Insider Trading v. Trading on Inside Information: A Primer for Management

Abstract

Insider trading has been a challenge for government regulators, corporate compliance officers, and managers. This area of the law encompasses statutes, case law, and agency rules; it includes civil and criminal liability; and moreover, insider trading can, and has been, very damaging to many people’s reputations, careers, “pocketbooks,” and freedom. Government prosecutors have charged many well-known individuals for being involved in insider trading schemes, such as trading on confidential non-public information, or passing on confidential stock information, leaking tips, and thereby making money from stock data that is not publicly available. This article deals with securities law regulation by examining certain fundamental legal principles so as to assist managers and other non-legal professionals to comprehend the issues and laws of insider trading. The article thus is intended to educate readers as to these principles while underscoring the potential for liability as well as to show how to avoid liability. Several court cases are presented for illustration and to demonstrate how the courts interpret the laws and thus what the courts might consider to be illegal insider trading. Since the purchase, sale, and transfer of securities are heavily regulated by federal and state statutes as well as the common law, this paper will assist managers in understanding the law and thus taking actions to prevent and to prohibit insider trading as well as other deceptive, fraudulent, manipulative, and unfair trading practices in the securities marketplace. The article explicates the relevant law and then provides practical recommendations for managers, employers, and other professionals to be in compliance with the insider trading laws and other securities laws and policies in the United States of America.

Keywords: Insider trading, inside information, information, material, non-public, trading on inside information, insiders, tippees, Securities and Exchange Commission, SEC Rule 10b5.