Insider Trading: What Every Business Professional Should Know

One of the key legal concepts that every business professional should understand is the concept of insider trading. This form of trading involves individuals who have special access to information, such as company directors and officers, who then use this knowledge to gain a benefit or an advantage in the securities market.

Simply put, when someone is found to have traded on inside information, it is deemed as a breach of trust and an illegal act. This is because those who have access to inside information are in a position of trust and it is seen as an abuse of that trust to gain inappropriate financial benefits from this knowledge.

The penalties for insider trading can be severe, with fines, criminal convictions and jail time possible for those found guilty of such acts. To protect themselves and their business, it is important for business professionals to understand the concept of insider trading and to be aware of the laws and the potential consequences of engaging in this type of activity.

Examples of Insider Trading

In 2013, a high-profile case of insider trading saw the arrest of a hedge fund manager, a Goldman Sachs board member and six other individuals. In the end, those charged pleaded guilty to all schemes and in the case of the hedge fund manager, received an 11 year federal prison sentence. The case showed the serious consequences that can come with insider trading.

A more recent case in 2018 saw former pharmaceutical executive, Martin Shkreli, convicted of security fraud and conspiracy to commit security fraud. He was found guilty of insider trading for using information he had access to through his company to buy and sell certain stocks and to defraud investors who had given him money.

Protecting Against and Preventing Insider Trading

The best way to protect yourself and your business from the risks associated with insider trading is to put in place policies and procedures to ensure that all employees who have access to confidential information, such as company executives, are educated on the laws surrounding insider trading. The company must emphasise to everyone involved that any trading on inside information is not permitted and that it is a violation of the law.

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Having a clear policy that outlines the punishments for anyone who is found guilty of insider trading, as well as the procedures for reporting any potential cases of insider trading, will help to ensure that all relevant personnel are aware of the risks and that they have a means to report any potential breaches.

Related Legal Concepts

Understanding insider trading requires familiarity with broader securities regulations and corporate governance principles. This illegal practice intersects with various areas of business law, including fiduciary duties of corporate officers and directors, disclosure requirements under federal securities laws, and compliance obligations for publicly traded companies. The concept of material nonpublic information is central to these violations, as is the legal framework governing trading restrictions and blackout periods for company insiders.

The Bottom Line

Insider trading represents a serious violation of securities law that can result in substantial criminal and civil penalties for individuals and organizations. Business professionals must maintain strict compliance with trading policies and understand their obligations regarding confidential information to avoid inadvertent violations. For guidance specific to your situation, always consult a qualified, licensed attorney.