A close look at insider traders
Insider trading is considered illegal when a person is buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading is also considered illegal because it is a form of securities fraud, and fraud is viewed a type of larceny or theft. That crime requires proof that a person took something from another person with the intent to steal it or permanently deprive that person of its use.
Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate this information.
To help better understand the whole world of insider trading, one must first take a look at just what an insider trader is. In the United States, for mandatory reporting purposes, corporate insiders are defined as a company's officers, directors and any beneficial owners of more than 10% of a class of the company's equity securities. Trades made by these types of insiders in the company's own stock, based on material non-public information, are considered to be fraudulent since the insiders are violating the fiduciary duty or financial responsibility that they owe to the shareholders. The corporate insider, simply by accepting employment, has undertaken a legal obligation to the shareholders to put the shareholders' interests before their own, in matters related to the corporation. When the insider buys or sells based upon company owned information, he/she is violating their obligation to the shareholders.
For example, illegal insider trading would take place if the Chief Executive officer of a company learned (prior to a public announcement) that the company will be taken over and then went out and bought shares in that same company while knowing that the share price would likely rise. In the United States and many other jurisdictions, however, "insiders" are not just limited to corporate officials and major shareholders where illegal insider trading is concerned but can include any individual who trades shares based on material non-public information in violation of some duty of trust. This duty may be imputed; for example, in many jurisdictions, in cases of where a corporate insider "tips" a friend about material non-public information likely to have an effect on the company's share price, the duty the corporate insider owes the company is now transferred to the friend and the friend violates a duty to the company if the corporate insider trades on the basis of this information. SEC Rule 10b5-1 made it clear that the prohibition against insider trading does not require proof that an insider actually used material non-public information when conducting a trade; possession of such information alone is sufficient to violate the provision, and the SEC would…