Insider Trading

Insider trading is the use of nonpublic information in making a securities transaction or the distribution of such information for the purpose of influencing a transaction. Anyone who gives or receives confidential information that leads to a profitable stock trade could be found guilty of insider trading. Guilty parties may include the employees or directors of a public company, who may make trades themselves or convince private investors to do so; the investors who receive the information and make the trade; or independent parties that may hold information that is material to a company’s success or failure. A hypothetical example of insider trading involving a third party would be if an individual at a printing company, who was paid to print private documents for a company, came across important information and advised someone else to make a trade.

Insider Trading Punishments

Inside traders may be subject to criminal prosecution by the Department of Justice, with a possible penalty of jail time and/or fine. Inside trading may also be punished by the Securities and Exchange Commission (SEC), which may seek several different punishments through a civil trial. One punishment that may be levied is an injunction – an order to desist with a particular act. An injunction usually carries specific mandatory penalties for its violation, such as fine or imprisonment. The SEC can also seek more direct punishment, such as reimbursement of illegal gains or a civil penalty. The penalty may be as much as three times the amount of the illegal profits; ordinarily, however, the two are about equal.