What is Insider Trading?

Insider trading

What is Insider Trading?

“Insider Trading” is a nebulous subject that conjures up images of a jailed Martha Stewart (most likely in couture stripes). While there is such a thing as “legal” insider trading, the more interesting concept that we love to see in media involves “illegal” insider trading.

Illegal insider trading is a simple concept. An employee who has a fiduciary duty to their company discloses the company’s non-public information regarding their stock to someone else. This other person then uses the non-public a/k/a insider information to buy or sell stock. Thus, making them some money.
In legal terms, our Supreme Court calls this the “misappropriation theory”. The misappropriation theory defines insider trading as the “deceitful acquisition and misuse of information that properly belongs to persons to whom one owes a duty.” Then that misappropriated or insider information is given to friends, business associates, family members, and other “tippees” who trade the stock after receiving such information. This would especially include attorneys who buy or sell stock after learning non-public information from their corporate client.

Now that we have a general understanding of insider trading, there is one extra wrinkle. The illegal insider trading we just talked about is only illegal when the tipper who disclosed this non-public information receives a “personal benefit.” This may mean getting paid cash, getting a nice bottle of wine or some other benefit (whatever that subjective term may mean to the SEC) for giving this information out. Likewise, the person getting the inside information also may not be held liable if he or she does not confer a benefit to the tipster. In simple terms, for insider trading to be illegal, you need a “tit for tat” scenario.

This concept of what constitutes “personal benefit” is precisely what the Supreme Court is currently analyzing in Salman v. United States. In this case, Mr. Salman traded some stocks based on the nonpublic information his future brother-in-law gave to him. Was this a gift? Is the friendship between Mr. Salman and his future brother-in-law a personal benefit? Or is something more “tangible” required? We all await the ruling from our high court.

Until we get a final ruling, that hot stock tip you got from a friend appears to be completely legal unless you buy that friend lunch or give them some type of personal benefit.[/vc_column_text][vc_empty_space height=”30px”]


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