art. 83 para. 2 TFEU A critical evaluation
*International Standard Book Number-13: 978-1-4200-7403-1 (eBook - PDF)


External links

General information

* [https://www.sec.gov/news/testimony/2006/ts092606lct.htm Testimony Concerning Insider Trading, by Linda Thomsen, Director of the SEC's Division of Enforcement, before the U.S. Senate Judicial Committee (September 26, 2006)]
SEC Forms 3, 4 and 5


*Hoffman, Liz
"Towers Watson CEO Sold Stock Before Big Deal: John Haley netted nearly $10 million on preannouncement sales"
''Wall Street Journal'', September 23, 2015. Towers Watson CEO John J. Haley's pre-deal sale of personally owned stock questioned. Articles and opinions
Insider Trading: The Legal and Illegal
SECLaw.com, 2002 * Timothy Sulliva
We're still against fraud, aren't we? United States v. O'Hagan: Trimming the Oak in the wrong season
St. John's Law Review, Winter 1997.
An opinion on Why Insider Trading Should be Legal
Larry Elder Interviews
Henry Manne Henry G. Manne (May 10, 1928 – January 17, 2015) was an American writer and academic, considered a founder of the law and economics discipline. He was Dean Emeritus of the George Mason University School of Law. Born in New Orleans, Louisiana, M ...

Why forbid insider trading?
by
Ajay Shah Ajay or Ajai may refer to: People * Ajay (given name) * Abe Ajay (1919–1998), American artist * Ajay (actor), Indian actor prominent in Telugu cinema Places * Ajai Wildlife Reserve, northeastern Uganda * Ajay River, a major river in Jharkhand ...
, consultant to the Ministry of Finance, India
''Information, Privilege, Opportunity and Insider Trading''
by Robert W. Mcgee and Walter E. Blocka scholarly work that opposes regulations against insider trading
''Free Samuel Waksal''
argues that businessman's insider trading should not be considered a crime

Data on insider trading
SEC Edgar Database on current Form 3, Form 4 and Form 5 filings
{{DEFAULTSORT:Insider Trading Corruption Financial crimes Stock market Ethically disputed business practices Conflict of interest Information