Most people have heard of insider trading, but many think it doesn’t apply to them because they’re not a chief executive officer or someone who has influence or access to non-public information that could make a company stock soar or plummet.
In fact, while insiders include company executives and directors who own over 10% of the company’s equity, the definition goes beyond that. Anyone with access to valuable information about a company that hasn’t been made public can be considered an insider and be guilty of illegal insider trading, which is a federal offense.
Legal vs. illegal insider trading
Not all insider trading is illegal. For example, company executives are allowed to sell or purchase shares of their company’s stock. However, they’re required to register their transactions with the Securities and Exchange Commission (SEC). That’s because large transactions by a company executive can cause others to buy or sell stocks, which can cause a significant fluctuation in the price and potentially on the entire stock market.
What if you have no link to the company other than a few dozen shares in your stock portfolio? You hear something that will send the stock falling. A friend who works in the company tells you their signature product is about to be recalled for a safety issue that hasn’t yet been made public. He advises you to sell your stock. If you follow his advice, you’ve engaged in insider trading. You and your friend could both face criminal charges.
What you might not know about one famous case
One of the most publicized cases of insider trading involved domestic guru Martha Stewart. However, many people don’t realize that her prosecution and conviction were less about the stock she sold based on insider information she received than her lies to authorities. As former FBI Director James Comey, who at the time was the U.S. Attorney for the Southern District of New York, said, “This criminal case is about lying — lying to the FBI, lying to the SEC, lying to investors.”
Lying to authorities is never wise. Getting legal assistance as soon as you find out you’re under investigation is. Even if you had no idea that what you were doing was illegal or believe you’re being accused of something you didn’t do, federal authorities take insider trading very seriously.