What Is Insider Trading & Penalties You Could Face If Found Guilty

Investing is a great way to build up a nice retirement fund. Many people invest for this purpose and in the process establish a diverse portfolio of stocks and/or bonds. But although investing can be profitable, there are some individuals who abuse stock trading in order to gain more really quick.

In the past few years, we’ve heard more and more stories about individuals who allegedly abused their investing privileges. For instance, Dallas Mavericks owner, Mark Cuban, was suspected of investment fraud but later was found not guilty by the U.S. Securities and Exchange Commission (SEC).  Most recently, professional golfer, Phil Mickelson, is being investigated after allegations surfaced that he made trades of his Clorox shares just days before billionaire Carl Icahn announced that he was interested in buying the company. Now investigators are trying to determine if Mickelson traded after finding out confidential information that the public wasn’t privy to.

What is Insider Trading?

“Insider trading” is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC. 

 

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.

Examples of insider trading cases that have been brought by the SEC are cases against:

• Corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential corporate developments;
• Friends, business associates, family members, and other “tippees” of such officers, directors, and employees, who traded the securities after receiving such information;

• Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;

• Government employees who learned of such information because of their employment by the government; and

• Other persons who misappropriated, and took advantage of, confidential information from their employers.

 

Any person who is accused of insider trading can face severe penalties if found guilty.  In Mark Cuban’s case, he was facing a $3 million fine. And in cases such as Mickelson’s, offenders who are found guilty can face up to 20 years in prison and given fines in the millions. But it is rare that the accused is found guilty.  Investment fraud cases are difficult to prove.

For more information regarding “insider trading” and the regulations surrounding its laws, visit www.SEC.gov.