What is insider trading?
Insider trading is just as its name describes. It involves making trades of a company’s securities with the benefit of insider information – this comes from an individual in the company (such as an employee).
The type of information typically traded will generally refer to confidential and material information that isn’t readily available to the public and could subsequently affect the stock price of the listed entity. As a result, someone who possesses this information will give others a ‘tip’ or an edge in trading – an unfair advantage which is punishable by the law.
While insider trading can come from anyone related to a business, not just an employee, it is most common that directors are most likely to be in possession of inside information given their role and the type of information they are exposed to. Therefore, directors must exercise extreme caution.
It’s important to highlight though that a common misconception is that all insider trading is illegal. It’s not and there are actually two methods by which insider trading can occur—one is legal, and the other is not. Legal insider trading could be when a CEO buys back shares of their company, or when other employees purchase stock in the company in which they work.
What are the penalties for illegal insider trading?
The penalties for this crime will depend on whether you are an individual or a corporation committing insider trading:
- An individual is subject to a maximum fine of $450,000 and/or ten years imprisonment.
- A corporation is liable for a fine of up to $1.1 million.
When determining the penalties to enforce for insider trading, history shows that the courts will look at a range of criteria including:
- amount of profit made
- character of the offender
- any expression of remorse or contrition
- any extra-curial punishment
- general deterrence
- manner in which the information was acquired
- personal circumstances of the offender
- any breach of confidence
- manner in which the trial was conducted and guilty plea
- relationship with the relevant company
- any delay in prosecution
- prospects of rehabilitation
- relationship with the securities industry
- specific deterrence
- acceptance of pecuniary penalty order
- amount of money wagered
- any hardship to the offender’s family
Insider trading is complicated and carries severe civil and criminal penalties. There have been many cases of where high-ranking executives have abused their power and knowledge to get an edge over other traders. However, as this blog shows, trading doesn’t have to be fraudulent and there are various opportunities for legal insider trading to occur.
If you are contacted by a regulatory agency regarding trades that you made, you should contact a criminal solicitor before speaking to the regulators.