Securities Fraud FAQ: What Is Insider Trading?

by Wall Street Fraud on September 19, 2011

Given the number of recent securities fraud cases involving insider trading, including the high-profile case of Raj Rajaratnam of the hedge fund firm Galleon Group., many investors may be confused about what insider trading is and how it works.

The Definition of an Insider

Company employees are considered “insiders” because they often have access to information not known to the general public that may influence the stock price. This can be a new product, an acquisition of another company, or a stellar earnings report.

The definition of insider, however, goes beyond company employees and directors to include anyone else who may have "temporary" or "constructive" access to material information on a company that is not available to the public. This includes anyone outside of the firm as well. A well-known example is Martha Stewart, who was convicted of insider trading after she traded on tip from her stockbroker.

What Makes Insider Trading Illegal?

It is important to understand that not all insider trading is illegal. Corporate insiders, such as officers, directors, and employees are allowed to buy and sell stock in their own company so long as they comply with certain rules and formalities established by the Securities and Exchange Commission.

However, to ensure an even playing field, insiders can only trade their stock when that 'insider' information is made public—when the insider has no direct advantage over other investors.

Therefore, illegal insider trading occurs when insiders trade on knowledge that is not accessible to the general public.

Consequences of Insider Trading

Insider trading can result in both criminal and financial penalties. Depending on the specific charges that are brought, individuals can face up to 20 years in prison for criminal securities fraud. With respect to financial penalties, the SEC has the authority to seek a court order requiring violators to give back their trading profits. The SEC can also ask the court to impose a penalty of up to three times the profit the violators realized from their insider trading.

Source: CNBC

At Wall Street Fraud, we are dedicated to offering assistance to those who have been hurt by improper corporate or investment practices.

If you have been the victim of stock brokerage fraud, securities fraud, mutual fund fraud, stockbroker fraud, annuities fraud, or any other type of investment fraud, please contact us today for a free case evaluation. Our talented and aggressive legal and professional staff is eager to help you recover your losses.

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