As a center for global trade, New York has long been a place of opportunity. But the pursuit of financial success can come with a high cost when the SEC gets involved. Anyone who participates in trading on the stock market should be aware of insider trading laws and how to avoid running afoul of them.
The Securities and Exchange Commission defines insider trading as, “when corporate insiders … buy and sell stock in their own companies.” The SEC is quick to point out that not all insider trading is illegal. Insider trading violates SEC trading rules when a member of a company with “material, non-public” information about a stock violates his or her duty to the company by using that information to gain an unfair advantage in the stock market.
Company employees are not the only ones who can commit illegal insider trading. Friends, family members and others who receive tips about the information can also be held criminally liable when they use that information to buy or sell stock.
Members of a company who have access to material, non-public information are required to file notices with the SEC when they buy or sell stock. While they cannot use their confidential information as the basis for a stock sale or purchase, the mere fact that they know something does not make a previously scheduled transaction illegal under SEC rules.
The legal landscape of insider trading is constantly evolving. The New York Times reported on one interesting recent case where insider information about the health care industry was provided to an investment consultant by a government employee. The consultant allegedly used the information he was given in advising a hedge fund to short-sell stock and make a profit. The U.S. District Court in Manhattan will have to determine whether tips that come from a government source fall under SEC insider trading rules.