Famous Insider Trading Cases

What is Insider Trading? Famous Cases of Insider Trading - Traders Log

By Henry King

Insider trading is a term most of have heard but know little about. Lately anytime you turn on CNBC or Bloomberg there seems to be a new insider trading case brewing. In this article, we are going to take a look at what exactly constitutes insider trading as well as when it is actually legal. We will take a look at the different authorities that enforce these rules as well as the punishment for insider trading. We will take a look at cases like Enron and Martha Stewart along with some arguments for insider trading.

The obvious place to start is to cover what exactly insider trading is and how it differs from other types of trading. Insider trading is defined by the SEC as buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, non-public information about that security. Although somewhat vague, directors, CEOs, employees, third-party business partners (in control of confidential information of a publicly traded company), friends and family of employees or just anyone who trades off non-public information can be considered an insider. Insider trading laws have been on the books since the mid-1930′s. The SEC has insider trading laws on the books because trading off inside information undermines the public’s confidence in the fairness and integrity of the securities markets. The insider trading rules in the United States are considered to be the most stringent in the world as well as the most regulated. Since the early twenty-first century, most industrialized nations with an organized securities market have some sort of insider trading laws on the books as the barriers to enter foreign markets have all but been done away with with the advent of electronic markets.

There are some types of legal insider trading and it is done all the time in the markets. Within the past twenty years, compensating employees with stock or stock options has gained widespread popularity. In order for these employees to actually cash in on their stock, they would have to engage in a sale of said stock, but with limitations. First off, since they are employees of the issuing company, any transaction they engaged in would be considered an insider transaction. For this transaction to be in compliance of the SEC, the employee must file a Form 4. The Form 4 (Statements of Changes in Beneficial Ownership) is a public document that details how much of their stock they wish to unload and when they want to do it. A typical example of this would be someone retiring from a company who wants to cash in their stock. For them to do this, they would file with the SEC their intent to sell stock, how much and when they were going to do it. So just because you see an insider selling their stock, it doesn’t necessarily constitute that they believe their stock will soon dive. They could be selling their stock to pay for their kid’s college or to pay for a new house. As far as buying their own stock, insiders are allowed to buy their stock at any time, given they have filed with the SEC beforehand. They are plenty of news services available that only track insider buying, believing that any insider buying is a positive for the stock.

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