December 11, 2010
This paper will give a brief introduction to insider trading. It will attempt to define the aspects of insider trading both legal and illegal. The paper will give a synopsis of some of the laws that have been put in place to try and regulate insider trading. It will touch base on the penalties for illegal insider trading and list an overview of some of the more pertinent cases on insider trading.
Table of Content
Legal Trading 5
Illegal Trading 6
Common Law 6
Misappropriation Theory 7
SEC Regulations 8
Court Decisions ...view middle of the document...
In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders (in the U.S., defined as beneficial owners of ten percent or more of the firm's equity securities) must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. Many investors follow the summaries of these insider trades in the hope that mimicking these trades will be profitable. While "legal" insider trading cannot be based on any information that would influence an investor's decision to buy or sell securities, some investors believe corporate insiders nonetheless may have better insights into the health of a corporation and that their trades otherwise convey important information. (Bhattacharya 2002)
Legal insider trading
When you hear about insider trading most people will automatically think of criminal actions where executives exchange stock market secrets. In theory, it is not illegal for insider trading to take place. Corporate officers, directors, and employees are permitted to buy and sell stock in their own companies. These trades are made public in the United States through the Securities and Exchange Commission (SEC) filings. Prior to 2001, US law restricted trading such that insiders mainly traded during windows when their inside information was public, such as soon after earnings releases (Stein, 2001). When trading stocks within your own company, you must report all your earnings from the trades to the Securities and Exchange Commission (SEC). The SEC is a government entity put in place to protect investors, and to maintain fair and orderly markets. According to the SEC, all investors, whether large institutions or individual traders, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. As a result, it is required by law that all public companies disclose meaningful financial information to the public. This is done to ensure that all investors have the ability to achieve the same of information about a company before deciding to invest their money into it (Insider, 2001).
Illegal Insider Trading
Illegal insider trading refers to buying or selling a stock while having the advantage of knowing information about the company that has not been made public. You may have a position within the business that has helped you acquire this information or you may have also been given tips by another party who has knowledge of non-public information. Either way, this information, gaining money, or avoiding a large loss, is considered illegal. The illegal kind of Insider Trading is the trading in a security, the buying or selling a stock, based on material information that is not available to the general public. (Coffee Jr) It is prohibited by the US Securities and Exchange Commission (SEC) because it is unfair and would destroy the securities markets by destroying investor...