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Stock Trading Stock Trading Strategy & Education
Part of
Guide to Financial Crime and Fraud
Part Of
Guide to Financial Crime and Fraud
Explore The Guide
 * Overview
 * Types of Financial Crime and Fraud
   * Overview
   * White-Collar Crime
   * Corporate Fraud
   * What Is Accounting Fraud?
   * Financial Statement Manipulation
   * Detecting Financial Statement Fraud
   * Securities Fraud
   * Insider Trading
   * What Is a Pyramid Scheme?
   * Ponzi Scheme Definition
   * Ponzi vs. Pyramid Scheme
   * Money Laundering
   * Pump and Dump Scam
   * Racketeering
   * Mortgage Fraud
   * Wire Fraud
   * Common Types of Consumer Fraud
   * Who Is Liable for Credit Card Fraud?
   * How to Avoid Debit Card Fraud
   
 * Financial Crime and Fraud Examples
   * Overview
   * The Biggest Stock Scams of All Time
   * Enron Scandal
   * Bernie Madoff
   * Ethics Violations by CEOs
   * Rise and Fall of WorldCom
   * Scandalous Insider Trading Debacles
   
 * Control and Regulation
   * Overview
   * Securities Exchange Act of 1934
   * Securities and Exchange Commission (SEC)
   * Financial Crimes Enforcement Network (FinCEN)
   * Anti Money Laundering (AML)
   * Compliance Department
   * Compliance Officer
   


INSIDER TRADING


By
Akhilesh Ganti

Full Bio
Akhilesh Ganti is a forex trading expert who has 20+ years of experience and is
directly responsible for all trading, risk, and money management decisions made
at ArctosFX LLC. He has earned a bachelor's degree in biochemistry and an MBA
from M.S.U., and is also registered commodity trading advisor (CTA).
Learn about our editorial policies
Updated December 15, 2021
Reviewed by
Somer Anderson
Reviewed by Somer Anderson
Full Bio
 * LinkedIn

Somer G. Anderson is CPA, doctor of accounting, and an accounting and finance
professor who has been working in the accounting and finance industries for more
than 20 years. Her expertise covers a wide range of accounting, corporate
finance, taxes, lending, and personal finance areas.
Learn about our Financial Review Board
Fact checked by
Pete Rathburn
Fact checked by Pete Rathburn
Full Bio
Pete Rathburn is a freelance writer, copy editor, and fact-checker with
expertise in economics and personal finance. He has spent over 25 years in the
field of secondary education, having taught, among other things, the necessity
of financial literacy and personal finance to young people as they embark on a
life of independence.
Learn about our editorial policies


WHAT IS INSIDER TRADING?

Insider trading involves trading in a public company's stock by someone who has
non-public, material information about that stock for any reason. Insider
trading can be either illegal or legal depending on when the insider makes the
trade.



Insider trading is illegal when the material information is still non-public,
and this sort of insider trading comes with harsh consequences.




KEY TAKEAWAYS

 * Insider trading is the buying or selling of a publicly traded company's stock
   by someone who has non-public, material information about that stock
 * Material nonpublic information is any information that could substantially
   impact an investor's decision to buy or sell the security that has not been
   made available to the public.
 * This form of insider trading is illegal and comes with stern penalties
   including both potential fines and jail time.
 * Insider trading can be legal as long as it conforms to the rules set forth by
   the SEC.

1:43

INSIDER TRADING




UNDERSTANDING INSIDER TRADING

The U.S. Securities and Exchange Commission (SEC) defines illegal insider
trading as:



> "The buying or selling a security, in breach of a fiduciary duty or other
> relationship of trust and confidence, on the basis of material, nonpublic
> information about the security."1



Material information is any information that could substantially impact an
investor's decision to buy or sell the security. Non-public information is
information that is not legally available to the public.



The question of legality stems from the SEC's attempt to maintain a fair
marketplace. An individual who has access to insider information would have an
unfair edge over other investors, who do not have the same access and could
potentially make larger, unfair profits than their fellow investors.



Illegal insider trading includes tipping others when you have any sort of
material nonpublic information. Legal insider trading happens when directors of
the company purchase or sell shares, but they disclose their transactions
legally. The Securities and Exchange Commission has rules to protect investments
from the effects of insider trading. It does not matter how the material
nonpublic information was received or if the person is employed by the company.



For example, suppose someone learns about nonpublic material information from a
family member and shares it with a friend. If the friend uses this insider
information to profit in the stock market, then all three of the people involved
could be prosecuted.1



The best way to stay out of legal trouble is to avoid sharing or using material
nonpublic information, even if you overheard it accidentally.


EXAMPLES OF INSIDER TRADING


MARTHA STEWART

Directors of companies are not the only people who have the potential to be
convicted of insider trading. In 2003, Martha Stewart was charged by the SEC
with obstruction of justice and securities fraud—including insider trading—for
her part in the 2001 ImClone case.



Stewart sold close to 4,000 shares of biopharmaceutical company ImClone Systems
based on information received from Peter Bacanovic, a broker at Merrill Lynch.
Bacanovic's tip came after ImClone Systems chief executive officer (CEO), Samuel
Waksal, sold all his shares of the company. This came around the time ImClone
was waiting on the Food and Drug Administration (FDA) for a decision on its
cancer treatment, Erbitux.



Shortly after these sales, the FDA rejected ImClone's drug, causing shares to
fall 16% in one day. The early sale by Stewart saved her a loss of $45,673.
However, the sale was made based on a tip she received about Waksal selling his
shares, which was not public information. After a 2004 trial, Stewart was
charged with lesser crimes of obstruction of a proceeding, conspiracy, and
making false statements to federal investigators. Stewart served five months in
a federal corrections facility.2




AMAZON

In September 2017, former Amazon.com Inc. (AMZN) financial analyst Brett Kennedy
was charged with insider trading. Authorities said Kennedy gave fellow
University of Washington alumni Maziar Rezakhani information on Amazon's 2015
first-quarter earnings before the release. Rezakhani paid Kennedy $10,000 for
the information. In a related case, the SEC said Rezakhani made $115,997 trading
Amazon shares based on the tip from Kennedy.3




LEGAL INSTANCES OF INSIDER TRADING

The term "insider trading" generally has a negative connotation. Legal insider
trading happens in the stock market on a weekly basis. The SEC requires
transactions to be submitted electronically in a timely manner. Transactions are
submitted electronically to the SEC and also must be disclosed on the company’s
website.



The Securities Exchange Act of 1934 was the first step to the legal disclosure
of transactions of company stock. Directors and major owners of stock must
disclose their stakes, transactions, and change of ownership.


 * Form 3 is used as an initial filing to show a stake in the company.
 * Form 4 is used to disclose a transaction of company stock within two days of
   the purchase or sale.
 * Form 5 is used to declare earlier transactions or those that have been
   deferred.4




HAS INSIDER TRADING A NEGATIVE CONNOTATION?

The term "insider trading" generally has a negative connotation that is based on
the perception that it is unfair to the average investor. Essentially, insider
trading involves trading in a public company's stock by someone who has
non-public, material information about that stock. Insider trading can be either
legal or illegal depending on whether it conforms to SEC rules or not.




WHEN IS INSIDER TRADING ILLEGAL?

Insider trading is deemed to be illegal when the material information is still
non-public and this comes with harsh consequences, including both potential
fines and jail time. Material nonpublic information is defined as any
information that could substantially impact the stock price of that company.
Obviously, being privy to such information could influence an investor's
decision to buy or sell the security which would give them an edge over the
public who do not have such access. Martha Stewart's 2001 ImClone trading is a
prime example of this.




WHEN IS INSIDER TRADING LEGAL?

Legal insider trading happens in the stock market on a weekly basis. The
question of legality stems from the SEC's attempt to maintain a fair
marketplace. Basically, it is legal when company insiders engage in trading
company stock as long as they report these trades to the SEC in a timely manner.
The Securities Exchange Act of 1934 was the first step to the legal disclosure
of transactions of company stock. For example, directors and major owners of
stock must disclose their stakes, transactions, and change of ownership.






ARTICLE SOURCES


Investopedia requires writers to use primary sources to support their work.
These include white papers, government data, original reporting, and interviews
with industry experts. We also reference original research from other reputable
publishers where appropriate. You can learn more about the standards we follow
in producing accurate, unbiased content in our editorial policy.

 1. U.S. Securities and Exchange Commission. "Insider Trading." Accessed Sept.
    3, 2021.

 2. U.S. Securities and Exchange Commission. "SEC Charges Martha Stewart, Broker
    Peter Bacanovic with Illegal Insider Trading." Accessed Sept. 3, 2021.

 3. U.S. Securities and Exchange Commission. "Former Amazon Employee and College
    Friend Charged with Insider Trading." Accessed Sept. 3, 2021.

 4. U.S. Securities and Exchange Commission. "Insider Transactions and Forms 3,
    4, and 5," Pages 1-2. Accessed Sept. 3, 2021.

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Part Of
Guide to Financial Crime and Fraud Guide
 * 
   Fraud Definition
   1 of 31
 * 
   White-Collar Crime Definition
   2 of 31
 * 
   Understanding Corporate Fraud
   3 of 31
 * 
   What Is Accounting Fraud?
   4 of 31
 * 
   How to Spot Financial Statement Manipulation
   5 of 31
 * 
   Detecting Financial Statement Fraud
   6 of 31
 * 
   What Is Securities Fraud?
   7 of 31
 * 
   What Is Insider Trading?
   8 of 31
 * 
   Pyramid Scheme Defubutuib
   9 of 31
 * 
   Ponzi Scheme
   10 of 31
 * 
   Ponzi vs. Pyramid Scheme: What's the Difference?
   11 of 31
 * 
   Money Laundering
   12 of 31
 * 
   How Does a Pump-and-Dump Scam Work?
   13 of 31
 * 
   Racketeering Definition
   14 of 31
 * 
   Mortgage Fraud: Understanding and Avoiding It
   15 of 31
 * 
   Wire Fraud Definition
   16 of 31
 * 
   The Most Common Types of Consumer Fraud
   17 of 31
 * 
   Am I Responsible for Fraudulent Charges on My Credit Card?
   18 of 31
 * 
   Is Your Money At Risk of Debit Card Fraud?
   19 of 31
 * 
   The Biggest Stock Scams of Recent Time
   20 of 31
 * 
   Enron Scandal: The Fall of a Wall Street Darling
   21 of 31
 * 
   The Bernie Madoff Story
   22 of 31
 * 
   5 Most Publicized Ethics Violations by CEOs
   23 of 31
 * 
   WorldCom
   24 of 31
 * 
   Four Scandalous Insider Trading Incidents
   25 of 31
 * 
   Securities Exchange Act of 1934
   26 of 31
 * 
   Securities and Exchange Commission (SEC)
   27 of 31
 * 
   Financial Crimes Enforcement Network (FinCEN)
   28 of 31
 * 
   Anti Money Laundering (AML)
   29 of 31
 * 
   Compliance Department Definition
   30 of 31
 * 
   Understanding Compliance Officers
   31 of 31




RELATED TERMS

What Is Insider Information?
Insider information is a fact that can be of financial advantage if acted upon
before it is generally known to shareholders.
more
Understanding Rule 10b5-1
The SEC's Rule 10b5-1 allows stock trades to be set up in advance by public
companies' officers or directors to avoid accusations of insider trading.
more
Insider
An insider is a director, senior officer, or any person or entity of a company
that beneficially owns more than 10% of a company's voting shares.
more
Signaling Approach Definition
A signaling approach refers to the act of following various market signals as
indicators for initiating trading positions.
more
What Is the Insider Trading Sanctions Act of 1984?
The Insider Trading Sanctions Act of 1984 is a piece of federal legislation that
allows the SEC to seek civil penalties for insider trading.
more
Insider Trading Act of 1988 Definition
The Insider Trading Act of 1988 amended the Securities Exchange Act of 1934 by
expanding the SEC's scope to enforce insider trading laws.
more

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