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What is 'insider trading?'


Everyone loves a good stock tip. It could be word about a merger that will send a company's stock soaring or news that a company's leading product will soon be recalled, sending the stock plummeting. However, when is it illegal for someone to leak that information, and when is it illegal to act on it?

That gets us into the realm of insider trading, which is a federal crime. According to the Securities and Exchange Act of 1934, an "insider" is a director, officer or anyone who owns at least 10 percent of a company. They are limited in their own transactions of the company's stock in order to help prevent them from acting on knowledge of the company's activities for their own financial well-being. This is illegal. So is sharing information with others that it is their fiduciary to protect.

When is it illegal to benefit from nonpublic information you receive on a company? It often depends on how you got the information. If you're in a restaurant, for example, and overhear two officers of a company discussing a planned acquisition that will likely cause the price of the company's stock to jump, acting on that information to buy the stock before it soars isn't illegal. You simply overheard a conversation in a public place.

If someone whose brother works for a company tells you that the new drug they're developing is going nowhere, that can be a little more complicated. The person who shared the information had no fiduciary obligation to the company. However, if the person who works there shares that information directly with you and you act on it, you're both in legal jeopardy.

Sometimes, as they say, it's not the crime -- it's the cover-up. Martha Stewart went to prison not for acting on a stock tip, as many think, but for lying to prosecutors about it.

Therefore, if you are questioned about a potential insider trading violation, it's essential to have an experienced Connecticut criminal defense attorney by your side. He or she can help protect your rights and work to mitigate the consequences of your actions.

Source: The Balance, "What Is Insider Trading and Why Is It Illegal?," Joshua Kennon, accessed Oct. 27, 2017